Casual Dining: Investing Essentials

Here's what you need to know about the business of casual dining.

Aug 22, 2014 at 11:30AM

Casual Dining Olive

Olive Garden is one of the most widely recognized chains in the casual dining industry, Photo source: Darden Restaurants,

Whether you lack the time, ability, or motivation to dine at home, or simply need a place to celebrate and socialize with a good meal around a table, the casual dining industry is happy to serve you.

But that's not the only way it can help. For investors who can find the best publicly traded companies in the space, the casual dining industry can also dish out impressive returns for your portfolio. Let's take a look at some things you need to know before investing in the sector.

What is the casual dining industry?

Restaurants in the casual dining industry are best described as midscale establishments, and often have an outsized reliance on the dinner daypart. Casual dining restaurants also typically feature comprehensive menus, usually serve alcohol, and require a longer start-to-finish service time than competing fast-food/quick service locations.

For the most part, that's because the casual dining industry is comprised of sit-down, full-service locations which aim to offer a reasonable middle ground between the cost, meal quality, and experience provided by fast-food and fine dining restaurants. According to NPD Group, the average price for a meal at a casual dining restaurant at the end of 2013 was just under $14.    

How big is the casual dining industry?

With nearly 300,000 casual dining restaurants in the U.S., most consumers will likely never suffer from a lack of options. Many of these restaurants are part of larger, nationwide chains. According to Nation's Restaurant News, the top five casual dining chains in terms of U.S. Systems sales as of this writing are DineEquity subsidiary Applebee's, Darden Restaurants' Olive Garden, Brinker International's Chili's, Buffalo Wild Wings, and Bloomin Brands' Outback Steakhouse.   And though casual dining restaurants "only" represented around 21% of all restaurant visits in this country in 2013  -- compared to 78% for quick service restaurants -- their higher average price points translated that traffic to nearly a third of all U.S. foodservice sales. That makes casual dining a more than $200 billion per year industry.

How does the casual dining industry work?

In addition to tracking revenue and earnings, casual dining industry investors should keep a close eye on comparable restaurant sales, or "comps." In short, comps usually focus on sales growth -- or declines -- from restaurants open at least a year. This helps investors gauge the productivity of established restaurant locations, and more effectively distinguish their resulting sales growth as opposed to revenue achieved through new restaurant openings. Ideally, investors like to see comparable restaurant sales continue to grow over time, as it indicates a willingness by consumers to continue spending more at restaurants that aren't necessarily novel to them.

Another big part of the casual dining industry is franchising. Specifically, franchising allows restaurant chains to quickly expand, while at the same time limiting their own risk by placing much of the financial burden of opening and maintaining new locations on the franchise owners. As a result, you'll often see two comparable restaurant sales figures reported by each company on a monthly or quarterly basis: One for franchised restaurants, and the other for company-owned locations.

But even with franchisees' ongoing royalty payments, franchises still aren't as profitable for the parent brand as company-owned restaurants. In addition, many casual dining chains are able to implement new corporate initiatives at company-owned locations in a more timely fashion. As a result, some chains seek to both bolster profitability and seize greater control over their corporate message by actively acquiring established franchises.

What drives the casual dining industry?

The economy is arguably the single greatest driver of the casual dining industry. If the economy is healthy, casual dining outings tend to become more frequent. If the economy suffers, consumers are more likely to scale back their budgets for dining out, which is increasingly considered a "nice-to-have" luxury.

Competition for those budgets is also fierce. More recently, the casual dining industry has endured significant competition from "fast-casual" restaurant concepts. Fast-casual restaurants are generally considered a sub-segment of the fast-food industry, but focus more on providing higher-quality, reasonably priced food in a timely fashion -- an incredibly attractive model for cost-conscious, on-the-go consumers. As a result, some casual dining chains are even exploring ways to take part in this growth by investing in fast casual concepts of their own.

Investors should also be aware of food, labor, and occupancy costs as the biggest key metrics driving the casual dining industry. Take Buffalo Wild Wings, for example, where cost of sales was 28.2% of total revenue last quarter. That most notably includes chicken wings, the price per pound of which is regularly reported during Buffalo Wild Wings' quarterly conference calls, as wide fluctuations can greatly influence overall results. Meanwhile, cost of labor last quarter was 31.3%, and is expected to rise going forward as minimum wage increases take effect in multiple states. Occupancy -- which encompasses leases, taxes, insurance, and other building-related costs -- ate up another 5.6%, while other operating costs and expenses collectively took away another 30.3%.

What's left after income taxes doesn't always leave much to the bottom line. But for the most efficient casual dining performers who can keep hungry consumers coming back for more, it can still be more than enough to create long-term value for shareholders.

Steve Symington owns shares of Buffalo Wild Wings. The Motley Fool recommends Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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