According to a report by NPD Group, "fast-casual restaurant" is the fastest growing segment of the restaurant industry. The segment currently generates about $35 billion in annual sales, and is expected to grow at about 10% annually for the next 5 years. This is an industry-wide growth prospect, and several fast casual restaurateurs stand to benefit here; specifically, Chipotle (NYSE:CMG) and Starbucks (NASDAQ:SBUX) seem well poised to deliver exceptional returns over the coming years.
Bringing another revolution
Starbucks is one of the biggest success stories in the market. By offering premium coffee in aesthetically-pleasing stores, it revolutionized the coffee drinking experience entirely. And its exponentially rising popularity allowed Starbucks to rapidly expand its network. Beginning with just one store in 1971, the coffee giant now operates over 19,000 stores across 62 countries. Yet believe it or not, there's room for further growth.
Starbucks acquired Teavana Tea for $620 million last year. The specialty tea chain operated about 300 stores across North America and the Middle East, and generated $168.1 million revenues in the fiscal year 2011. But that's not all. Qtrade Tea and Herbs believes that "specialty tea" is the fastest growing tea segment – growing at about 8%-10% annually. So, Starbucks is opening a new growth avenue by entering a booming industry.
The coffee giant opened its first Teavana bar earlier this month, and plans to open 1,000 Teavana bars over the next 5 years. Its plan appears to be simple: revolutionize the tea drinking experience before anyone else does.
With a modest debt/equity ratio of 29% and about $3.23 billion in liquid positions, I don't think Starbucks will face any financial roadblocks in its expansion project. But that's not all.
Teavana Tea doesn't have many competitors at the moment. So, its rapid expansion can establish Starbucks in the tea industry with minimal competitive headwinds. Naturally, this move will also bolster Starbucks' growth momentum, and give it an even stronger position in the fast casual restaurant industry. So, investors can consider investing in the coffee retailer with a long-term view.
Boosting organic sales
Chipotle is another story of dazzling success. The Mexican food giant began operations in 1991, and since then it has expanded its store count to 1,500 outlets. This has propelled its financial growth; over the last 5 years, its operating and free cash flows have grown by a staggering 1020% and 153%, respectively. And Chipotle still offers robust growth prospects.
Chipotle recently unveiled Sofritas, a vegan dish. At the moment, none of the large-scale food chains offer vegan meals, giving Chipotle a competitive advantage. The Mexican food chain aims to bolster its comparable sales growth by attracting vegan food lovers, and the results are already beginning to show.
Within months of its launch, sales from Sofritas represent about 4% of the overall restaurant revenues where it's being offered. Its quick adoption suggests that there is an untapped market for vegan dishes, and that Chipotle has struck a chord with the foodies. This has motivated the company's management to introduce Sofritas in about 40% of its restaurants by the end of 2013 – up from the current 25%.
This is a big positive for the Mexican food giant. Its slowing comparable sales growth has been concerning investors for months. However, by catering to a new demographic, Chipotle might just regain its lost growth momentum. The rising popularity of Sofritas can even encourage Chipotle to unveil more vegan dishes. So, investors shouldn't give up on Chipotle yet.
No longer a king?
Burger King Worldwide (UNKNOWN:BKW.DL) is another prominent fast casual restaurateur. It operates over 13,000 restaurants located across 79 countries, and like its peers mentioned above, Burger King has been rewarding for investors. Its shares have risen by about 25% over the last year . However, the burger chain doesn't appear to be an attractive investment.
Burger King recently posted a 40% plunge in its quarterly revenues, and its paltry comparable sales growth of 0.9% was disappointing. Its nearly stagnant comparable sales growth suggests that the burger chain isn't attracting new customers. And it is possible that the ongoing shift to healthier foods is impacting its growth. So, the burger chain needs to introduce new menu items to attract new consumers and grow organically. But until that happens, investors should avoid investing in the burger chain.
Burger King's financial performance during the recent quarter was lackluster. Although it was able to cut operating costs and boost its profits, the its revenues shrank. Instead, investors should consider investing in Starbucks and Chipotle. Both companies have been growing at a rapid rate, and have ample catalysts to retain their growth momentum.
Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill and Starbucks. 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.