The NRF Foundation, Prosper Insights and Analytics, and KPMG, recently released information on generational spending trends. You will soon see how the two largest generations, Baby Boomers (born 1946-1964) and Millennials (born 1981-1995), are likely to spend in 2014. This, of course, is excellent insight for investors.
Another study conducted by Barkley, The Boston Consulting Group, and Service Management Group reveals Millennials' seven favorite fast-food restaurants. Millennials might not have as much spending power as Baby Boomers, but they're the largest generation since the Baby Boomers and their opinions should have a major impact on future spending at fast food restaurants. In other words, whatever company lands the no. 1 spot on this list is likely to offer significant long-term investing potential.
Baby Boomers changing their eating habits
A year ago, NPD Group reported that Baby Boomers were spending 6% more dining out than in the previous year, which was good news for the restaurant industry. This trend has changed, however, which is a potential negative for fine dining, casual dining, quick-service, and fast-food establishments. According to the NRF Foundation's recent study which surveyed Baby Boomers over the past six months, they don't seek to dine out as much now that many of them are preparing for retirement. Rather, they would prefer to save money for their retirement by eating at home.
If Baby Boomers plan on eating home more, then they are going to need to buy more food from grocery stores than in the past. Given that Wal-Mart (and Kroger have the most exposure in this category, this is a positive catalyst for both companies. After all, 55% of Wal-Mart's revenue now comes from food.
That's one way to increase your investment potential in 2014, but it's not the only way. Now let's see which fast-food restaurant Millennials like best. For the record, "fast food" was the term chosen for the study. Some of these restaurants would otherwise be classified as quick-service.
Profiting off Millennial dining habits
Coming in at no. 7 was Dunkin' Donuts. Given that 26% of Millennials see themselves as health-conscious, this might come as a surprise. However, Dunkin' Donuts is mostly about the coffee, and it continues to add healthy items to its menu. Surprisingly, Starbucks didn't make the list, which might relate to its image of attracting pretentious consumers.
The sixth-favorite fast-food restaurant for Millennials was Wendy's, which came in slightly behind McDonald's at no. 5. McDonald's might be the largest fast-food restaurant in the world, but it's still fighting hard to shed its unhealthy image.
No. 4 on the list is Taco Bell, which is owned by Yum! Brands (YUM 0.19%). Taco Bell is far from being known as a healthy dining option, but it's convenient, and it has a strong reputation as a quick-bite-to-eat location for young consumers. It has also altered its menu to better cater to today's consumer. Taco Bell might not be fading, but future growth potential isn't likely to be high. It's facing more competition than in the past, and it's not known as a healthy dining option.
No. 3 is Subway, which has a lot to do with the combination of healthy/fresh foods and convenience. Subway is a private company, though, so we don't need to dig too deep here.
No. 2 is Panera Bread (PNRA +0.00%), which makes sense. Millennials don't see dining out as just an eating experience; they see it as a social event as well. Panera Bread offers a comfortable atmosphere where you won't be rushed out. Even if you're not socializing, it's a great place to accomplish work on your laptop as it offers more space than most Starbucks locations which have a similar atmosphere. Of course, Panera Bread's fresh and healthy food has a lot to do with it ranking second on this list.
The no. 1 position belongs to Chipotle Mexican Grill (CMG +0.10%). This isn't a surprise, either. Chipotle targets today's consumer perfectly. It not only offers healthier and fresher Mexican food than its rivals, but the atmosphere is setup for comfort and relaxation, not eat your food and go. If Chipotle is the favorite "fast food" restaurant for Millennials, and the average Millennial spends $174 per month eating out (vs. $153 per month for all other consumers), that's a big positive catalyst for Chipotle.
The bottom line
Baby Boomers plan on eating at home more this year, which means more spending at grocery stores. Wal-Mart and Kroger have more exposure than all other grocery stores, and are therefore likely to benefit the most. Kroger might offer more potential in this regard since most Baby Boomers are more financially sound and are less likely to shop at Wal-Mart.
Moving over to Millennials and their opinions on fast food, Panera Bread and Chipotle cater the most to their desires thanks to comfortable atmospheres and healthy and fresh food. Notice a trend here? The fast-food (or quick-service) restaurants that offer these two features are the most likely to succeed going forward.
Panera Bread and Chipotle are highly likely to be long-term success stories. The only risk here is that Chipotle and Panera Bread are trading at 54 and 26 times earnings, respectively. Personally, I think they're both capable of growing into those expectations, especially Chipotle. However, please do your own diligence prior to investing.
