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A Convenient Excuse for Fast Food's Underperformance

By Rich Duprey - Feb 6, 2014 at 10:56PM

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Quick-serve restaurants are now fighting a war of attrition on two fronts.

Although Chipotle Mexican Grill (CMG 2.00%) and Panera Bread (PNRA) have become shorthand for fast casual dining, and are seen as the reason fast food restaurants are fast losing sales, there may be a different culprit at work -- one that, until now, has been surreptitiously siphoning off sales.

According to the market researchers at Technomic, convenience stores have been stealing fast food customers away. A survey of 4,000 convenience store shoppers found 26% ended up not hitting up the local burger joint because they already picked up something to eat at their local 7-Eleven or Wawa. 

Source: Wikipedia

Sure, we've been able to buy Spicy Bites and warmed-up pizza of varying quality from them for years, but the trend toward prepared foods has accelerated lately and, as the Technomic report that was issued in December makes clear, the quality of the foods has dramatically improved, suggesting that fast food restaurants are now fighting a battle on two fronts.

Feeding the success of Chiptole and Panera has been their striking the right balance of price, quality, and speed in a pleasant environment. The convenience store might not be able to offer the same lounge-style atmosphere that are leading McDonald'sBurger King, and even Taco Bell to emulate them by remodeling their stores, but the C-stores have also raised the bar on quality, variety, and perhaps, just as importantly, convenience.

Not everyone wants to sit down to eat, or pay the premium for dining at a fast casual restaurant. Grab-and-go food is still an important part of the typical consumer's day, whether it's breakfast foods to eat in the car on the way to work, or a snack bar on the way home. The C-stores are now wedging their way into the lunch and dinner markets, too, making their presence one that can't be ignored any longer. Technomic says 4% of consumers say they would have visited a restaurant had they not purchased a prepared food from a C-store on their most recent visit.

Wawa, 7-Eleven, and Sheetz were among the top-rated C-stores in the Technomic survey, though 7-Eleven, because of its broad retail footprint, had more customers than anyone else. Still, we're seeing the value of the retail operation as a key selling point when it comes to gas stations.

Hess (HES 1.41%) is in the process of mulling over whether to sell or spin out its retail business, and Marathon Petroleum (MPC 0.79%), while not making a commitment one way or the other, has said those assets would be a "great fit" for its Speedway operations. This is the fourth largest C-store chain with around 1,470 locations, in part, because increasing food service sales are pushing profits higher. Hess is the largest convenience store owner on the East Coast, with 1,258 fuel and food outlets. Others considered in the running for Hess's business include Alimentation Couche-Tard (ANCT.F 2.77%), whose Circle K brand is second in size only to 7-Eleven, and BJ's Wholesale Club, which has around 200 wholesale clubs in 15 eastern states, half of which feature gas stations.

Of course not every C-store has a gas station attached to it, but the Association for Convenience & Fuel Retailing says there were 149,000 C-stores as of the end of 2012, and 123,000 of them also sold fuel.

You're not going to see 7-Eleven, Wawa, or Speedway turn their stores into Chipotle or Panera, but then they don't have to. But like their casual dining counterparts, convenience store operators have found a niche, and have improved on it. That means that fast food restaurants will be like a keg tapped at two ends, quickly depleted, leaving investors in their stocks with the convenient excuse for why they abandoned them.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, McDonald's, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. 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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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,663.70 (2.00%) $32.61
Hess Corporation Stock Quote
Hess Corporation
$113.72 (1.41%) $1.58
Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
$97.47 (0.79%) $0.76
Panera Bread Company Stock Quote
Panera Bread Company
Alimentation Couche-Tard Inc. Stock Quote
Alimentation Couche-Tard Inc.
$46.55 (2.77%) $1.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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