When it comes to life's little luxuries, Americans love to eat out. Based on a July 2013 poll conducted by Rasmussen, 58% of Americans admitted to going out to eat at least one time per week. One in seven Americans admitted to dining out more than once a week, while one in 25 admitted to eating in restaurants four or more times per week. I'm going to freely admit I fall into that one-in-25 crowd!
The restaurant industry is big business. According to the National Restaurant Association, restaurant industry sales are expected to reach $709.2 billion in 2015 and comprise 4% of U.S. GDP. Furthermore, restaurant employees make up about 10% of the United States' total workforce. It's a growing industry that is forecast to add another 1.7 million jobs over the next decade.
With that growth comes a potentially intriguing investment opportunity, but only if a restaurant chain can manage to stand out from its peers. Currently, there are roughly 1 million restaurants in the U.S., meaning brand loyalty creation isn't always easy. Nor, for that matter, is it easy to measure how loyal consumers are to a restaurant.
The incredible power of brand loyalty
With that in mind, let's turn to the Brand Keys 2015 Customer Loyalty Engagement Index to get a better feel for how Americans view the casual dining industry, and which brands really stood out. Brand Keys' 2015 CLEI focuses on consumer perceptions of brands, the brands' interaction with consumers, and how consumers compare that brand to its peers. The idea would be that brands with better loyalty and engagement would be expected to drive more consumers through their doors, potentially leading to better profitability.
Additionally, loyal customers serve two key purposes. First, they're ambassadors to a brand and can provide priceless free advertising for a restaurant. You've probably heard the saying that "a happy customer will tell one person, and an unhappy customer will tell 10 people." The idea being that if you meet or exceed a consumer's expectations, you're likely to transform that consumer into a customer for life.
Also, loyal customers are less reliant on specials and discounts to drive their business. Don't get me wrong, you'll likely see regulars in a restaurant during happy hour; but overall, they're more willing as a group to accept price increases and buy higher margin products. In other words, they're the bread and butter customer for the casual dining industry.
Now that you have a better idea of why brand loyalty is so critical, and before we unveil who topped the list for brand loyalty in casual dining among the 16 restaurants Brand Keys examined, let's look at a couple well-known restaurants that missed the mark.
Back to the kitchen
As you might imagine, there were quite a few surprises among the list of 16 restaurants -- especially for those restaurants near the bottom of the list.
For example, privately held TGI Fridays came in dead last. I suspect such disappointing consumer loyalty is primarily a response to the company being in a state of transition. It's moving to a franchisee model and is in the costly process of remodeling the interior of its stores, which have grown outdated. Not to mention it's had to change up its menu to accommodate a consumer that's craving healthier options.
Less of a surprise are Darden Restaurants' (NYSE:DRI) current and former restaurants near the bottom of the list. Olive Garden, which recently transformed its logo and its menu, took the 12th spot, while Red Lobster, which Darden jettisoned to Golden Gate Capital for $2.1 billion last year, ranked 14th. Considering that Olive Garden's same-store sales rose 0.5% in the second quarter, reported in December, you could argue that its menu innovations have stopped the bleeding, but the jury is still out on whether this is a long-term solution.
Another disappointment? How about DineEquity's (NYSE:DIN) IHOP and Applebee's, which ranked 7th and 8th, respectively. Both have witnessed some pretty drastic menu redesigns over the past couple of years, as well as an added emphasis on highlighting appetizers, which are generally a very high-margin item for casual dining restaurants. For Applebee's, it'll be interesting to see if the rollout of its tabletop tablets will help improve table turnover and the overall dining experience. There are plenty of avenues for improvement here, but it'll take time to see if they work.
Panera is dethroned!
Perhaps one of the biggest surprises this year was learning that 2014's casual dining brand loyalty leader, Panera Bread (NASDAQ:PNRA.DL), has been pushed to the No. 2 spot this year, ahead of Texas Roadhouse at No. 3, Denny's at No. 4, and Au Bon Pain at No. 5.
To be painfully clear, I don't believe Panera's drop out of the top spot is an indication that it's doing anything wrong, so much as a testament that the new leading casual dining company is doing everything right. Panera's regular menu innovations, right-portioned meals that stick to consumers' healthier eating lifestyles, and premium blend coffee are all factors that work toward driving customers regularly through its doors. With some of its locations even sporting a drive-thru, Panera is finding ways to attract all types of consumers based on budget, meal preferences, and even time preferences.
Taking into account Panera's 3.3% rise in fourth-quarter same-store sales, I'd suggest everything is just fine here.
And the brand loyalty leader is...
Based on Brand Keys' research, casual dining's 2015 brand loyalty leader is none other than Chipotle Mexican Grill (NYSE:CMG).
Why Chipotle? I suspect a considerable amount of its brand loyalty from consumers stems from the transparent manner in which it operates its business. Chipotle operates under the promise of "Food With Integrity," meaning it'll supply meats free of antibiotics and hormones when possible. We saw the company own up to its pledge by removing pork from its menu in January for about a third of its stores after discovering that one of its suppliers wasn't living up to its end of the bargain. Consumers can appreciate a company willing to stand by its mission to deliver fresh, natural, and organic foods.
They also appreciate Chipotle's healthy food offerings, which are perfectly in touch with today's consumer, who craves natural and organic options, and is usually more than willing to pay a premium for those options.
Chipotle has also balanced the right mixture of price and convenience. With the exception of long lines (signifying how much consumers love Chipotle) the ordering process is streamlined, the food is prepared right in front of the customer, and the prices for its products are very comparable to fast food meals, where the caloric intake is higher and the "health factor" is usually much lower. Because Chipotle tends to be up-front about its costs, consumers have been willing to accept beef, guacamole, and other price increases instituted over the past year.
As a socially responsible company, it's the type of investment people can feel proud to own, and it's the type of casual dining restaurant consumers are happy to eat at and tell a friend about. Sporting comparable-restaurant sales growth of 16.1% from the prior-year quarter in the fourth quarter, it's safe to say that Chipotle appears to be practically unstoppable.
For consumers and Chipotle investors, that's a tasty situation to be in.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Chipotle Mexican Grill and Panera Bread. It also recommends Texas Roadhouse. 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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