Restaurants Seeking to Boost Revenues: Time to Invest?

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According to the National Restaurant Association, 2016 could be the seventh consecutive year of real sales growth in the restaurant industry. The industry generates sales that account for 4% of U.S. GDP. It is expected to counter headwinds on the back of strong sales initiatives.

Given past trends and growth prospects of the industry, we have highlighted some of the positives to help investors decide whether they should increase their investments in the space.

Improving U.S. Economic Growth: An improving economy and employment picture, along with growing consumer confidence, have led to a slow but steady recovery in the restaurant industry. Despite global concerns, the U.S. economy is improving. While the decline in oil prices raised concerns of a global deflation and an economic slowdown, it is actually driving consumer spending, which accounts for more than two-thirds of U.S. economic growth. Stepped-up economic activities, improving business conditions, renewed optimism as a result of housing recovery and rising consumer confidence are expected to keep investors' confidence high in 2016.

Sales Strategies: Restaurants strive to improve sales by targeting higher footfall and delivering something unique. Having stabilized their financial positions, the operators are constantly striving to add new items to their menu to cater to the ever-changing palates of customers while making food presentation better. Buffalo Wild Wings Inc. ( BWLD ), The Wendy's Company ( WEN ), Papa John's International Inc. ( PZZA ) and Jack in the Box Inc. ( JACK ) are some of the restaurateurs playing this card.

Another initiative undertaken by the food chains is re-imaging the stores, which has received overwhelming response from guests. Wendy's, Domino's Pizza, Inc. ( DPZ ), Ruby Tuesday, Inc. ( RT ) and Carrols Restaurant Group, Inc. ( TAST ) have been working on these lines. Reimaging stores aims to create a more appealing but differentiated concept that connects the brand better to guests, especially millennials.

Meanwhile, restaurant companies like BJ's Restaurants, Inc. ( BJRI ), Brinker International, Inc. ( EAT ), Red Robin Gourmet Burgers Inc. ( RRGB ) and Panera Bread Company ( PNRA ) have started offering loyalty programs at their outlets to enhance value dining. Loyalty programs help retain old diners while bringing in new ones, which drives traffic.

Some industry players like Brinker, BJ's Restaurants and Red Robin Gourmet are rolling out prototypes and smaller restaurant chains to augment value and drive traffic, thereby lowering construction and occupancy costs but enhancing returns on capital. Smaller prototypes also accelerate growth in non-traditional locations. Darden Restaurants, Inc. ( DRI ), Panera Bread and BJ's Restaurants are investing in kitchen equipment to improve capacity and speed.

Modern Technology, Digital Ordering, & Delivery Gaining Precedence: The digital wave has hit the U.S. fast casual restaurant sector as more and more restaurateurs are deploying technology to enhance guest experience. While smartphone apps attract consumers, video menu boards in quick-service restaurants and tabletop devices speed up sales and ensure convenience.

Panera Bread and Buffalo Wild Wings are using tablets to drive traffic. Meanwhile, Red Robin Gourmet and Brinker International have partnered with Ziosk, a provider of ordering, entertainment and pay-at-the table tablet, to install tabletop technology at their outlets.

Chipotle Mexican Grill, Inc. ( CMG ) is also prioritizing its e-Commerce program and looking to extend its online ordering platform by adding the delivery option. Apart from re-launching chipotle.com for mobile users, the company has begun online and mobile order delivery in 67 cities using the Postmates delivery app. The company has also launched an app for Apple Watch to allow guests to order before they arrive at the restaurants. The chain is also testing mobile payment methods like Apple Pay and the Google Wallet at restaurants.

Also, Chipotle Mexican Grill has entered into a partnership with Tapingo, a leading mobile commerce app that provides food pickup and delivery services to students. Students were able to order food through Tapingo at 40 college campuses nationwide by the end of 2015 and the company intends to make the service available at more than 100 campuses in the U.S. this year.

Papa John's added Google Wallet into their ordering process and launched an iOS app. The company continues to set the pace in the digital arena and ended last year with more than 50% of domestic system-wide sales coming from the digital channel. Domino's Pizza has gained significantly from the digital trend too, with around 50% of its U.S. sales coming via digital platforms. The company is also updating its digital platforms constantly to connect better with guests.

Additionally, the world's largest coffee-shop operator, Starbucks Corporation ( SBUX ) has secured a leading position by leveraging its mobile and digital assets, and loyalty and e-Commerce platforms to create more revenue streams. Nearly 20% of all U.S. transactions of Starbucks take place through mobile, more than double the figure a couple of years ago. Starbucks launched the Mobile Order & Pay service which is now available in all company-operated outlets in the U.S. This initiative allows customers to order before arriving at a Starbucks café and pick up the items at their selected Starbucks store, thus saving time.

Starbucks has started to deploy the facility in select stores in the UK and in Canada as well, with plans to continue rolling out the platform in key international markets. Moreover, in order to expand its loyalty program, Starbucks formed strategic loyalty partnerships with Lyft, Spotify and The New York Times, under which these partners will purchase Starbucks stars that will be rewarded to their customers as loyalty points and subscriptions. A third-party loyalty program further leverages Starbucks' digital ecosystem and adds a revenue stream.

In order to capitalize on the increasing demand for their products, a few players in the industry like Panera Bread, BJ's Restaurants, Chipotle and Noodles & Company ( NDLS ) are offering off-premise catering programs. These programs are especially designed to serve a large number of customers at their homes, offices or at any other venue.

Starbucks has started a food and beverage delivery service through its employees at New York's Empire State building in last October. The company also began testing food and beverage delivery in collaboration with on-demand delivery service, Postmates, in select areas of Seattle in December. Customers in these regions can place orders through the Starbucks mobile app using the 'Mobile Order & Pay' feature, while those in New York can order online.

Restaurant operators also rely on social media for promotions and incorporate Facebook, Inc. ( FB ), online review sites, Twitter, Inc. ( TWTR ) and blogs aggressively into their marketing mix.

Cost-Cutting Efforts Needed: Given the exponential rise in costs, companies are trying various ways to keep them in control. Through its Project Q initiatives, BJ's Restaurants is striving to reduce kitchen hours and enhance labor efficiencies. The Cheesecake Factory Inc. ( CAKE ), Darden and Cracker Barrel Old Country Store, Inc. ( CBRL ) are also working on techniques to aggressively cut costs.

Adapting to Changing Consumer Preference: The latest trend at the U.S. eateries is a healthy menu as consumers are increasingly showing preference for fresh, organic, nutritious and low-calorie food. Rising health concerns and growing awareness about obesity and related diseases have led to the shift in consumer preference toward healthy and "good for you" products.

Starbucks and Panera are replacing all artificial flavors and colors used in their food items with natural alternatives. Burger giant, McDonald's Corp. ( MCD ) has pledged to discontinue the use of chicken raised on antibiotics meant for humans within the next two years and intends to use cage-free eggs. Meanwhile, Chipotle is also popular for using genetically modified organism-free ingredients in its food items.

Further, companies like McDonald's, Dunkin' Brands, Wendy's and Panera are shifting to cage-free eggs to appease health conscious guests. Pizza chain, Papa John does not use trans-fat or partially hydrogenated oils in its products. Papa John is the first national pizza brand to remove cellulose as an anti-caking agent from its mozzarella cheese. Except soft drinks, the company has removed all sources of artificial flavors and synthetic colors from its menu in 2016, which includes pizza ingredients, pizza toppings, dessert items and sauces. By the summer of 2016, the company plans to remove antibiotics from its chicken toppings and poppers.

On the consumer side, it seems that Americans are becoming keener on having breakfast at restaurants. Breakfast visits were higher in 2016 than last year, while lunch and dinner visits remained flat, according to research firm, NPD Group. Exclusive breakfast offerings such as coffee, pancakes and doughnuts have been driving traffic at most U.S. restaurants, outpacing conventional lunch and dinner items. In fact, Denny's Corporation ( DENN ), Jack in the Box and Sonic Corp. ( SONC ), which have been offering all-day breakfast for quite some time now, highlight how the trend has been successfully driving sales.

Massachusetts-based Dunkin' Brands also sells breakfast sandwiches all day, which is a major contributor to sales. Fast-food giant, McDonald's started its own all-day breakfast platform in the U.S., which has proven to be a remarkable success.

Other players in the industry like Yum! Brands, Inc.'s ( YUM ) Taco Bell are also capitalizing on the rising demand for breakfast. Meanwhile, this daypart generally has lower food cost requirements. Therefore, focusing on it somewhat offsets the adverse impact of rising food costs, thereby boosting margins.

With breakfast foods playing a key role in the daily eating habits of restaurant-goers, the fast food industry has been able to turn around and drive growth even as the non-healthy items in their menus are falling out of favor.

Bottom Line

There are plenty of reasons to be optimistic about the restaurant industry's near- to medium-term outlook. Given the efforts undertaken by the companies, it is needless to say that investors can cash in on the existing opportunities in the space.

Check out our latest Restaurant Industry Outlook here for more on the current state of affairs from an earnings perspective and the trend for this important sector.

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