Fast-food businesses are investor favorites. A typical national chain that sells burgers, pizza, or chicken usually has an easy-to-follow business with healthy profit margins. And the best fast-food stocks enjoy huge market potentials thanks to some basic and enduring consumer preferences around taste, value, and convenience.
It's a hard business to succeed in, though, and relatively few companies have what it takes to consistently compete on a national or global scale. Rivals are always seeking to chip away at an industry leader's market share with new products and lower prices.
With those challenges in mind, let's take a look at the fast-food stocks that dominate U.S. public markets today, as ranked by market capitalization, or the total number of a company's shares outstanding multiplied by the stock's market price.
Biggest fast-food stocks in the U.S.
|Company||Market Capitalization||Industry Niche|
|1. McDonald's (NYSE: MCD)||$167 billion||Burgers|
|2. Starbucks (NASDAQ: SBUX)||$113 billion||Coffee, beverages, pastries|
|3. Yum! Brands (NYSE: YUM)||$36 billion||Chicken, Tex-Mex, and pizza|
|4. Chipotle Mexican Grill (NYSE: CMG)||$23 billion||Fast-casual Tex-Mex|
|5. Restaurant Brands International (NYSE: QSR)||$19 billion||Burgers, chicken, and breakfast|
|6. Yum China (NYSE: YUMC)||$17 billion||Chicken and pizza in China|
|7. Domino's Pizza (NYSE: DPZ)||$10 billion||Pizza|
|8. Dunkin' (NASDAQ: DNKN)||$7 billion||Coffee, beverages, pastries|
|9. Wendy's (NASDAQ: WEN)||$5 billion||Burgers|
|10. Shake Shack (NYSE: SHAK)||$4 billion||Burgers|
Market share data as of Aug. 30, 2019.
1. McDonald's -- the industry leader
McDonald's doesn't operate the most quick-service restaurants in the U.S. (that title goes to privately held Subway), but Mickey D's is by far the biggest global player, with more than 36,000 locations spread out through most markets around the world. The burger giant has been a staple for decades. In fact, its iconic Big Mac sandwich just celebrated its 50-year anniversary.
Image source: Getty Images.
McDonald's accounts for roughly 7% of all annual fast-food sales, but that's not where the company earns most of its money. Instead, the chain's franchising setup, whereby entrepreneurs pay the company fees, royalties, and rent, is its real cash generator. Its valuable brand and consistently high sales volumes allow McDonald's to charge these managers premium rates, leading to market-beating profit margins.
The burger giant's massive size is normally a key advantage, but size proved a challenge as it struggled to react to major changes in consumer tastes around natural ingredients in recent years. Still, McDonald's adjusted to demands for fresher products and higher-quality preparation methods and is back to growing at a robust pace as of mid-2019. The dividend giant's robust cash flows, meanwhile, give management the means to invest heavily in maintaining its leadership position through store upgrades and new functionality like kiosks, mobile ordering, and home delivery.
2. Starbucks -- premium drinks and snacks
While McDonald's added convenience and value to Americans' eating habits, Starbucks won global blue-chip status by boosting the coffee experience to a premium level. The formula was a massive hit with consumers and helped support a more than 150-fold increase in the chain's stock price in the 25 years following its 1992 initial public offering. Today, Starbucks operates more than 17,000 locations, with the U.S. and China being its two biggest markets. Its food menu has grown in recent years, but beverage sales still account for roughly three-quarters of its business.
Starbucks' success in the premium coffee niche attracted many competitors, including McDonald's and Dunkin' Brands. The chain has stumbled at times against these rivals, as products that had been hits in the past, like holiday merchandise and dessert drinks, fell out of favor in a quickly shifting industry. But Starbucks has a knack for adjusting itself to the latest tastes while driving the industry forward through drink innovations and specialty products. That success should allow it to remain a major industry player, particularly as competition moves into China.
3. Yum! Brands -- a winning portfolio
Yum! Brands operates three of the biggest fast-food chains around. Its KFC division is its largest, ringing in more than $26 billion of sales in fiscal 2018. Pizza Hut is second at $12 billion of annual revenue, and Taco Bell clocks in at just under $11 billion. Together, these chains account for 48,000 locations around the world.
That diversity has served investors well over the years. In particular, it has helped keep overall sales and earnings rising even though the Pizza Hut chain has lost ground against delivery-focused rivals like Domino's. Steady growth in KFC and Taco Bell more than made up for the pizza losses in fiscal 2018.
Yum! Brands is aiming to reinvigorate the Pizza Hut brand by attacking the delivery segment more aggressively. With a leadership transition set for early 2020, the incoming CEO hopes to use the chain's strong global base to accelerate sales growth through a balance of rising customer traffic and an expanding sales footprint. That's a likely scenario, given that Yum! Brands has a firm hold in three of the biggest fast-food niches.
4. Chipotle -- the fast-casual leader
Chipotle grew to prominence by disrupting the fast-food industry. The burrito specialist brought restaurant-quality ingredients and preparation methods to the niche, and its assembly-line approach allowed it to serve record numbers of hungry customers -- over 200 an hour at peak lunchtimes. The chain parlayed those advantages into a store base that today maintains over 2,400 locations, mainly in the United States.
Chipotle's food safety scare, starting in 2015, demonstrated a key risk of investing in this industry, as customers abandoned the brand in droves following news of foodborne illnesses spreading from several of its locations. It has taken the company several years, lots of cash, and turnover at the highest ranks to recover from that stumble. Meanwhile, profit margins still haven't approached their 2015 highs as of mid-2019. Yet investors have celebrated the business's steady rebound over the past few years and are optimistic that Chipotle can grow quickly as more of the industry shifts toward home delivery.
5. Restaurant Brands International -- targeting all mealtimes
Restaurant Brands International is the owner of three major chains and in that way earns frequent comparisons with rival Yum! Brands. Its Popeyes restaurant concept competes head to head with KFC in many markets, in fact, and the fast-food giant also runs thousands of Burger King locations that battle with McDonald's for market share. Its Tim Hortons brand, meanwhile, is the largest donut-and-coffee chain in Canada and fights for coffee fans against Starbucks.
CEO Jose Cil and his team have aspirations to establish Tim Hortons more firmly in the U.S. market over the next few years. Their recent successes with the Burger King and Popeyes brands, at the same time, suggest they can expand into places like China, Spain, and Thailand to significantly improve on their current base of 26,000 restaurants. That growth will require strong execution across new markets with diverse taste preferences. However, Restaurant Brands International has demonstrated a knack for elevating the fast-food dining experience in recent years, and that asset should serve it well as it targets its next round of global expansion.
6. Yum China Holdings -- dominating one giant market
Yum China Holdings is easily the youngest company on the top-10 fast-food list. It was born in 2016, in fact, when the larger Yum! Brands company spun off its China holdings into a separate public business.
Yum China is the largest restaurant operator in the world's second-biggest economy, with more than 8,400 locations in the country. These include the KFC, Taco Bell, and Pizza Hut brands originally made famous in the U.S. but also several region-specific brands such as Little Sheep and East Dawning. Don't let the chain's recent IPO convince you that it has little experience, though. Its brands have a long history in China, having first entered the market in 1987.
Executives have big plans to more than double the company's store footprint to 20,000 locations over the next decade or so, and this aggressive target should be supported by a continued move toward higher incomes and more discretionary spending in China. While that's achievable, how quickly the expansion happens will depend on broader economic growth trends in the country. It also relies on Yum China holding off rival fast-food giants -- all of which see the market as critical to their global ambitions.
7. Domino's -- the pizza delivery leader
Few fast-food companies can claim anything approaching the growth that Domino's had in the decade ending in 2018. The pizza delivery specialist increased its market share in each of those fiscal years while expanding its store base at a robust clip. This track record translated into impressive returns for shareholders as annual sales soared to $3.4 billion from $1.4 billion in 2018.
Image source: Getty Images.
Wall Street has worried at times that Domino's lacks a strong competitive moat, given that a version of its product is offered by thousands of quick-service operators -- ranging from food trucks to local neighborhood restaurants. Yet the chain has outpaced these competitors for years, using a mix of marketing savvy and technical innovations like its "hot-spot" program that allows for quick delivery to thousands of nontraditional addresses like parks and beaches. It also helps that Domino's small store footprint makes it an ultra-efficient business. Low costs ensure that most locations can be profitable with just a relatively low sales base.
For Domino's to continue its growth streak, the chain will need to defend its leadership position in the delivery market against new rivals like McDonald's and Starbucks. Executives hope to pair successes there with a growing store base that keeps rivals out of most of its neighborhoods by making carryout a breeze and by giving Domino's one of the most efficient delivery infrastructures of any company.
8. Dunkin' Brands -- the regional breakout
Dunkin' Brands operates 21,000 restaurants through its Dunkin' and Baskin-Robbins brands situated in the U.S. and across key international markets. It maintained 9,400 Dunkin' U.S.-based restaurants as of the end of 2018 but has ambitions to roughly double that footprint over the long term. Its 300 store additions in both 2017 and 2018 attest to those aggressive expansion hopes.
But Dunkin' faces serious challenges in moving to extend its brand beyond the Northeastern U.S. region that has traditionally been its base. Entrenched operators, especially Starbucks, have held dominant positions in key markets like California for years, and Dunkin' doesn't enjoy the same brand awareness there as it does in states like Massachusetts, where it is headquartered.
In response, the chain's strategy involves shifting its food and beverage menu to a platform that can compete better across the country. A foundational aspect of that initiative is its espresso-based coffee rollout that seeks to establish the fast-food specialist as a premium caffeinated drink provider. If Dunkin' can carve out a defensible niche here and in areas like snack foods, it has a good shot at building a much larger sales base over time.
9. Wendy's -- fast-food rival
Wendy's 7,000 restaurants make it the third-largest quick-service restaurant chain in the burger niche. Like its main rivals, Burger King and McDonald's, the chain sells a range of staple products like its "never-frozen" burgers, Frosty ice cream desserts, chili, and chicken sandwiches, along with seasonal or limited-time offers. It has a similar attraction in offering low-priced food at convenient locations. Roughly two-thirds of Wendy's sales occur at the drive-thru window.
The fast-food chain uses a variety of strategies in seeking to claw away market share from its bigger competitors. These include menu innovation, aggressive value-based promotions, and an active social media presence. CEO Todd Penegor and his team have achieved modest success, as these initiatives keep Wendy's sales growing at existing locations while the restaurant base expands as well. Yet it's hard to imagine the chain mounting a serious challenge to McDonald's in this mature market.
10. Shake Shack -- sizzling growth potential
Investors are attracted to Shake Shack for a simple reason: The "better burger" upstart has a massive growth opportunity ahead given its relatively tiny sales base. The company counted just 74 locations in that base in mid-2019, up 48% from a year earlier.
That's tantalizing growth, but there are also a few major areas of concern for investors. The first is that Shake Shack hasn't been enjoying booming growth at its existing locations. Customer traffic declined in 2018 and through most of 2017, which doesn't bode well for a company aiming to spread itself deeper into the U.S. fast-food landscape.
The second worry is that Shake Shack's profitability is declining as it expands outside of its traditional geographic focus around New York City. Stores outside of this dense metropolitan area are booking far lower volumes, and so it's likely that the wider business will see lower profit margins as it matures.
None of that will matter to investors if Shake Shack delivers on its promise of taking the better-burger concept to a wider audience in the way Chipotle did with its premium take on burritos. In such a competitive burger space, though, the odds are stacked against the upstart.
How to find your stock
Investors interested in the fast-food industry wouldn't be limiting themselves by focusing on just these top stocks. Each has the potential to produce acceptable or even market-thumping returns. That's as true for a market leader like McDonald's as it is for a regional challenger like Dunkin' Brands. And while there are always risks involved when investing in stocks, the strong track records of the above businesses illustrate how protected they can be from normal market swings.
When choosing a fast-food stock to buy, consider its competitive assets such as industry position, scale, and brand power. If you're looking for dividend income, you'll want to stick to more mature businesses like Starbucks and McDonald's, which pay a regular dividend to shareholders. If growth is your focus, stick to companies like Domino's that are still adding restaurants at an accelerated clip.
Finally, following along with management's regular comments to shareholders can be a great way to gain an understanding of the business while getting a feel for how well actual results tend to sync up with the projections of a management team. Find a fast-food company that delivers on these characteristics of competitive strength, solid finances, and a good management team, and you're in a great position to earn positive long-term returns from investing in this high-growth industry.
10 stocks we like better than McDonald's
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and McDonald's wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 1, 2019
Demitrios Kalogeropoulos owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.