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Must-know: Why restaurants are so important to investors

Part 3
Must-know: Why restaurants are so important to investors (Part 3 of 11)

Key restaurant industry formats: The fast food business

Fast food

As you noted earlier in this series, while restaurants come in different types, you can divide chain restaurants into fast food, fast-casual, casual dining, and family dining. You can invest in these spaces using the PowerShares Dynamic Food & Beverage ETF (PBJ).

Fast food restaurants, as the name suggests, specialize in serving food they can prepare and serve quickly. Fast food restaurants have no table service, like at McDonald’s (MCD). The menu is priced on the lower end. For example, the average check at a fast food restaurant is much lower than at a full-service restaurants. Most fast food restaurants also have a drive-through.

2014-07-07 Year Ended 2013 Sales ($ in Billion) Fast FoodEnlarge Graph

The food quality at these restaurants is average. Often, “fast food” is synonymous with “junk food”—high in calories and low in nutritional value. Food items usually include cheeseburgers, fried chicken, french fries, chicken nuggets, wraps, and pizza.

According to the American Journal of Preventive Medicine, the nutritional quality of fast food scored 48 points. Compared to the USDA’s average recommended American’s Diet score of 55, this was concerning.

People tend to believe that the low-income population is the biggest customer for fast food restaurants. According to the U.S. Census Bureau, in 2010, 48% of Americans fell into the low-income category, which had a threshold income of $45,000 per household. Customers’ average age at a fast food restaurant is between 12 and 30 years.

The players

McDonald’s (MCD) is the biggest player in the fast food restaurant space, with a market share of 17.8%. McDonald’s (MCD) annual sales were $28.10 billion in 2013. Yum! Brands (YUM), which owns KFC, Pizza Hut, and Taco Bell, had annual sales of $13.1 billion. Burger King (BKW) had annual sales of just $1.14 billion over the same period. Other fast food restaurants include names such as IN-N-OUT Burgers, Arby’s, Popeyes (PLKI), and Jack in the Box (JACK).

Many analysts consider this segment of the industry to be in a mature stage. This means small restaurants will have to differentiate themselves from large brands like McDonald’s (MCD), while large chains focus on international expansion.

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