The state of fast-food restaurants

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The concept

Fast-food restaurants, as the name suggests, specialize in serving food they can prepare and serve quickly. Fast-food restaurants have no table service, and the menus are priced on the lower end. For example, the average check at a fast-food restaurant such as McDonald’s (MCD) is between $4 and $8, compared to $20 at a full-service restaurant such as Bloomin’ Brands (BLMN). Most fast-food restaurants also have a drive-through facility.

FF Profitability and Margin Analysis FY 2013 2014-11-26

The food quality at fast-food restaurants is typically average. Often, fast food is synonymous with junk food, or high in calories and low in nutritional value, which may also be why this restaurant group is facing challenges from changing demographic trends.

Food items usually include cheeseburgers, fried chicken, french fries, chicken nuggets, wraps, and pizza.

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The players

McDonald’s (MCD) is the biggest player in the fast-food restaurant space, with a market share of 17.8%. In 2013, annual sales for McDonald’s (MCD) were $28.10 billion. 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 In-N-Out Burgers, Popeyes (PLKI), Jack in the Box (JACK), and Sonic Drive-In (SONC).

The average earnings before interest, taxes, depreciation, and amortization (or EBITDA) margin of the above players was 28% in 2013, and the average net profit margin was 13%.

Some of the above names are also included in the exchange-traded fund (or ETF) Consumer Discretionary Select Sector Standard and Poors depositary receipt (of SPDR) (XLY).

The fast-food industry has reached its mature stage in the United States, and several fast-food chains are already focusing on international expansion.

In the next part of this series, we will look at the fast-casual restaurant concept.

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