3 Facts You Didn’t Know About the Fast-Food Business

If you’re like most people, you’ve consumed a fair amount of fast food in your life. After all, fifty years after McDonald’s (NYSE: MCD) introduced its iconic Big Mac, the industry has climbed to over $1.2 trillion of annual sales.

The fundamentals of innovating, marketing, preparing, and delivering all of those meals can seem pretty straightforward. But there are some key pieces of this process that investors might not know about. Below, we’ll take a closer look at a few of these surprising facts.

Image source: Getty Images.

1. The biggest profit source isn’t food

Food sales are volatile and suffer from low profit margins. That’s a key reason why the industry’s biggest players generate their earnings through sources other than the straight sale of fast food to consumers. Most of McDonald’s profits, for example, come from its franchise and royalty fees, in addition to the rent it charges across its network of independent operators.

That setup maximizes cash flow and protects investors from big sales and profit swings. The efficiency is one reason why McDonald’s owns just 8% of its store base and Yum! Brands operates less than 5% of its Pizza Hut, Taco Bell, and KFC restaurants. Chipotle is a notable exception here, as the burrito chain owns all of its stores, giving it both more control over the business and a greater risk profile as compared to franchised rivals like McDonald’s.

2. Keeping things fresh

“Innovation” probably isn’t a word that jumps to mind when you think about the fast food business. As mentioned above, McDonald’s has been selling its Big Mac for decades. And customers still love the Sonic hot dogs and shakes that haven’t changed much since the company was founded in the early fifties.

Standing still is a sure way to lose market share in this industry, though. That’s why McDonald’s is planning to spend $2.4 billion on restaurant upgrades and remodels in 2018 alone. These investments include an aggressive move into the home delivery market that might eventually disrupt the drive-thru approach Mickey D’s dominated for decades.

Domino’s Pizza (NYSE: DPZ) is a tech leader already, booking a full 60% of its sales through e-commerce channels. The pizza giant’s recent Hotspot program, which extended delivery to thousands of places that lack addresses like beaches and parks, is just the latest example of a long line of tech innovations that have helped keep it on top of the pizza delivery market.

3. So many ways to profit

There’s a wide range of business model choices for investors looking for exposure to the fast-food industry. Want an untested, but attractive, brand concept that boasts a huge growth opportunity? Take a closer look at Shake Shack. Prefer a mature dividend giant with market-leading profit margins? McDonald’s is right around the corner.

There are huge differences in growth approaches even among the biggest established players. Invest in Starbucks, for example, if you believe that international markets like China will power its next wave of sales gains. Domino’s is leaning on its international segment, too, but the pizza chain’s real appeal comes from having a small, efficient store concept that allows for an unusually quick physical expansion pace.

More than one of these approaches is likely to deliver positive shareholder returns over the long term, and so there’s no pressure to identify the ultimate fast-food winner today. Instead, investors might want to buy a few attractive stocks in the industry and then patiently watch as the companies improve at the process of feeding customers better, more conveniently delivered food at unbeatable values.

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Demitrios Kalogeropoulos owns shares of CMG, McDonald’s, and SBUX. The Motley Fool owns shares of and recommends CMG and SBUX. The Motley Fool is short shares of SHAK. The Motley Fool has a disclosure policy.

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