Change is on the menu for McDonald’s, Starbucks and the other players in the fast food market, which is worth £291billion a year in the US alone.
You may not care for a Big Mac, a Mighty McMuffin or a pumpkin cream cold brew (yes, that is a drink), but there could be benefits for your portfolio if these businesses can reverse the decline in demand.
The mighty names in fast food may be down but ‘they are not out’, according to Joshua Cummings of Janus Henderson Global Research.
The sector’s long-term prospects are strong. Goldman Sachs argues that people still want to eat out – so long as they feel that they are receiving value for money.
Cost-conscious inflation-weary consumers are compelling the industry to provide discounts.
Tasty: According to McDonald’s chief executive Chris Kempczinski, customers have become ‘more discriminating with their spend’
According to McDonald’s chief executive Chris Kempczinski, customers have become ‘more discriminating with their spend’, which is why, in the US, the company is extending a summer $5 meal offer until December. Fans of its fare weren’t lovin’ more expensive burgers and fries.
On both sides of the Atlantic, there are warnings of the dangers to health from ultra-processed foods and here, the Government plans a pre-watershed (before 9pm) ban on TV junk food advertising.
Weight-loss drugs like Ozempic are said to pose another threat to the ‘lunch stocks’, as Wall Street likes to call McDonald’s and the other chains.
This GLP-1 medication can cut the appetite – and the taste for high-fat or sugary treats.
But the fast food giants are responding to these challenges, not content to rely on ‘patriotic nostalgia’, the term that sums up the fondness among Americans for the familiar flavour of a Big Mac or similar treat.
Shares in the £82bn Starbucks, the world’s second largest fast food operator, leapt on the news of the appointment of Brian
Niccol – the executive who transformed the burrito chain Chipotle Mexican Grill – as boss.
Starting his job in September, Niccol – who has vowed to make Starbucks a ‘community coffee house’ once more – will take a 1,000-mile commute by private jet three days a week from Newport Beach, California, to the Starbucks HQ in Seattle.
Chipotle is mourning his loss. But the business could be one of the beneficiaries of the vast cost savings that US bank Morgan Stanley says will flow from the deployment of humanoid robots in kitchens.
An avocado processing robot – which prepares guacamole – is being tested at two Chipotle restaurants in California.
The risks are high. But the returns could be, well, tasty. Here are the stocks to savour in the US and the UK.
USA
McDonald’s
The £159billion McDonald’s Corporation is the world’s largest fast food company, with more than 38,000 restaurants in 100
countries. Its former employees include US vice-president Kamala Harris.
The various ‘industry and competitive’ challenges facing the business include the higher cost of ingredients, energy and packaging. Customers, deterred by ‘Mcflation’, have been trading down, that is buying groceries from the supermarket. Customers have also been trading up, preferring smarter ‘fast casual’ restaurants. In America, Chipotle is a favourite in this category.
Analysts reckon that McDonald’s decision to ‘right-size’
pricing on some meals will force competitors to follow suit.
Meanwhile, the 16 per cent rise in the shares to $294 (more than £221)over the past three months suggests confidence in McDonald’s ability to win back diners.
Analysts at Citigroup have now raised their target price for the shares to $301 (£226), while analysts at Jefferies are betting on $310 (£233).
Overall, 17 analysts consider McDonald’s shares a ‘buy’ and 13 rate them as a ‘hold’.
Starbucks
The range of challenges facing Starbucks, the second largest name in fast food, includes the impersonal vibe of its cafes and the need to placate the New York activist investor Paul Singer of Elliott Management. Singer snapped up a sizeable stake in July following a drop in the share price. Like McDonald’s and some other US brands, Starbucks has been hit by Middle East boycotts, as a result of American support for Israel in the Gaza conflict.
Last week, Niccol said that he would first address the chain’s issues in the US, transforming what he calls the ‘transactional feel’ of the cafes and tackling the disaffection of Gen Z with the Starbucks brand. He will then turn his attention to China and other locations overseas.
Niccol, who has been called a ‘dream hire’ and a ‘hall of fame’ restaurant boss, ‘aspires to get the morning right’ in collaboration with his staff of ‘green apron partners’. Such was the transformation that Niccol wrought at Chipotle that this week analysts at Bank of America said they now have ‘greater confidence’ in Starbucks. They are targeting a price of $118 (£89), against the current $96 (£72). But most other analysts are watching and waiting and so rate the shares a ‘hold’.
Restaurant Brands
The fast food empire of this £16.9billion Canadian group encompasses Burger King, Tim Hortons and Popeyes. The company – which operates through 30,000 restaurants in 120 countries – began its comeback programme a year ago, spending £1.5billion to revitalise the look of its 7,000 outlets in the US.
The design aims to encourage diners to buy more Whoppers and fries.
Like McDonald’s, Burger King has a $5 deal which has been extended until October because, for one thing, it seems to be appealing to women.
The New York-listed shares are down by 8pc this year to date, now at $69 (£52). But analysts remain optimistic in the group’s ability to renew the appetite for FAFH – ‘food away from home’.
Most analysts rate the shares a ‘buy’; RBC has set a target price of £71.
Chipotle
Niccol’s departure saw some investors sell the shares, which had risen by 770 per cent between 2018 when he joined the group and his departure for Starbucks.
Bill Ackman, manager of the FTSE 100 investment trust Pershing Square, is among those who strategically reduced his stake in the £60billion business.
As a consequence, the company’s shares have tumbled by 15 per cent to $57 (around £43) over the past three months.
Chipotle, which has 3,500 restaurants in the US, Canada, the UK, France, Germany and Kuwait, is Goldman Sachs’s number one pick in the sector – largely because it is not under pressure over its pricing.
There has been controversy, however, over the portion size of its Tex-Mex cuisine.
Customers complained on social media that the burrito bowls were not filled to the brim.
The new policy is to be more generous, and analysts seem to think that this will be successful as the majority rate the shares a ‘buy’, with some targeting a price of $73 (£55).
UK
Value is also seen as the recipe for success in the UK fast food game – which is worth £22billion a year. This week, the private equity-owned Pret a Manger chain said sales of its 99p filter coffee rose by 60 per cent last month, as its clientele switched from £3.50 lattes.
The £3.23billion Greggs chain is opening more of its branches later, so that customers can enjoy its steak bakes, sausages rolls and their vegan alternatives for supper. Greggs shares are up by 28 per cent this year, to 3,161p.
But, despite this leap, the majority of analysts still rate the shares a ‘buy’, targeting an increase to 3,314p. Earlier this year, Deliveroo seemed entirely unappealing to investors, but the view shifted when the company delivered a small profit.
The shares, which floated at 390p in 2021, stand at 156p, thanks in part to talk of a bid from the US delivery service Doordash.
Some analysts may still rate the shares a ‘sell’ amid doubts that this low-margin business can ever achieve sufficient scale to be competitive. But the majority are more confident, predicting further recovery to 170p.
Shares in Domino’s Pizza Group, the London-listed franchise of the US group, have declined by 25 per cent to 292p this year following a profit forecast downgrade. Orders were lower than expected, despite the Olympics. But the shares are still rated a ‘buy’, with Investec setting a target of 383p.
Fast food may be a forbidden pleasure. But the view of the City and Wall Street is that we will not deny ourselves if the treat is affordable and plentiful. Investors have the choice to abstain but still plump up their portfolios.
DIY INVESTING PLATFORMS
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.