Ever thought of investing in a restaurant and decided against it? That can be an understandable reaction given some of the headlines about failed ventures. That does not mean the sector is a no-go for those able to take a diversified approach in certain areas, according to the author of this article.
The business pages are littered with stories of how risky it is to try and make money in the restaurant trade. But perhaps some food outlets are riskier than others, and if a portfolio approach that emphasizes diversification is adhered to, putting money into restaurants might make sense after all, depending on one’s appetite for risk.
To consider such an idea is Dan Fletcher, of iCapital Network, a platform that gives access to alternative investments such as private equity and in a way that it says helps democratize access to assets that have been previously the preserve of the super-rich.
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When seeking out recession-resistant investments, the restaurant industry may not be the first place investors look, but they could be missing an opportunity. Certain categories within the restaurant industry, most notably quick service restaurants and fast casual restaurants, offer affordable menus that often lead to stable consumer demand, even under weak economic conditions.
In fact, consumers may be more likely to eat at QSRs and FCRs during a recession, as they are inexpensive and convenient. During the global financial crisis, these restaurants proved to be attractive investment options, as they exhibited modest sales growth even as the rest of the economy contracted (Exhibit 1). (1).
Trends shaping the restaurant investment opportunity
In addition to their relatively resilient nature, the QSR and FCR segments of the restaurant industry are poised for significant growth in the coming years, thanks to several overarching trends.
Consumers have less time to cook
Americans lead busier lives than ever and have less time for traditional household activities. According to data published by Pew Research in June 2019, the percentage of dual-income households in the US has risen to 66 per cent, up from 49 per cent in 1970. (2) Technology is also keeping American workers connected to their jobs during all hours of the day, while children face growing pressure to partake in numerous extracurricular activities.
For many families, the solution to this challenge has been to cook less (historically reported as the most time-consuming domestic task) (3) and dedicate more income toward take-out and delivery. Data from the USDA shows that food-away-from-home accounted for 54 per cent of total food expenditure in the US in 2018, up from 50 per cent in 2009, and around 25 per cent in the 1950s (Exhibit 2). 4 This trend is particularly pronounced among younger consumers, as eating out represents a greater share of total food spend for each successive generation. (5)
QSRs and FCRs are expanding menu options for health-conscious consumers
Many restaurants have updated their menus with items designed to attract different types of customers. The addition of menu options that are perceived to be healthier, for example, makes quick service restaurants more attractive to health-conscious consumers who might otherwise not buy fast food. Numerous fast food chains now offer menu items that are food-allergy friendly or aligned with popular diet trends, which has allowed these businesses to broaden their addressable markets. Additionally, the fast food industry as a whole offers consumers a variety of options, ranging from burgers to pizza to Mexican cuisine, further enhancing the appeal for consumers.
Technology offers easier food delivery and provides additional revenue opportunities
Technology developments in the food service industry have made dining out (or in) easier than ever. The rise of startups such as DoorDash, Postmates, and Uber Eats has made meal delivery simpler and more efficient. This has led to a surge in online and mobile ordering. By 2020, food delivery app usage in the US is projected to surpass 44 million people and reach nearly 60 million people by 2023. (6) The global market for online food delivery is expected to grow to $365 billion by 2030, representing a 20 per cent CAGR from 2017 levels. (7)
Further, operators continue to invest in technology to generate additional revenue opportunities and improve profitability. Nearly 50 per cent of restaurant chains intend to increase their technology spending over the next year, (8) with much of that investment going toward artificial intelligence (AI). Several prominent brands are implementing AI to power their online ordering service with chatbots. Many operators are also installing ordering kiosks with AI engines to reduce customer wait times and implement targeted selling, where the systems detect ordering patterns to generate suggestions for additional items.
Finally, technological innovations have helped restaurant owners improve their margins by becoming more efficient in the way that they track food costs and manage their supply chains.