Which Restaurants Are Winning With Millennials?

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  • KeyBanc believes that Millennials will have a bigger impact on the restaurant business in 2020 than Baby Boomers do today.
  • Restaurants that appeal to Millennials will likely continue to thrive, while others will struggle.
  • The next five years will be critical for restaurants currently experiencing growing pains.

In a new report, KeyBanc analyst Chris O'Cull takes a look at the impact that Millennials will have on the restaurant business in coming years. According to KeyBanc, Millennials will make up 26 percent of the peak spending population in the US by 2020, well more than the 20 percent of the peak spending population that is currently made up of Boomers.

This shift in customer base will likely have a major impact on the restaurant business, and KeyBanc breaks the big public names in the industry into five life cycle groups.

1. Emerging Group

These companies currently have less than 50 units, but have demonstrated success at existing units. In addition, they are actively expanding their business by at least 20 percent annually but are currently experiencing earnings losses due to that expansion. Emerging names include Zoe's Kitchen Inc ZOES, Habit Restaurants Inc HABT and Kona Grill Inc KONA.

Related Link: Dear Millennials: Facebook's Telling You To Start Planning Your New Year's Resolutions Now

2. Youth Group

These names are expanding but still less than 50 percent penetrated with neutral to positive cash flow. Investors should focus on new unit sales, margins and consistency. Youth names include Papa John’s Int'l, Inc. PZZA, Bojangles Inc BOJA and Wingstop Inc WING.

3. Growing Pains/Critical Period

This segment of the industry might be the most interesting of all. KeyBanc describes these names as companies with surprise reductions in growth rate because of new store productivity, with weak traffic, with average unit volume (AUV) growth less than same restaurant sales (SRS) growth, and with added balance sheet leverage to placate troubled shareholders. Names in this group include Panera Bread Co PNRA, Chipotle Mexican Grill, Inc. CMG and Red Robin Gourmet Burgers, Inc. RRGB.

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4. Youth 2.0

This is the group that the critical period restaurants are striving to join. These restaurants have experienced resurgence in traffic growth, margin improvements and a rekindling of unit growth due to more efficient store prototypes. Names in this group include Starbucks Corporation SBUX, Domino's Pizza, Inc. DPZ and Buffalo Wild Wings BWLD.

5. Mature Group

Much like the negative connotation that the word "mature" holds for people, this is the category that critical period restaurants want to avoid slipping into. These restaurants are unable to drive positive traffic momentum despite large investments, instead relying on capital returns to boost share prices. In addition, many of these companies are selling restaurants to franchisees at unfavorable valuations and assuring investors that they are doing everything they can to jump-start the business.

This group includes names such as McDonalds Corporation MCD, Yum! Brands, Inc. YUM's KFC and Brinker International, Inc. EAT's Chilis.

Takeaway

By 2020, Millennials will be dominating the restaurant customer base. The younger customer base has already materially impacted the restaurant business, driving concepts such as alternative menu offerings, natural ingredients and connected service. Favorability among Millennials will likely continue to be the key difference between the winners and the losers in the restaurant business for years to come.

Disclosure: the author holds no position in the stocks mentioned.

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Posted In: Analyst ColorRestaurantsTop StoriesAnalyst RatingsGeneralChris O'CullKeyBancmillennials
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