It wants food when it's hungry, whether the economy is humming or fumbling. Your mind doesn't really enter into it until you have to decide where to eat.
With the economy still wobbling and Wall Street backpedaling, a lot of folks are getting their food where it's cheap and plentiful. In the restaurant business, that means fast food and fast casual chains.
"Consumers are searching for value, so restaurants that offer good product and high value are doing well," said Darren Tristano, executive vice president at Technomic, an industry tracker.
Such restaurants include Chipotle Mexican Grill (NYSE:CMG - News) and Panera Bread (NASDAQ:PNRA - News), which focus on fresh ingredients and creative menus.
McDonald's (NYSE:MCD - News) has moved up the value chain with salads, wraps and its McCafe line of coffee drinks aimed at competing with chains such as Starbucks (NASDAQ:SBUX - News) and Peet's Coffee & Tea (NASDAQ:PEET - News) .
On the flip side, the more elegant restaurants in the group have taken harder hits.
"Higher-priced casual dining chains have not been able to achieve the level of demand and traffic they would like," Tristano said.
For many restaurants, however, 2011 has been a big improvement over the previous couple of years. Sales are up, profits are up and some chains are back in expansion mode.
The 55 stocks in IBD's Retail-Restaurants group hit an all-time high on July 7. The correcting market has since driven the group down more than 20%.
But the group still ranked No. 10 among the 197 industry groups tracked by IBD, up from No. 43 at the beginning of June.
The recent sell-off — combined with renewed fears about the global economy — aided the belief that value-oriented restaurant chains are the ones with a reason to be optimistic.
But experts say not all chains are created equal.
In the fast food sector, analysts predict McDonald's will maintain solid growth, largely on its continued expansion into overseas markets.
Mickey D's sold its more than 1,750 locations in South America to private investors for $700 million in 2007. Now named Arcos Dorados (NYSE:ARCO - News), the operation has taken up the expansion of the chain under a 20-year franchise agreement with McDonald's.
Wendy's (NYSE:WEN - News), which operates its namesake restaurants as well as the Arby's chain, is expected to keep struggling.
The next rung on the ladder are fast casual chains like Chipotle Mexican Grill, Buffalo Wild Wings (NASDAQ:BWLD - News) and Panera Bread. These offer more upscale menus than fast food joints, but still no table service. These should maintain double-digit sales and profit growth into the next few quarters, according to most analysts.
The forecast is less rosy for pricier full-service restaurant operators like McCormick & Schmick's (NASDAQ:MSSR - News) and O'Charley's (NASDAQ:CHUX - News), with little or no growth in the near-term outlook.
Despite the minirebound in 2011, experts remain cautious regarding the overall industry's momentum over the near term.
"Riding on the back of a slowly reviving U.S. economy and the consequent rise in comparable-store sales, restaurant operators have managed to post improved results in recent months," a recent report from Zacks Equity Research said. "We expect restaurant companies to continue delivering better numbers in the (third) quarter."
1. Business
IBD's Retail-Restaurant group ranges from coffee chains and steak houses to burger joints and sports bars.
The largest is McDonald's — with a market cap of $90 billion and nearly 33,000 stores worldwide.
At the other end of the spectrum is Good Times Restaurants (NASDAQ:GTIM - News), a Golden, Colo.-based hamburger chain with 49 restaurants and a market cap of $4 million.
McDonald's over $25 billion in annual sales is more than the combined sales of the next biggest companies: coffee retailer Starbucks and Yum Brands (NYSE:YUM - News), which owns KFC, Taco Bell and Pizza Hut.
Despite its massive size, McDonald's has managed to produce eight straight quarters of double-digit earnings gains.
Last quarter the company topped Wall Street estimates with 19% profit growth and 16% sales growth.
It logged same-store sales gains of 4.5% in the U.S., 5.9% in Europe and 5.2% in the Asia/Pacific, Middle East and Africa division.
"Despite concerns that Euro trends could moderate following austerity measures, the region has proven to be the most resilient thus far in 2011," Citigroup analyst Gregory Badishkanian wrote in a report on McDonald's Q2 results.
Fellow fast food operator Yum Brands increased its profit in double digits four of the past six quarters.
Like McDonald's, Yum has done a good job building its business overseas. KFC and Taco Bell have done well in China. In May, Yum moved to acquire the 73% of shares remaining in China-based Little Sheep Group, which operates a chain of hot pot restaurants. The deal valued the chain at $863 million.
Wendy's has not made nearly as big a push into international markets. Less than 10% of its sales come from outside the U.S. — a key reason the company's revenue growth has lagged, watchers say. Last quarter's 1% sales gain was the first time in six quarters that Wendy's even grew its top line. Analysts expect sales to decline at least 14% in each of the next four quarters.
• Name of the game: Recession weary consumers in search of value have played to the strengths of low-priced, fast food icons like McDonald's and of fast casual chains like Chipotle Mexican Grill. The increase in customers has turned the challenge to one of getting enough food out, faster.
2. Market
On the face of it, the restaurant industry is a simple one: Companies make food and beverages, and customers buy them.
But there are vast differences in what the companies sell and whom they sell to.
At some restaurants, you can drive right up to a window, order through an intercom and get away for under 3 bucks.
At others, you must book reservations a week in advance and spend $100 or more for a meal.
Even companies that share the same space vary in terms of food and atmosphere. The fast casual category is an example. Chipotle, Panera and Buffalo Wild Wings all operate in the sector, each with their own specialty.
Chipotle, known for burritos and fresh ingredients, might be the restaurant industry's top performer, fast casual or otherwise. It has increased sales and profit at least 12% the past eight quarters.
Analysts expect revenue growth of at least 19% and earnings growth of at least 22% each of the next four quarters as the chain benefits from a handful of positive trends and initiatives.
"Additional pricing and strong new unit volumes, matched with customer strength and operational initiatives, offset cost pressures and continue to drive top-tier earnings performance," JPMorgan analyst John Ivankoe noted.
3. Climate
Because of the uncertain economy, many restaurant chains have tried to lure customers with low prices and special deals. That's a challenge, given this year's steep rise in commodity costs.
Food costs suck up a third of restaurant sales.
Wholesale prices of corn, wheat, coffee and other commodities are all higher in 2011. So are the prices of energy and materials.
In many cases, restaurants have no choice but to raise prices.
"Most of the restaurants will try to safeguard their margins by passing the cost increases to consumers," the Zacks report said.
McDonald's has pushed through price hikes of 2.4% in the U.S. and 2% in Europe, Citigroup's Badishkanian notes, but consumers haven't flinched.
"It appears the company has seen fairly limited resistance thus far," he wrote. "They continue to grow guest counts and take share from the market."
4. Technology
Much of the technology spending in the restaurant industry centers on point-of-sales (POS) systems, which help companies track transactions, keep up with inventory, monitor labor costs and learn how long it takes to fill orders.
A survey earlier this year by Hospitality Technology, an industry publication, found that 25% of respondents said they will replace their POS systems within the next five years.
Elsewhere, some restaurants have installed self-serve kiosks that let customers punch in their orders on a computer monitor. The orders are sent directly to the kitchen staff. When the food is prepared, the customer picks it up from the kitchen counter and proceeds to a cashier to pay.
"It reduces the number of order takers, which lowers labor costs," Tristano said. "It also improves the accuracy of the restaurants."
In other cases, restaurant operators have focused on building better-designed and more efficient restaurants. An example is Chipotle's initiative to open smaller, less expensive stores, which it calls A Models.
"About 30% of the new units opened this year have been the A Model prototype," analyst Ivankoe noted. "In our view, this suggests significantly higher returns on investment."
5. Outlook
The biggest wild card is how the economy will shape up, both in the U.S. and elsewhere.
For many restaurant firms, another steep economic slide would be catastrophic.
"A lot of these chains have been trying to get past this recession, and they have a hard time doing so," Tristano said. "So you're likely to see more bankruptcies and equity buyouts."
Industry leaders might emerge in decent shape even if the economy takes another negative turn.
"We believe well-positioned companies will drive above-average traffic trends and enjoy pricing power," the Zacks report said.
Overall sales for U.S. restaurants are expected to grow 3.6% to $604 billion this year, according to data from the National Restaurant Association.
• Upside: Tastes are always changing, but everybody has to eat, so restaurants aren't likely to go out of style.
Growth of overseas markets in Europe and Asia should benefit the biggest names in the industry.
• Risks: Rising food costs and less confident consumers pose the two biggest threats to the industry.
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