Friday Fun With Food and Inflation

As stock market geeks, we often ask ourselves – Is this place publicly-traded? – when we visit or pass by a restaurant chain. 

For example, this week The Juice wondered about popular pretzel chains, Wetzel’s Pretzels and Auntie Anne’s? 

We dug and discovered you can get a piece of Wetzel’s if you buy stock in Canadian company MTY Food Group, which trades as MTY on the Toronto Stock Exchange and MTYFF on the OTC (over-the-counter) market. 

MTY just purchased Wetzel’s for $207 million from privately-held Center Oak Partners. Wetzel’s crushed 2021 with same-store sales up 24% versus 2019. Over the last 12 months, Wetzel’s has generated $245 million in sales. 

MTY owns more than 70 brands, including Cold Stone Creamery, Pinkberry, Taco Time, La Salsa Mexican Grill, Papa Murphy’s, TCBY Frozen Yogurt, and The Counter Custom Burgers. 

The opportunity? While a speculative play, there’s an investment case to make for MTY. 

Wetzel’s saw the writing on the wall before MTY bought it. With mall traffic down, the chain started diversifying, partnering with Phillips 66 (PSX) to sell pretzels in gas station convenience stores. Wetzel’s also has locations inside Walmart (WMT) stores across the country with plans to expand the store-within-a-store concept to Lowe’s (LOWE) and Home Depot (HD). 

MTY can also pair Wetzel’s alongside some of the brands it already owns. So there’s meaningful synergy here. Something to keep an eye on. 

As for Auntie Anne’s. Similar story. For example, the chain has a deal with Jamba Juice for co-branded drive-thru locations. 

Who owns Auntie Anne’s? Privately-held Focus Brands, which also happens to own Jamba (duh!) as well as Carvel, Cinnabon, and Schlotzky’s, among others. 

Key Takeaways:

• In the restaurant space, it’s all about scale and synergy. 
• Without these things, you need a strong, unique brand to survive, let alone succeed. 
• This makes the investment options crystal clear. 

Our twist on the pretzel space got us thinking about smaller restaurant and hospitality chains. 

So we hit up our proprietary Trackstar database of the tickers investors search for most, limited our query to restaurants and filtered to small and micro cap companies only. This way the big names we covered last week (McDonald’s, Chipotle, etc.) wouldn’t come up. 

Here’s a look at the one-year performance of the stocks Trackstar served: 

Source: Google Finance 

In a future edition of The Juice, we’ll consider the standouts on that list.

However, after looking beyond the top five, we concluded it’s tough to be an El Pollo Loco (LOCO) or Red Robin Gourmet Burgers (RRGB) in this competitive fast food, fast casual, and quick service landscape.

Without the size and scale of McDonald’s or Chipotle, it’s challenging to operate a small chain of restaurants under one brand. 

How can you expect to compete against the behemoths without an alternative focus (e.g., RCI Hospitality Holdings (RICK)), which owns strip clubs) or a strong brand that goes beyond the actual food (e.g., Nathan’s Famous (NATH))?

This helps explain why so many micro to small to even midsize restaurants end up part of large privately-held firms. 

Synergy and scale matter so much in this space, especially during times of economic uncertainty and high inflation. 

A small chain with 546 locations such as Red Robin simply doesn’t have the buying or pricing power to make an impact on the top and bottom lines like one with more than 38,000 locations worldwide and roughly 13,500 in the U.S. such as McDonald’s. 

This is why it’s wise to stay away from small stocks like LOCO and RRGB and focus on the big names as well as promising speculative bets such as MTY. 

Speaking of Inflation in the Restaurant Space

Last week, we detailed how much more it costs for a fast food meal this year versus last:

The cost of a meal at BK increased 21% year over year. 

But this is still a relative bargain. You’ll pay an average of $8.18 for a meal at Burger King, which is sandwiched between #3 Jack in the Box (JACK) ($10.20) and #5 McDonald’s (MCD) ($6.19) for the most expensive fast food…

Across all chains, you’ll pay the most for the average fast-food meal in San Francisco ($15.30), Los Angeles ($14.59), and New York ($14.22). 

You’ll pay the least in Tulsa, Oklahoma, where a typical fast-food meal sets you back just $6.55. 

Today, we relay how much some of the major chains have hiked prices: 

• Chipotle (CMG): A 4% increase in menu prices in August after a 10% increase in 2021. 
• McDonald’s (MCD): An 8% increase in Q1 of this year. 
• Domino’s (DPZ): Upped the cost of its mix-and-match menu from $5.99 to $6.99 per item in October. 

The Bottom Line: Next Friday, The Juice focuses on food once again. And why not? So many of us spend Friday looking forward to what we’re going to eat over the weekend. We have data on which restaurant chains did well in Q3 alongside other interesting tidbits on the impact of inflation and the economy on hospitality.

For now, it’s an investing tenet or three worth repeating. 

• Focus your investing dollars on big name brands with size and scale. We’re talking McDonald’s first, followed by CMG, DPZ, and Starbucks (SBUX). 
• Look for speculative stories with synergy like the one we introduced and will follow up on around MTY.

Consider taking some of the guesswork out of the process by buying an ETF that owns a diversified portfolio in the broad food & beverage industry. We suggested a few in the abovementioned Juice from last Friday.

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