Dine In and Dish Up Your Plate and Your Portfolio

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

City living changes the ways that people live and eat. All of this change impacts dining habits, thus enhancing growth in the food industry. In 2014, the food industry is expected to reach $990 billion with 586 billion transactions. This represents a compounded annual growth rate of 18% over the past five years. Restaurants and cafes make up over 50% of the total industry.

The three companies under analysis here are focused on increasing their presence in the global market to take advantage of the rise in city living. How will the expansion plans benefit stomachs everywhere as well as investors?

Re-imaging and opening new restaurants for incremental sales

Fast food restaurants like McDonald's (NYSE: MCD) keep adopting various strategies to enrich the customer experience. The company is currently upgrading around 1,500 to 1,600 stores globally. It will spend $1 billion on this project out of $3.2 billion in slated spending this year. The upgrades will include doubling the number of windows in the drive-thru and other interior changes. The stores will be upgraded by late 2014 and average sales per upgraded store are estimated to increase from $2.3 million to $3.1 million.

Coffee sales in China will increase from $1 billion in 2011 to $2.61 billion in 2017. To maximize this opportunity, the company is planning to expand its coffee house, McCafé, in China. It will increase number of McCafé outlets by 200 this year, bringing the total to 750 outlets. Furthermore, the company is expanding by opening up to 1,600 new restaurants globally. This will include 300 new restaurants in China, totaling 2,000 restaurants by 2014. It will spend approximately $1.6 billion on the expansion plan, from allotted funds.

With re-imaging its existing stores and by opening new restaurants, its operating income will grow by 7% and the company will experience a total sales increase of 3% to 6% year-over-year.

Competitor’s advantage

In 2012, Chipotle Mexican Grill (NYSE: CMG) increased its restaurant presence in new locations by 15%. With this expansion, the company has reported revenue growth of 20% year-over-year. It is planning to continue its expansion with 180 new restaurants this year. This will include opening four restaurants outside the U.S, increasing its international presence by 25% and bringing its number of locations worldwide to approximately 1,590. Single unit revenue is approximately $2.1 million annually, and the company expects the same revenue from its new restaurants. The company’s total revenue will increase from $2.7 billion in 2012, to $3.1 billion in 2013, and $3.7 billion in 2014.

Chipotle and its close competitor Qdoba both specialize in burritos. Qdoba is facing financial problems, so it is planning to close 67 restaurants in United Stated by September. It is expected that approximately 25% of Qdoba’s customers will be converted to Chipotle’s customers. This will drive $14.2 million in additional sales revenue in the fourth quarter of 2013.

With the various strategies adopted by the company, its earnings per share will increase from $8.77 in 2012 to $10.52 in 2013. This will be followed by $12.69 in 2014.

Expanding in emerging markets

Yum! Brands (NYSE: YUM) has both company-owned businesses and franchises, with 33% of its stores being company-owned while the rest are all franchised. Company-owned business generates 60% of the company's total annual sales. With this high percentage of returns, Yum! plans to expand its company-owned stores by 700 new restaurants in China; this is due to China having the second-largest economy in the world. The total number of restaurants will reach to 6,400 by the end of this year. With this expansion strategy, the company’s revenue from China will grow from $6.7 billion in 2012 to $8.3 billion in 2014.

Stores in India are showing the highest same-store sales over the last three years after China. The company currently has 500 restaurants in India and plans to double that number by 2015. To meet this goal, it will open 150 new restaurants in India this year and will spend approximately $150 million on its expansion plan. The India segment is expected to bring revenue of $1 billion by 2015, with an additional profit of $100 million as a result of the expansion.

These strategies will increase the companies earnings per share from $3.34 in 2012 to $3.71 in 2014, and will be followed by $4.23 in 2015.

Conclusion

Yum! Brands and McDonald's are expanding in emerging markets. This will bring additional revenue opportunity for both the companies. On the other hand, Chipotle is adopting a balanced expansion strategy by opening new restaurants globally. Looking at the potential of above companies, I recommend a buy for all three stocks.

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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