3 Characteristics of a Great Restaurant

By Kyle Campbell - August 31, 2012 | Tickers: BWLD, CMG, MCD, SBUX, YUM | 0 Comments

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Let’s face it, the restaurant industry is tough. Competition in this space resides on nearly every major intersection and off every highway exit. Barriers to entry are non-existent as anyone with an oven and closet space can say they are a restaurant. That being said, there are three key characteristics which make a restaurant successful.

If you wanted a slice of pizza and were choosing between two similar-looking pizzerias, how would you decide which restaurant to purchase from? In this case, all other things being equal, you would most likely choose the least expensive. This brings us to our first characteristic: A restaurant must have the ability to distinguish itself from its competition!

As an example, let’s look at Chipotle Mexican Grill (NYSE: CMG). If I were standing in front of a Chipotle and a burrito joint I have never heard of, which would I pick? Chipotle of course! Why? Because I know that, although probably more pricey, the food that I will get is fresh. The company’s “Food with Integrity” program is highly advertised and is an important part of its brand.

Buffalo Wild Wings (NASDAQ: BWLD) is another example of a restaurant that distinguishes itself from its peers. Rather than focusing on its food (though it is quite tasty), Buffalo Wild Wings’ atmosphere stands above those of its competitors. The company combines a plethora of big-screen televisions (to watch the games of course!), tasty wings, and a large beer selection to create the perfect environment for sports lovers and families alike.

Everything mentioned above is all well and good, but it is completely useless if the customer can’t find you. Location is the second key characteristic of a great restaurant. McDonald’s (NYSE: MCD), in my opinion, has been one of the most successful restaurants in terms of picking golden locations. As the highway system was being built, management at the golden arches smartly chose to open restaurants right off of hundreds of exits. These turned out to be prime locations and helped to catapult McDonald’s to being the giant it is today.

Taking a play from McDonald’s book, Yum! Brands (NYSE: YUM), the owner of Taco Bell, Kentucky Fried Chicken, and Pizza Hut, has been snapping up key locations off of China’s new highway systems. If history is any indicator, this may prove to be a key catalyst in driving higher revenues and profits for Yum! Brands.

Location and the ability to distinguish oneself are very important, but to make a restaurant a great investment, there must be opportunities for growth. Companies approach growth in a number of ways, but I believe a disciplined approach is the best method. Chipotle and Buffalo Wild Wings have used a disciplined approach to great effect. By expanding cash flow and not saddling up on debt, these two companies were able to easily weather the Great Recession.

CMG Revenue Growth data by YCharts

Starbucks (NASDAQ: SBUX), on the other hand, took a more aggressive approach to growth and ended up in a bit of hot water. Just before the onslaught of the financial crisis, the going joke was that there were Starbucks stores everywhere, even in their own bathrooms! Obviously, this was not a disciplined approach and it forced them to take heavy restructuring charges. The company appears to have learned from its mistake and, today, approaches growth more in line with the strategies of Chipotle and Buffalo Wild Wings.

Restaurants are my favorite companies to invest in. With these companies, I am able to go out and test their products on a regular basis. By doing this, I hope to keep my fingers on the pulse of the company, while also enjoying some great food! Chipotle, Buffalo Wild Wings, and Starbucks are considered core stocks for me, and I intend on adding to my positions in each in the near future.

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