Analyzing Three QSR Stocks

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

Quick Service Restaurants (QSR) have always been appealing to diners’ appetite for their tastes and variety. With never-ending consumer desires, restaurant operators are now focusing more on the growth in the number of units and marketing activities, in addition to more menu options and price economy. The QSR industry is getting bigger parallel to the population increase, high per capita incomes, and the constant demand for convenience. Going forward I think that the expansion of QSR's should outpace the overall industry as the demand for quality food increases.

Among the QSR's, Panera Bread Co. (NASDAQ: PNRA) is a stock with multiple drivers providing it visibility in the industry. It has major investments planned for 2013 that I believe should help it bring higher brand awareness and increased traffic to its chains.

Panera has been outstanding in building brand loyalty with a powerful 'surprise and delight' tool for direct marketing. The MyPanera program, which was introduced in 2011, now has over 12 million members with a growth of ~1 million from the last quarter. Its email approach is highly successful, with a 30% open rate and a 6% click-through rate. This should remain a major driver for SSS growth.

Additionally, Panera has guided its unit development well, with total new openings of 91 units YTD (41 company owned and 50 franchise units). It has more scheduled openings of ~120 units for 2013, which reflects a growth of ~7% following 7.8% of 2012. Panera is laying its stress more on the performance of 2012 openings, which have reported higher volumes but have also been affected by high costs.

Let’s have a look at how Chipotle Mexican Grill (NYSE: CMG) has planned its unit development. It has opened 49 units in 4Q 2012 compared to 67 in 4Q 2011, which reflects a slower pace. Total new openings planned for 2013 is ~175. But I can see Panera is well placed above Chipotle in respect to unit productivity and SSS growth. The new unit productivity for Panera is running in the range of 100% - 105%, driven by expansion into urban regions. For Chipotle, the range lies below Panera with 80% - 85%. Also, the comparable same store sales for Panera come in the 5% - 6% range as a result of more focus on quality food and marketing. Compared with this, same store sales for Chipotle are running between 4% - 5% due to lower spending on brand development.

In regards to its marketing strategy, Chipotle is following a more traditional approach for marketing and loyalty programs. The company is focusing on advertising with actual food images, unlike the animated promotions. In addition to this, it is looking to introduce a Panera style program offering rewards, which is more differentiated than traditional means. The initiatives will be starting in 2013, which is somewhat late compared with Panera, which has already established an early market entry. But we expect a frequent customer base should notice the digital efforts of the company and translate it into ROI driven and sales growth figures.

Speaking of Panera's marketing approach, the company has increased its marketing dollars over the last two years. It has a multi-year marketing project with an evolution message to generate brand awareness. The company communicates the new message through a campaign designed to engage more and more customers by highlighting values that consumers can generate. The company hopes to build a deeper connection with consumers through effective marketing to generate higher ROI. Its media spending has increased to 1.7% of sales from 1.3% in 2011. Also, the company is shifting its advertising media from radio to TV and social, which should be more effective and reach more consumers. Though the budget is relatively small compared to other peers, with the company’s focus and increasing efforts I believe that the spending will bring good returns.

Another competitor of Panera, Dunkin' Brands Group (NASDAQ: DNKN), is focusing on bringing a pipeline of products through innovations in sandwiches, beverages, and other items as opportunities to help drive traffic and sales growth in the next year. The news makes sense, as Dunkin’ generates ~70% of its revenue from specialty sandwiches and drinks, while donuts bring in lower sales due to the inefficient supply chain. Along with this, it is also considering adding some sweet and savory items to bring in traffic in the afternoon/evening. In addition to this, the launch of K-cups during September accompanied by increased media spending has been well received in the market, as reflected in the incremental comps growth. It is estimated to have contributed ~2% to the overall comp on a quarterly basis since the launch.

Panera has introduced an innovative menu with the addition of Chopped Chicken Cobb with Avocado, and Strawberry Poppy seed Chicken Salad, which has increased its signature salad sales 11.6%. The Roasted Turkey & Avocado BLT sandwich also has contributed a 28% increase in signature sandwich sales during 3Q12. Panera is testing out its pasta, which is likely to be added to the menu in early 2013.

Summing up the above points, the future layout of Panera with planned investments strengthens its position. Panera will continue to drive traffic growth through menu enhancements with new salads and sandwiches. Its disciplined approach to  marketing initiatives with increased spending should bring meaningful comps growth over time. The new sales drivers and greater brand recognition will potentially push the stock upside. 

ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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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