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Will fast-food deliver fast growth in the next year?

by , 02 July 2020
Will fast-food deliver fast growth in the next year?
This week, sit-down restaurants once again opened their doors to the public.

They opened under a cloud of restrictions. But they're open!

This must be a welcome relief to so many private restauranteurs and small business investors. Because, while they can't serve alcohol, offer a buffet and or hand you a menu (menus will have to be replaced by “no-touch” options), they can at least start to generate a bit of revenue to cover their ballooning fixed costs.

The Covid-19 induced lockdowns have meant most sit-down restaurants, bars and cafes have been deprived of customers for months. Bills have been piling up and financial pressure has mounted.

You may think being allowed to deliver food through apps like Mr D or Uber Eats would have given some relief, but the fact is, brick-and-mortar, sit-down dining experiences just cannot make ends meet by running the kitchen alone.

Furthermore, most of these independent small business restaurant operators don't have deep pockets like their massive chain-operated competitors.

And while I think restaurants are still going to face serious challenges in the months ahead, it's also where I'm seeing an opportunity this morning.

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As you likely know, markets are forward looking. Often the best time to buy into listed company’s shares is when things look the bleakest.
It’s only when everyone else is convinced it’s time to sell an asset that you (the savvy buyer) will get the best price.
So, today’s contrarian idea is to buy into the listed restaurant and leisure sector.
Why do I believe now is the right time?
It’s notoriously difficult to pick the bottom of any price move. But value investors root out businesses that have been unfairly punished. Businesses that will survive and then thrive when the economic cycle turns.
And let’s face it. The restaurant and leisure industry will survive this. We will be going to entertainment venues again. Tourism will recover. It’s not a question of “if” it’s a question of “when”.
Now we know large chain restaurants, hotels and casinos are also struggling. Lockdowns have been no walk in the park. But they have a massive advantage over the small mom and pops restaurant owners.
Firstly, they have very deep pockets. When you run a single restaurant, you have a high concentration risk. However, when you’re a shareholder of a large group of restaurants you have the following advantages.
Advantage #1: Diversification
You diversify your risk across many sites. If one of the restaurants does badly your overall investment is not affected. Some of the restaurants in the chain may close, but overall, the bulk of the business survives. As an investor, in times like these, the diversified option is going to be better.
Advantage #2: Deep pools of central financing
If a single restaurant is particularly hard hit by a temporary setback, but the long-term business case is sound, central funding allows the group to support the individual restaurant site. The small independent owner goes bust in the same situation.
The group, as a whole, can also raise capital in various ways to shore up its balance sheet. It can use the creditworthiness of its stronger businesses to help raise funds to support the weaker businesses in uncertain times like these. This strategy is also not available to the small restaurateur.
This makes it far more likely for a listed business to survive single shock impacts like the recent lockdown. Individual stores may become unprofitable, but the group survives.
Advantage #3: Suppliers are more likely to help the bigger group
Larger listed restaurants have central buying power. This gives them an advantage over small business when it comes to negotiating with suppliers.
When times are tough (as they are now) suppliers would rather protect their relationship with a big chain (the bulk of their business) by giving better contract terms. The smaller business once again suffers.
Think about how much beef Steers (as a group) buys from farmers. Then think of the negotiating position of a single independent restaurant. Let me tell you, the single restaurant is a price-taker. They are forced to take the price the supplier offers. There is no room to negotiate. The same principle often applies to landlords and property rental costs.
Bulk negotiating power is a massive advantage. 
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So how do you get exposure?
You could look at a group like Famous Brands (FBR). It’s currently down -51.06% for the year. It owns Wimpy, Steers, Mugg & Bean, Fishaways, Debonairs, Wakaberry, Tasha’s, Turn ‘n Tender, Europa, Mythos, and more. Each of these powerful chains can cross subsidise each other and make sure the whole entity survives.
You could also explore other companies in the hotel and gaming space.
Currently the hotel group City Lodge (CLH) is down -67% for the year.
Gaming groups like Sun International (SUI) or Tsogo Sun (TSG) are down -60% and -65% respectively.
If you’re looking for beaten up value stocks, South Africa has got to be one of the most fertile grounds for selection.
Of course, there are plenty of international opportunities too. I recently had a client buying Royal Caribbean Cruises (RCL) on the New York Stock Exchange at $22 per share. It’s currently trading at $50.83 per share. That’s more than double the money profit in a few short months.
If you’re looking for triple digit returns, you generally find them in markets where everyone is panic selling.
Welcome to the world today.
If you’d like to set up an account with me, I work as an advisory investment broker at Rand Swiss. You can contact me directly by sending an email to support@randswiss.com. As part of our full-service accounts I will personally help you review and build up your personal share portfolio.
Werner Fourie,
Rand Swiss, Wealth Manager

Will fast-food deliver fast growth in the next year?
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