Take a bite of these fast food giants

Change is on the menu for McDonald’s, Starbucks and the other players in the £291 billion a year fast food market in the US alone.

You may not like a Big Mac, a Mighty McMuffin or a pumpkin cream cold brew (yes, that’s a drink), but there could be benefits to your portfolio if these companies can reverse declining demand.

Fast food’s big names may be down, but they’re not out of business yet, according to Joshua Cummings of Janus Henderson Global Research.

The long-term outlook for the sector is good. Goldman Sachs says people will still want to eat out as long as they feel they are getting value for money.

Cost-conscious consumers fed up with inflation are forcing the sector to offer discounts.

McDonald’s CEO Chris Kempczinski said customers have become “more selective with their spending,” and the company is extending a $5 summer meal deal in the U.S. through December. Fans of the food weren’t thrilled with the pricier burgers and fries.

On both sides of the Atlantic, warnings are being issued about the health risks of ultra-processed foods. In this case, the government plans to ban junk food advertising on TV before 9pm.

Diet pills like Ozempic are said to pose another threat to the “lunch stocks,” as Wall Street calls McDonald’s and other chains.

This GLP-1 drug can reduce appetite – and the taste for fatty or sugary treats.

But fast food giants are responding to these challenges and are not content to rely on “patriotic nostalgia,” the term that sums up Americans’ fondness for the familiar taste of a Big Mac or a similar treat.

Shares in £82 billion Starbucks, the world’s second-largest fast food chain, rose after news of Brian’s appointment

Niccol – the manager who transformed the burrito chain Chipotle Mexican Grill – as boss.

Niccol, who wants to turn Starbucks back into a “community coffee house,” starts his new job in September and travels more than 1,000 miles by private jet three days a week from Newport Beach, California, to Starbucks headquarters in Seattle.

Chipotle is mourning its loss. But the company could be one of the beneficiaries of the huge cost savings that Morgan Stanley says it will bring from deploying humanoid robots in kitchens.

An avocado processing robot that makes guacamole is being tested at two Chipotle restaurants in California.

The risks are high. But the rewards can be, well, tasty. These are the stocks to feast on in the US and UK.

US

McDonald’s

The McDonald’s Corporation, with a turnover of £159 billion, is the world’s largest fast food company, with more than 38,000 restaurants in 100 countries.

countries. Former employees include U.S. Vice President Kamala Harris.

The various ‘industry and competitive’ challenges the company faces include the higher cost of ingredients, energy and packaging. Customers, put off by ‘Mcflation’, have started downgrading, that is, buying groceries at the supermarket. Customers have also upgraded, preferring smarter ‘fast casual’ restaurants. In America, Chipotle is a favourite in this category.

Analysts believe McDonald’s decision to determine the “right size”

The prices of certain meals make competitors do the same.

The 16 per cent rise in shares to $294 (more than £221) in the past three months suggests there is confidence in McDonald’s ability to win back customers.

Analysts at Citigroup have raised their price target on the shares to $301 (£226), while analysts at Jefferies are pushing for $310 (£233).

In total, 17 analysts consider McDonald’s shares a ‘buy’ stock and 13 consider them a ‘hold’ stock.

Starbucks

The range of challenges facing Starbucks, the second-biggest name in fast food, includes the impersonal atmosphere of its cafes and the need to appease New York activist investor Paul Singer of Elliott Management. Singer bought a significant stake in July after the stock fell. Like McDonald’s and some other American brands, Starbucks has been hit by boycotts in the Middle East over U.S. support for Israel in the Gaza conflict.

Last week, Niccol said he would first tackle the chain’s problems in the U.S., transforming what he called the “transactional feel” of its cafes and addressing Gen Z dissatisfaction with the Starbucks brand. He will then turn his attention to China and other locations abroad.

Niccol, who has been called a “dream hire” and a “hall of fame” restaurant boss, “aims to get mornings right” with his team of “green apron partners.” The transformation Niccol has brought about at Chipotle has been so dramatic that analysts at Bank of America said this week they now have “more confidence” in Starbucks, targeting a price of $118 (£89), up from the current $96 (£72). But most other analysts are watching and waiting, and are therefore rating the stock a “hold.”

Restaurant brands

The £16.9bn Canadian group’s fast-food empire includes Burger King, Tim Hortons and Popeyes. The company, which operates through 30,000 restaurants in 120 countries, began its comeback programme a year ago, spending £1.5bn to revamp the look of its 7,000 US outlets.

The design should ensure that guests buy more Whoppers and fries.

Like McDonald’s, Burger King has a $5 deal that has been extended through October, in part because it appears to appeal to women.

Shares in the New York-listed company have fallen 8% so far this year, now trading at $69 (£52). But analysts remain optimistic about the group’s ability to reignite appetite for FAFH – ‘food away from home’.

Most analysts rate the shares as a ‘buy’, with RBC setting a price target of £71.

Chipotle

When Niccol left, a number of investors sold his shares, which had risen 770 percent between his joining the group in 2018 and his departure from Starbucks.

Bill Ackman, manager of FTSE 100 investment fund Pershing Square, is among those who have strategically reduced his stake in the £60bn company.

As a result, the company’s shares have fallen 15 percent over the past three months to $57 (around £43).

Chipotle, with 3,500 restaurants in the U.S., Canada, the U.K., France, Germany and Kuwait, is the industry’s number one, according to Goldman Sachs, largely because the company has not faced price pressure.

However, controversy has arisen over the portion sizes of Tex-Mex dishes.

Customers complained on social media that the burrito bowls were not filled to the brim.

The new policy is to be more generous and analysts seem to think this will be successful as the majority rate the shares as ‘buy’, with some targeting a price of $73 (£55).

United Kingdom

Value is also seen as the recipe for success in Britain’s £22bn-a-year fast-food sector. This week, private equity-owned chain Pret a Manger said sales of its 99p filter coffee rose 60 per cent last month as its customer base switched from £3.50 lattes.

The £3.23 billion Greggs chain is set to open more stores later this year, so customers can enjoy its steak bakes, sausage rolls and vegan alternatives for dinner. Greggs shares have risen 28 per cent this year to 3,161p.

But despite the jump, the majority of analysts still rate the shares as ‘buy’, targeting a rise to 3,314p. Earlier this year, Deliveroo looked completely unattractive to investors, but that changed when the company posted a small profit.

The shares, which were at 390p in 2021, are now at 156p, thanks in part to rumours of a bid from US delivery service Doordash.

Some analysts may still rate the shares as a ‘sell’, amid doubts that this low-margin business can ever achieve sufficient scale to be competitive. But the majority are more confident, predicting further recovery to 170p.

Shares in Domino’s Pizza Group, the US group’s London-listed franchise, have fallen 25 per cent this year to 292p after a profit forecast cut. Orders were lower than expected, despite the Olympics. But the shares are still rated ‘buy’, with Investec setting a target of 383p.

Fast food may be a forbidden pleasure. But the City and Wall Street’s view is that we won’t deny ourselves if the treat is affordable and plentiful. Investors have the choice to abstain but still fill their portfolios.