Restaurant Brands International (QSR -2.65%), or "RBI", is a fast-food giant that operates three major fast-food brands (Popeyes, Tim Hortons and Burger King) in Canada, North America and other parts of the world. RBI reported a strong quarter in its recent Q3 2019 earnings, with Burger King system-wide sales increasing by around 15% internationally and Popeyes achieving comparable sales growth of more than 10% in the USA.
The group is so confident of its future that it recently announced the pricing of its second lien $750 million 4.375% senior secured notes offering due 2028, adding to the burgeoning debt on its balance sheet. This will further add to the more than $12 billion of debt the group is carrying, is a sure sign of confidence in future prospects.
Burger King's growth has been broad-based and not only is the brand expanding is in established markets such as Western Europe, but also in emerging countries as well. Asia-Pacific region saw the opening of the restaurant number 3,000, a significant achievement considering there were only 800 restaurants back in 2010.
Investors may be feeling optimistic about RBI's plans and growth prospects, but I should caution that there are two clear headwinds they should take note of in order not to get blindsided.
Source: Restaurant Brands International Website: About Us
The trend towards healthier living
Health and wellness are the latest buzzwords these days, and it's also apparent that millennials (i.e. those born between 1980 and 1999) are driving this trend. Spending on health and wellness is increasing and according to the Global Wellness Institute, the industry is now worth $4.2 trillion. Consumers are increasingly participating in activities that improve well-being, such as using devices and apps that aid sleep, eating organic or natural foods and taking health supplements.
RBI's two main brands - Popeyes and Burger King, both focus on fast food with French fries and fried items as its main attraction. With more and more people eschewing fast food and turning to more healthy alternatives such as salads and poke bowls, this is a trend that will work against RBI over time. Though fast food may satisfy an instant hunger craving, more and more millennials will question the long-term effects of consuming vast amounts of fast food, and thus may alter their diets accordingly.
This trend is growing and will definitely not bode well for RBI.
Eschewing meat-based products for plant-based products
The second headwind is the shift towards plant-based products. Increasingly, more and more people are forsaking meat for plant-based alternatives. More websites and food guides are now touting the nutritional benefits of protein sources such as nuts, beans, pulses and tofu in place of eggs, meat and dairy products. Such a shift in consumer preferences is seeing demand soar for plant-based products that are able to effectively substitute meat products.
AT Kearney, a global consultancy firm, also predicts that by 2040, most of the meat we eat will not come from slaughtered animals, but that 60% of it will be grown in vats or replaced by plant-based products that look and taste like meat.
With RBI's brands serving up predominantly meat-based products, this means that a change in corporate direction is sorely needed in order for the group to avoid losing customers to this new trend. As RBI continues to expand into different territories, management needs to be mindful of this trend as more and more people eschew meat-based products.
Plant-based shift
However, there's hope yet on this front as Burger King recently partnered with Impossible Foods to launch a plant-based patty. The new burger is known as the "Impossible Burger", and according to Burger King, is one of the most successful launches in the company's history. Even RBI's CEO Jose Cil mentioned in the company's recent conference call that "the sales of the Impossible Whopper have been highly incremental and have attracted new types of guests into our restaurants." This seems to stand in stark contrast to MacDonald's attempt to introduce a plant-based burger.
It's good news for investors to know that RBI is cognisant of the two headwinds above and has taken active steps to ensure the business adapts to such changes. By working with Impossible Foods, Burger King has, in fact, even attracted new customers even as it avoided alienating existing ones.
RBI is not standing still, though. Last week, it announced that it would be launching meatless burgers across Europe in a big push for plant-based options. With these initiatives, investors should feel assured that the risks of RBI falling behind are mitigated.
