Federal budget time is approaching again, with softening consumer confidence and declining retail sales, a familiar theme over the last 12 months of post-budget blues. Some retailers, though, are able to cope with swings in consumer confidence better than others. That ability is why many of the world's biggest companies and most powerful brands are in the food and beverage sector.
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The Coca-Cola Co, McDonald's and Starbucks are a textbook trio of retail's growth potential. Starbucks has grown from a market value of $US271 million at the time of its IPO in 1992 to $US71.4 billion today, as its overseas growth helped deliver a near 7000 per cent return to early investors.
Notably, two local food and beverage businesses have been fast growers themselves over recent years, with their sights also set on overseas expansion.
Putting on weight
Domino's Pizza Enterprises (ASX:DMP) is looking to grow its pizza outlet numbers into the world's third-largest economy, Japan, while Retail Food Group (ASX:RFG) is planning to grow its multi-brand food franchise businesses into Asia.
RFG has an impressive portfolio of belt-widening businesses including Donut King, Pizza Capers, Crust Gourmet Pizza, Michel's Patisserie and Brumby's bakeries. The outlets continue to post organic growth in Australia, with the acquisition of Pizza Capers and Crust Gourmet Pizza part of a strategy to enter the quick service or fast food restaurant space.
Neither of the pizza brands are anywhere near maturity, although earnings have grown fast to represent 22.7 per cent of total earnings in the last financial year. However, the strategy of new pizza outlet growth faces a big challenge to disrupt the market leader in Domino's Pizza.
Digital dough
Probably Australia's best digital retailer, Domino's really hit its straps by pioneering the online market for pizza ordering across Australia. The key to its success is the ability to leverage social media, an interactive website, targeted text messaging and online advertising to achieve dominance.
The shift online also means staff waste less time on the phone taking orders and more time making pizzas, with 60 per cent of sales now coming from online in Australia and 50 per cent of them from mobile devices. Domino's digital strategy has delivered a 550 per cent return to investors over the past five years, although the ongoing expansion into Japan has its challenges and the stock is vulnerable to any hint of slowing growth.
Caffeine hits
For RFG, though, coffee may be the best bet for growing returns, with its roasting, supply, and retail businesses having multiple emerging markets of coffee addicts to expand into. Starbucks' fastest-growing market by comparable store sales is China and its success there an example of the moderate competitive advantages Western brands enjoy over their Chinese rivals.
RFG is following Starbucks into China via a joint venture with a local partner to operate a handful of its Gloria Jean's coffee outlets around the nation. The agreement gives RFG a limited interest in the joint venture's future earnings, but in return it receives an upfront fee of $6 million, low-risk entry into a complex market and modest share of future profits.
In total it now has more than 500 international coffee outlets across multiple brands, with some handy leverage to the drink's growing international popularity. The company also believes other food and beverage brand systems it operates are strong candidates for international expansion.
For now though its Michel's Patisserie, Brumby's Bakery and Donut King businesses remain among the core domestic earners, with the outlook for the second half of 2015 recently described as buoyant. That said, the group's potential is no secret and the stock is a little on the expensive side, selling for 23 times annualised earnings per share.
Foolish takeaway
Legendary Wall Street investor Peter Lynch advised investors to buy what they know and suggested that his best investment ideas often came to him outside the office, maybe even on his lunch break.
Those hungry for the best long-term returns would do well to remember the potential of expanding food and beverage businesses as the powerful combination of price, speed and convenience continues to deliver big returns for dominant operators.
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Tom Richardson is a Motley Fool writer/analyst. He owns shares in Retail Food Group. The Motley Fool owns shares in Computershare.
You can follow The Motley Fool on Twitter @TheMotleyFoolAu. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
