5 up-and-coming fast-food restaurants

Missed Starbucks on its way up many years ago? Here are the names you should be watching now.

By Minyanville.com Dec 27, 2012 10:42AM
Creatas PictureQuestYou might assume that fast food behemoths like McDonald's (MCD), Burger King (BKW), Wendy's (WEN) and Yum Brands' (YUM) Kentucky Fried Chicken and Taco Bell leave little room for competition. But market researcher IBIS World data indicates that the top four players based on 2011 revenue -- McDonald's, Subway, Starbucks, (SBUX), and Wendy's -- are actually forecast to have a combined total market share of less than 40% in 2012.

In the $170 billion quick service restaurant (QSR)/fast food industry, such market fragmentation equates to major opportunity for smaller fast food restaurants -- and investors looking for future opportunity.

Here are five up-and-coming fast food restaurants to watch.

David's Tea
Described by one fan as an "Apple store for tea nerds," David's Tea, a family-owned business that was opened in 2008 by Canadian entrepreneur David Segal, David's Tea's currently has a retail presence in Canada, New York, California, and Illinois, and an online business that ships products, including tea and gifts across both Canada and the U.S.

Davids TeaNevertheless, don't mistake a limited brick-and-mortar footprint for limited potential. By delivering a careful combination of unique tea and product selections, hands-on customer service, and a connoisseur-like experience (similar to the Starbucks of yesteryear), David's Tea has ability to convince customers that $3 to $5 for a cup or pot of steeped tea is wholly justifiable.

On the heels of Starbucks' recent acquisition of Teavana (TEA), David's Tea could be poised to live up to its name in a David-and-Goliath style battle, particularly in capturing the attention of health-conscious consumers who are seeking an alternative to the mass-market sprawl that has become Starbucks.

Jamba Juice
Though Jamba Juice Company (JMBA) entered the QSR scene back in 1990 as one of the original "better for you" fast food retailers, it lost some steam and began regrouping three years ago to turn a sinking ship around. To do so, it expanded its smoothie product offering to support its shift to an overall lifestyle brand, adding steel cut oats, fresh juices, and reduced calorie options to the menu.

jamba juiceIn November, having turned out two consecutive years of positive same-store sales, it announced plans to add 120 new store units across its original home base of California, adding to its existing 788 retail and franchise units, located in the U.S. and abroad.

Jamba might also be taking a strategy cue from what beer and cigarette manufacturers have long known: Win over young taste buds early and capture a customer for life. In September, it unveiled JambaGO, its "self-serve" smoothie effort (in partnership with the National Dairy Council), aimed at providing healthier options for K-12 school students. In its third-quarter earning report, the company shared plans to open 1,000 more JambaGOs in 2013.

Minyanville contributor Lloyd Khaner of Khaner Capital picked the stock as part of a 2012 Value Investing Conference presentation this fall. Khaner said he saw Jamba as a value opportunity under new CEO James White, a student of turnaround specialist Jim Kilts. Khaner's comments caused the stock to jump 3.5%.

Five Guys Burgers & Fries
five guysThough Five Guys has existed in the Washington, DC, area since 1986, it didn't begin rapid expansion until it extended its tried-and-true formula of offering fresh, hand-formed burgers and fries cooked in peanut oil, to franchisees in 2003. Today, there are more than 1,000 locations nationwide and 1,500 more units in development.

Five Guys climbed 12 spots (from #42 to #30) in just two years on QSR Magazine's "The QSR 50" list, ranking second behind Panera Bread (PNRA) in 2012 for the "fast casual" segment, a group that food industry research firm Technomic predicts will grow 12% in 2013, driven largely by consumer catering needs, which represent a $27.5 billion market opportunity. The privately-owned Zagat-rated company ended 2011 with $950 million in sales.

Jimmy John's
JImmy johnsWhile Subway restaurants continue expansion and tout their healthy sandwiches and $5 footlongs, Jimmy John's, an Illinois-based company that opened in 1983, may prove to be the dark horse in the competition for a key fast food market segment: Millennials. Defined as consumers aged 20 to 35, they ranked Jimmy John's as a favorite in a recent Technomic Consumer Restaurant Brand Metrics poll, thanks to its commitment to offering fresh, affordable ingredients like bread that is baked in-house daily, and meats and veggies that are prepared fresh every morning.

Though these customers have far less spending power than baby boomers, they're also less reactive about the state of the economy, opting to satisfy their impulses now -- and worry about retirement later. For restaurants that capture their business, that attitude keeps business moving ahead when other consumer segments pull back on spending.

According to QSR Magazine, Jimmy John's ended 2011 with $895 million in sales and 1,329 stores (part corporate-owned, part franchise). From 2010 to 2011, it opened 199 locations, earning it a second place rank behind Subway for the most new stores opened in the QSR sandwiches segment.

Papa Murphy's
Papa MurphyAs fast food restaurants continue the quest of balancing affordability with healthier food options, Papa Murphy's, the "take n' bake" pizza chain that has been Zagat-rated as the  No. 1 pizza chain for two years running, just keeps on growing. With a current tally of more than 1,200 stores spanning 37 states, the Washington-based company is the fifth-largest pizza chain in the U.S., and it's not stopping there.

In September, Papa Murphy's, which was acquired in 2010 by private equity firm Lee Equity Partners, announced plans to open 100 new locations throughout the Gulf Cooperation Council in partnership with MAM Foodco. Papa Murphy's is Keeping up with the flood of other fast food establishments like Texas Roadhouse (TXRH), PF Chang's (PFCB), Starbucks, Pinkberry, and Fatburger, all hoping to capitalize on the Dubai customer. The first location in Dubai, UAE, is slated to open by the end of the year.

More from Minyanville
Mar 11, 2013 5:41PM
wow, too bad Im in the Philippines and do not have access to these stores. :|
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