Chick-fil-A makes more in annual sales per restaurant being open six days a week than McDonald’s does in seven.
That’s according to Hedgeye Risk Management Consumer Staples analyst Daniel Biolsi.
Most people wouldn’t know that fact because Chick-fil-A is a private company and always has been since its founding by the late Samuel Truett Cathy in 1967.
Chick-fil-A is also one of the fastest-growing quick service restaurant chains in the U.S. with the highest customer satisfaction ratings.
Why are we telling you about a private restaurant chain if there are no publicly-listed shares to buy?
Well, you can profit from Chick-fil-A’s unique business model and growth… indirectly, through a public company that is an important supplier to the restaurant chain.
Keep reading to find out how.
One of the reasons Chick-fil-A continues to be so successful is the nature of its franchise model.
The company has more than 2,600 restaurants, including four in Canada with plans for 20 more by 2025.
It only costs about $CDN15,000 to become one of Chick-fil-A’s independent franchisees but each operator is handpicked by the company and has to go through a rigorous training program that can last months.
Chick-fil-A states on its website:
This is not the right opportunity for you if you:
- Are seeking a passive investment in a business.
- Want to sell property to Chick-fil-A, Inc.
- Are requesting that Chick-fil-A, Inc. build at a specified location.
- Are seeking multi-unit franchise opportunities.”
About eighty per cent of Chick-fil-A operators own just one restaurant.
That means the owner is deeply involved and hands on to ensure food quality, cleanliness, and the other myriad factors that go into running a thriving Chick-fil-A restaurant.
Here’s how the company describes the benefits of its franchise model on its website:
“Chick-fil-A’s independent restaurant Operators are the backbone of Chick-fil-A’s franchise model.
Our Operators are not passive investors; rather, they are local business owners who invest time and energy in their businesses, engage with their Team Members, and connect with their customers.
They are independent Owner/Operators who lead their businesses on a day-to-day basis — from hiring and developing Team Members, to running daily operations, to marketing and growing their businesses.”
Chick-fil-A’s model clearly works because it’s been named the top quick service restaurant choice of U.S. consumers for eight years in a row, according to the Customer Satisfaction Index.
In addition, Chick-fil-A topped the annual quick service restaurant (QSR) survey from Market Force Information out of 53 brands in these key areas:
- Food quality
- Speed of service
- Staff friendliness
- Overall value
The fact that Chick-fil-A inspires this kind of customer loyalty as a private company is not lost on Keith McCullough, the Canadian who founded and runs the privately-held, Connecticut-based Hedgeye.
“The part of keeping something private is that you own it,” McCullough said on a recent episode of Hedgeye’s The Call, a subscription service.
“There’s no irony when the average tenure of a CEO on the S&P 500 is 4.3 years. You don’t own it. You get paid by it. There’s a big difference.”
So, how can an investor get access to Chick-fil-A’s market-leading brand and strong growth?
Lancaster Colony (NASDAQ:LANC) manufactures all of the restaurant chain’s sauces and dressings and Chick-fil-A represents 21 per cent of sales and about 50 per cent of Lancaster’s sales growth.
The company is also the exclusive supplier of Chick-fil-A sauces to retail grocery stores in the U.S. including Walmart.
On top of that, Lancaster sells it products to other restaurant chains such as Buffalo Wild Wings and retail food outlets.
Chick-fil-A’s growth is exemplified by the fact that it is building a fourth distribution centre in Tennessee to act as a supply hub for the U.S. Southeast.
That should benefit Lancaster’s revenue and earnings..
Pandemic-induced supply chain issues have increased input costs such as fats and oils and pressured profit margins for the company.
But those costs peaked last spring and, while still elevated, should fall further next year.
“Lancaster has seen significant margin pressure from higher input costs including from cooking oils.
2023 will see margin recovery from price increases and falling input costs,” Biolsi said in a recent note.
The shares of Lancaster, which has a market cap of US$5.4 billion, are up about 22 per cent in the last year, having hit all-time highs in late November.
The company pays a dividend yield of 1.7 per cent.
Lancaster’s trailing twelve month price-to-earnings ratio of 55 could be construed as expensive so investors may want to wait for a better entry point.
Biolsi has Lancaster on his list of buy recommendations and it’s one of only three current longs in Hedgeye’s subscription-based Investing Ideas Newsletter.
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