The Coronavirus Stock Market has battered almost every sector. Since February 19, 2020, the previous high of the S&P500, every major US index has fallen over 25% at the time of writing. As buying trends shift to deliveries I explore last-mile logistics strategies employed by restaurant stocks to evaluate which are best placed to take advantage of this shift.
The Coronavirus has changed secular purchasing habits shifting consumers from in-person physical purchases to deliveries. As CFO of Bringg, a SaaS platform that digitizes and automates the delivery chain to allow our customers to optimize speed, cost and quality of the delivery experience, I have a unique perspective on how well-positioned companies are for this shift to deliveries.
Whilst we have seen an average uptick of 40% on deliveries across all our customers*, in this article, I am going to focus on the Restaurant segment. For obvious reasons, I cannot disclose any of our customers' data, nor can I name all of our customers as some are under NDA that prohibit disclosure of the relationship. In this article, I will refer to aggregated data and industry knowledge we have formed from working with customers deep in their delivery ecosystem. Some of the companies mentioned in this article are our customers. Those customers that we publicly disclose can be found on our website.
Since the S&P500 highs on February 19, 2020, the SP500 has fallen by 29%, the DJI by 32% and the Nasdaq by 25%
No one knows whether we are at the bottom. What is certain is that volatility has reached record heights. On Thursday, March 12, 2020, the VIX hit 75.83. Those are levels that have been seen only once before during the height of the financial crisis of 2008. Following that the VIX hit a record high of 82.69 on March 16, 2020.
Below is a finer resolution of the VIX during that period during 2008. The VIX briefly spiked above the 75 mark twice in October and November
Data by YCharts
With wild price movements over such a short period, and record volatility come pricing inefficiencies. The market often doesn't have the data to adjust at a granular level so quickly.
Looking at a cross-section of restaurant stocks most stocks fell inline with the market since the Coronavirus selloff began on February 19. Domino's Pizza (DPZ) is an exception as it reported excellent earnings as well as a dividend increase that boosted its stock by 19%. As a result, DPZ climbed 6.5% whilst the S&P 500 fell 20%, until last week. Over the same period, DPZ is down 20% compared to the SP& 500 at 29%. Wendys (WEN) also reported earnings in this period resulting in a 5% drop in the stock price. Over the period from February 19, WEN fell 50%.
None of the other four stocks reported earnings during this period and fell between 29%-53% against the S&P 500's 29% in the same period. The daily movements closely track the broader index. QSR is the outlier with a 53% fall.
OpenTable reported year-on-year falls of around 20% for US diners. On the flip side, Oppenheimer upgraded Grubhub (GRUB) on March 09, on Coronavirus tailwind. Quoting from that report:
Given more people working from home and the potential to shy away from crowded restaurants, food delivery companies should benefit from an uptick in order frequency, assuming there are no city-wide quarantines (like those enacted in China). We could also see sustained industry-wide online delivery share gains after the impact of the virus subsides.
Of our restaurant customers, 77% have seen increases in deliveries over the last month. On average, deliveries have increased by 30% but there is a huge variance. One of our customers has experienced an increase of 132% in deliveries in just one month, and others are in the high ninety percent range. Others are flat. This article evaluates the parameters that allow restaurants to exploit the current secular shift to deliveries. These stocks may be stocks to buy now as the stock market continues to fall.
Bringg views the last mile logistics stack through a flywheel of five components.
The first component is the customer. The ease with which a customer can order is critical. The marketing campaign and the friction in the online ordering process has a dramatic impact on the number of orders that will be placed. As an example, we had one restaurant client that ran a "free delivery" campaign for one month. For that month, online orders were almost three times higher than that of the month after the campaign ended.
Once the order is placed, the inventory needs to be identified, reserved and in the case of restaurants prepared. That needs to be done by the most appropriate store. This will often be the closest store to the customer with the right inventory, however sophisticated business logic can be evaluated as the decision is made. In parallel, a delivery driver needs to be ordered to that location to take the food from the restaurant to the customer. This component is critical. The fleet a restaurant uses can place either geo constraints or peak-time order constraints on their ability to accept orders.
Best practice is to use multiple fleets. This provides overflows and workarounds to find a delivery solution for every order.
The two key components that may give clues as to which stocks are best positioned to boost their deliveries from the Coronavirus fallout are their fleet strategies and ownership over the order and marketing funnel.
Analysis of fleet usage
I visited each of the listed companies websites and went through the process of making an order to understand their delivery strategy. The table below summarizes the different strategies
Source: Alon Zieve analysis
McDonald's (MCD) and Wendy's (WEN) use a strategy that passes you through to a third party on clicking "Order" from their site. This is an example of what happens on the McDonald's website.
The entire order and delivery experience is controlled by a third party. This means that the supply of drivers is completely in third party hands as is the ordering funnel.
Chipotle (CMG) controls the ordering process on their site. However when you click through to order it is apparent that DoorDash (DOORD) controls the delivery.
Whilst they have stronger control over their sales and marketing experience, the ultimate delivery is controlled by DoorDash, with the associated fleet limitations.
At the time of writing the websites of Taco Bell, Pizza Hut and WingStreet were down. The last of the Yum! Brands (YUM) chains, KFC, has a similar setup to Chipotle, however in this case partnering with Grubhub.
The Restaurant Brands International (QSR) group has a more sophisticated setup. The menu selection and marketing funnel is controlled by their own websites. In addition, they utilize multiple fleets. For example, the below can be seen on the Popeyes website when you try and order.
By using both DoorDash and Postmates (POSTM), Popeyes gets better geo coverage, and peak time coverage, purely as they have access to a larger combined fleet. In addition, they could be trying to get price efficiencies by working with two fleets.
Domino's Pizza (DPZ) appears to be using their own drivers. There is no visible mention of third party fleets, however there is mention of tipping "Our Drivers."
From this analysis, it appears that RBI and Domino's Pizza have the most sophisticated delivery strategy. The advantage of working with your own and multiple external fleets cannot be understated.
Working with multiple fleets gives you access to a greater pool of drivers, maximizing speed of delivery, geo coverage, peak time coverage.
Working with multiple fleets allows optimization for cost.
Working with internal fleets allows you to convert store hands to drivers almost instantly. This cost-effectively scales your fleet.
Controlling the marketing channels and fleets gives you the ability to create deeply integrated marketing campaigns.
Take for instance this update sent by Wings Over, a national chicken brand with 70 locations mostly on college campuses. This is not possible without control over the entire stack
A combination of the above strategies can increase deliveries by tens of percents if not more. We have one customer that scaled up to integrate 7 external fleets, doubling its delivery business as it did so.
I checked the ratings of the six stocks I reviewed on Seeking Alpha Premium
Source: Seeking Alpha Premium
The only stock that gets a Bullish quant rating is Restaurant Brands International, one of the two stocks I identified with the most sophisticated delivery strategy. The stock is also rated bullish by SA Authors and the Sell Side. The stocks with the least bullish ratings are Yum! Brands and Wendy's, with only Bullish ratings from the Sell side. Wendy's had the least sophisticated delivery strategy along with McDonald's. I could not fully analyze Yum! Brands, which also has just one bullish rating and as at the time of writing many of their websites were down. McDonald's only recently had its SA Author Rating upgraded from Neutral.
Source: Seeking Alpha Premium
Restaurant Brands International has very interesting valuation metrics. The EV/EBITDA is the most attractive of these six stocks, and the dividend yield also beats the rest. Whilst both the past year and forward-looking revenue growth are just below the averages, this comes off the back of 5 years of extremely strong growth. Perhaps the drop in growth rate is what has put price pressure on the stock resulting in the worst 3-year price performance of the 6 companies, and a disappointing 5-year price performance. On an EV/EBITDA basis QSR is trading at a 41% discount to its peer group.
The current growth leader is Chipotle, and is priced accordingly with an EV/EBITDA 41% above its peer group. Domino's Pizza has also had impressive growth, and priced 45% above its peer group on an EV/EBITDA basis.
The delivery strategy will likely be key for restaurant stocks to capitalize on secular shifts to contactless food purchases. Those restaurants that know how to work with multiple fleets, and can deeply integrate their marketing and delivery funnels will likely take advantage of the new Coronavirus reality.
* When looking at our customer base, I eliminated customers at the beginning of implementation and running at low volumes.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am the CFO of Bringg.
Some of the companies mentioned in this article are customers of Bringg. Those customers that we publicly disclose can be found on our website at www.bringg.com
Some of our customers are under NDA that prohibit disclosure of the relationship.