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Could Dining Out Feed Your Portfolio That’s Hungry for Growth?

23 July 2015 in Hardeep's Thoughts

This year, Americans are spending more money dining out than eating at home.

Like I said on CNBC, restaurants and bars are seeing faster growth than any other type of discretionary spending.

While total discretionary spending rose just 2 percent during the first six months of this year compared to the same time period a year ago, establishments serving food and beverages brought in 8.8 percent more revenues.(1)

Grocery stores, by contrast, only registered a 2.9 percent increase. This contrast becomes more striking considering the fact that restaurant prices have been increasing—they are up 3 to 4 percent over last year.(2)

Could dining out feed your portfolio that's hungry for growth? Check out the Eating Out motif.

Yet grocery prices have been stabilizing.

This difference between restaurants and grocery stores means that the growth is not simply due to rising food prices.

A key driver appears to be the overall rise in consumer confidence. It currently ranks in the top 37 percent of monthly measurements of this sentiment since June 1977.(3)

This may be a stronger driver for Millennials, those born between around 1980 and 2000; 43 percent of their food and beverage spending goes toward consumption outside of the home. Baby Boomers spend about 37 percent of their food budget that way.(4)

Longer term growth among eateries will likely result from Millennials continuing to enter the workforce. This year, people born between around 1980 and 2000 are expected to usurp the Baby Boomers as the most populous generation living.(5) Millennials’ spending power will grow over the next decade to account for 75 percent of the growth in restaurant revenues.

How do you invest in this trend? Picking restaurant stocks can be very difficult and involves numerous risks. The Eating Out motif is a basket of 25 individual stocks focused in the restaurant industry. It is up 28 percent over the past year, almost three times the performance of the Standard & Poor’s over the same time period.(6)

Want to feed a portfolio with stronger growth? Consider the Eating Out motif.

The stocks in the restaurant category have some risks bearing consideration. First, the companies are susceptible to any decline in consumer confidence, which currently may be supported by variables such as stable wages, low gas prices, and an improving housing market.

Additionally, changing consumer preferences may require restaurants to adapt to demand for healthier food and socially conscious sourcing of ingredients. This can pose challenges for larger chains that have been in business longer and thus have more established supply chains.

A third risk concerns new and pending legislation raising minimum wages, which have the potential to negatively impact restaurants with already low margins and low wages.

To mitigate these risks, diversifying your portfolio beyond the restaurant category may be the investment equivalent of eating a balanced diet.

Whatever your tastes may be, you might be satisfying them at restaurants more often than you used to. The next time you go out to eat, pay attention to all the signs that this industry is growing.

(1) U.S. Department of Commerce, “Advance Monthly Sales for Retail and Food Services June 2015,” Census.gov, July 14, 2015.

(2) Federal Reserve Bank of St. Louis, “Consumer Price Index for All Urban Consumers: Food Away from Home,” StLouisFed.org, June 2015.

(3) Short, Doug. “Another Gain in Consumer Confidence,” AdvisorPerspectives.com, June 30, 2015.

(4) Ascarelli, Silvia, “Who Spends More Eating Out, Millennials or Boomers?” Bloomberg, February 2, 2015.

(5) Jamrisko, Michelle. “Americans’ Spending on Dining Out Just Overtook Grocery Sales for the First Time Ever,” Bloomberg, April 14, 2015.

(6) Performance figures are all as of July 22, 2015.