Financial Insight from Foodies: Digging In

The U.S. culinary scene is booming, with top chefs on par with celebrities, and diners who get to eat fresh, delicious, and locally grown food no matter where they live.

Many of the hippest restaurants are in big cities, like the always-popular Momofuku Noodle Bar in New York, Parson’s Chicken & Fish in Chicago, or Zazie in San Francisco, but even smaller cities like Asheville, North Carolina and Portland, Oregon are heavy into the food scene.

The restaurant industry is big business. The National Restaurant Association forecast restaurant-industry sales in 2016 to reach $783 billion, the seventh consecutive year of real growth. The top three food trends for 2016 are locally sourced meats and seafood, chef-driven, fast-casual concepts, and locally grown produce, they said.

Better Burger, But Where’s the Beef?

Many critically acclaimed restaurants are privately held, but that hasn’t stopped publicly traded restaurant holding companies from stepping up to the plate and offering higher-quality food to keep their customer base satiated. An example of this was the evolution of the “better hamburger,” with chains like Red Robin (RRGB), The Habit (HABT), and Shake Shack (SHAK) becoming popular with diners and investors at the expense of stalwarts like McDonald’s (MCD). But dining trends can be fickle, and investors may have gotten a little indigestion, as all four are off of their highs. HABT and SHAK are below their IPO prices. Figure 1 shows an index of these four stocks.

Part of the trend among burger-focused stocks might have to do with a shift in consumer preferences. Beef consumption is declining in the U.S., as noted in food trade publication Global Meat News. More Americans are eating poultry instead.

“Better chicken” could be the next food trend for restaurants, according to a restaurant industry insight report from Duff & Phelps. They note that privately held Chick-fil-A surpassed Kentucky Fried Chicken, part of Yum! Brands (YUM), as the top chicken fast-food chain in 2013 despite KFC having more than twice as many U.S. stores. Duff & Phelps says Chick-fil-A serves up a hand-breaded, breast-shaped fried chicken sandwich versus the heavily processed chicken patties its competitors serve.

Duff & Phelps notes Chick-fil-A’s success is being studied closely, with Shake Shack testing out a better chicken sandwich, for instance. Duff & Phelps also said that several of the “better-chicken” chains in the U.S., such as Wingstop (WING), saw more locations opening up.

“While not all of these chicken chains offer chicken sandwiches, they do show that the demand for better chicken is heating up,” they said.

Build a Better Sandwich with Futures?

Investors who want to gain exposure to trends in food can look to futures contracts to add meat and bread to a portfolio. Although there are no chicken futures, investors can look to the CME Group’s live cattle and lean hogs futures markets for a protein component.

More liquid futures markets include the CME Group’s grain futures. Wheat is the main ingredient in bread, of course. Just as important are corn, soybeans, and soybean meal and oil, which make up livestock feed, to plump up those cattle and hogs for dinner. Figure 2 displays wheat (/ZW) and corn (/ZC) futures over the last year. Corn futures are shown as purple candlesticks.