American fast food is getting big shake-up, as Arby’s owner Inspire Brands announces that it will be gobbling up the gourmet sandwich outlet Jimmy John’s. The move will make Inspire Brands the fourth-largest restaurant company in the States, but — importantly for Canadian investors — it could also mean a loss of market share for Tim Hortons owner Restaurant Brands International (TSX:QSR)(NYSE:QSR).
Restaurant Brands’s market share could get eaten into
A multi-billion-dollar business, it’s hard to believe that Inspire Brands is now only the fourth-largest fast-food empire in the U.S. with an impressive line-up that already includes Sonic, Arby’s, Rusty Taco and Buffalo Wild Wings. Competitors include McDonald’s and Yum! Brands — which owns Taco Bell, KFC, Pizza Hut, and WingStreet — and, of course, Restaurant Brands.
Restaurant Brands’s share price was down by a few percentage points for the week and may already be reacting to the development in Inspire Brands. If the market senses a loss of market share, Restaurant Brands stock could end up having a big bite taken out of it, opening up an opportunity for value investors bullish on the Tim Hortons parent.
Taking a longer view, Restaurant Brands will have to contend with the consolidation of Jimmy John’s into the already impressive Inspire Brands roster. However, Restaurant Brands has proven itself adaptable, and its continuing push into Asian markets means that income should continue to increase through franchise royalties and distribution sales.
A tasty dividend stock for low-risk investors
In terms of adaptability, Restaurant Brands shook up the market earlier in the year when Tim Hortons added Beyond Meat products to its menu. While the meatless foodstuffs stock has swung wildly on the exposure, the move has shown that Restaurant Brands isn’t afraid to experiment with the market and is flexible enough to roll out and scale back products as needed.
However, if investors believe that Restaurant Brands will have trouble competing with an increasingly dominant Inspire Brands, the share price of the former company will likely continue to drop. In terms of a real-world effect, if the growth of Inspire Brands through acquisition ends up hurting Restaurant Brands’s bottom line, the latter’s stock will almost certainly suffer in the long term.
This is an industry, after all, that punished Beyond Meat by knocking 6% off its share price as soon as news got out that Tim Hortons was pulling it from menus in all but two provinces. That said, with the additional fast-food giants Burger King and Popeyes Louisiana Kitchen consolidated under its corporate umbrella, Restaurant Brands’s 3% dividend yield looks fairly well covered by defensive revenue at a time when market uncertainty is pushing investors into consumer staples.
The bottom line
Stacking shares in big-cap fast-food companies is a smart move if you’re bearish on the global economy. However, given the increasing potential for Inspire Brands to nibble at Restaurant Brands’s bottom line, would-be stockholders in the Tim Hortons parent may want to wait and see whether the share price levels out over the coming months before gaining exposure.