Hi Investors ,
This is an Investment research summary on The Cheesecake Factory
Key findings
1) Domestic expansion likely to boost its growth potential
2) Expansion overseas increases it presence overseas
(A) Business description
The Cheesecake Factory Inc. is a US-based operator of full-service, casual dining restaurants where is operates 194 upscale casual dining restaurants under “The Cheesecake Factory” brand and 13 restaurants under the “Grand Lux Café” and “RockSugar Southeast Asian Kitchen” brand.
The Cheesecake Factory restaurants is appeals to a diverse consumer base across a broad demographic range and offers over 200 menu items, including appetizers, pizza, seafood, steaks, chicken, burgers, small plates, pasta, salads, sandwiches, omelettes, and desserts, including approximately 50 varieties of cheesecake and other baked desserts. Whereas, Grand Lux Café gives a globally-inspired, artisan cuisine under an ambiance of modern sophistication and offers approximately 150 menu items containing classic American dishes and international favourites. On the other hand, RockSugar Southeast Asian Kitchen is an upscale casual dining concept showcasing the cuisines of Thailand, Vietnam, Malaysia, Singapore, Indonesia and India.
The company also owns and operates 2 bakery production facilities in California (Calabassas Hills) and North Carolina (Rocky Mount) which produce approximately 70 varieties of cheesecakes and other baked desserts based on proprietary recipes for The Cheesecake Factory and Grand Lux Café restaurants, as well as for international licensees and 3rd party customers.
Other than the 211 company-owned restaurants in the United States (US), The Cheesecake Factory Inc. also operate 18 restaurants in Middle East, Latin America and Asia under licensing agreements.
(B) Macroeconomic trend
1) Economic uncertainty
There is significant economic uncertainty in the current market and it is expected that the economy of many countries would experience decline. This ranges from the protectionist policies of the US to the dispute in the Middle East. Faced with such uncertainty, many countries’ economy growth would be negatively affected (Figure 1). Hence, local consumers’ propensity to spend might decline together with their income growth.
2) Technological advancement
On the other hand, there have been significant progress in the technological frontier. The upcoming 5G network would definitely improve the connectivity and collaboration across sectors such as finance, transport, retail and many more. Together with the increased in smartphone penetration rate across many regions (Figure 2), it would enable people to get better access to information and services. Thus, the connection between the various businesses and the consumers would improve, leading to a more frictionless society as a result.
(C) Industry overview and competitive positioning
In 2016, full-service restaurants posts a current value growth of 2% to reach sales of USD210.6 billion, while both number of transactions and outlets remain fairly flat (Figure 3).
1) Increase use of technology
Operators have also begun to introduce technology into their business model by integrating it into its marketing campaigns and by improving its sales channel. For instance, third-party online ordering and delivery platforms like UberEATS and Amazon Restaurants are giving consumers access to restaurants food which traditionally only is available in its store. This has led to an increasing offline sales across the consumer food service in the US (Figure 4).
2) Maturity of industry
The US consumer foodservice growth is expected to slow as growth attributed by the economic recovery had largely matured in 2016, with visits to outlets stagnating according to the National Restaurant Association, resulting in a poorer performance in this sector. Additionally, the multiple online options such as Blue Apron and Plated, which provide US consumers with fresh, healthy options to cook at home, could gain popularity in the coming years that would snatch away consumers’ dining expenditure from the restaurants in the US.
3) High degree of casual-dining restaurant concentration
Within the casual-dining restaurant sector, it is dominated by 3 large players which collectively holds more than 60% market share in terms of revenue. DineEquity is the market leader (28.4% as of 2016), followed by Darden Restaurants (23.2%) and Brinker International (14.7%). On the other hand, The Cheesecake Factory held only 7.4%. However, while the top 3 are losing market share since 2011, The Cheesecake Factory is closing gap with the leaders by gaining market share (Figure 5).
4) Low degree of casual-dining restaurant brand concentration
In terms of sales generated within this sector, the restaurants brands is solely dominated by DineEquity (27.8% as of 2016) and closely followed by Bloomin’ Brands (18.5%), Texas Roadhouse (14.8%) and The Cheesecake Factory (13.0%). However, Texas Roadhouse and The Cheesecake Factory is steadily increasing its brand share year after year since 2011 while DineEquity is moving in the opposite direction (Figure 6).
5) Competitive Positioning
The Cheesecake Factory targets a broad range of consumers by having the most variety in its menu that would be reviewed bi-annually. Despite the huge range of products, they still provide excellent food quality and uphold good hygiene practices to their consumers (Figure 7).
(D) Investment summary
1) Domestic expansion
There are still room for growth in the domestic market as CAKE. Since CAKE normally open in places where the urban rate is among the highest, these are still a list of areas that has high urban population and CAKE has yet to expand into. Specifically in the area where urban population is more than 90%, CAKE has yet to expand into approximately 60% of these places (Figure 8). Furthermore, the expansion into these area would not be difficult as many of these places have yet to be popularised by the other competitors.
The smaller number of Cheesecake Factory could be a blessing in disguise as they are more agile to adapt to the macro environment. In recent years, the rise of technology has given consumers more dining convenience which led to the rise of food delivery services for The Cheesecake Factory products (Figure 9). Thus, to tap on this emerging trend, The Cheesecake Factory’s future Fast Casual concept could be a boon to its business as they could roll out their own delivery services and have more control of their off-premise growth. Having less reliance on the 3rd party food delivery services, The Cheesecake Factory could better serve the consumers which would ultimately lead to stronger growth.
Although CAKE having a lower market share, they are better at doing business than their peers as their sales per unit was ranked among the top consistently for the past few years (Figure 10) but their comparable sales has been on a downwards trend since 2014 (Figure 11). However, they consistently outperformed the casual dining industry as a whole, as the industry faced a 1.4% decline for the industry, as measured by Knapp Track and this could be due to the massive disruptions caused by the recently technology advancement.
Thus, with so many places yet to be explored by The Cheesecake Factory and the launch of the Fast Casual concept, the US market offers a significant amount of growth opportunities. In other words, there is land for growth and the concept to attract consumers, the future of The Cheesecake Factory is bright.
2) Expansion overseas
With current low penetration rate into the overseas market, there is room for growth for CAKE. China, the world’s emerging economic powerhouse, only has 2 CAKE located in the country where the population is 4 times larger than the US and China’s middle class is evolving rapidly. Furthermore, the millennials, who occupies a huge portion of China’s demographics (Figure 13), tends to spend a higher proportion of their income on services and experiences. Thus, with a rising population of consumers with higher spending power (Figure 12), CAKE’s venture into China would hold a higher chance of success.
(E) Potential catalyst
1) Stability in the Middle East
Saudi Arabia and the United Arab Emirates are the largest markets for full-service restaurants in the region and both countries are also the fastest growing countries in the region, following Qatar, Oman, Egypt, Lebanon and South Africa. UAE leads the region in per capita spending terms, benefiting from the increased in tourists and its large working expatriate base dependent on foodservice outlets for meals. On the other hand, Saudi Arabia is advancing as its large consumer base dines out more often for leisure. Furthermore, the recent corruption crackdown in Saudi Arabia could help improve its business environment which would lead to more direct investment from the other countries. Thus, more business activities could happen which would lead to a better economy and a higher standard of living.
2) Growth of US economy
When the overall economy improves, people would record higher income which would in turn lead to a higher standard of living. Since Cheesecake Factory targets the people who are around the middle class income, the improved economy would increase the demand of consumers for The Cheesecake Factory. Signs that the US economy is heading towards the right direction comes from the improved workers’ productivity, low unemployment rate and the Trump administration’s focus on growth of the US economy.
(F) Risks
1) Unstable economic environment in the Middle East
Compared globally, Middle East reports the weakest growth and the lowest spend per capita for full-service restaurants, as economic and political crises remain key factors impeding growth. Furthermore, the region remains varied, highly disintegrated and the lower income levels in numerous countries. Thus, further expansion plans into the Middle Eastern region could face setback that could reduce the growth potential of The Cheesecake Factory.
2) Intensifying competition
The low barrier of entry would attract entrepreneurs into the market and with a more variety of food choices available for consumers, it is making an already competitive industry even more challenging. This has caused a reduced growth rate of the 100 largest chains in the US from 5.8% to 3.6%. Thus, this would put further pressure on The Cheesecake Factory, which has been experiencing falling traffic recently, as they would have trouble raising the price in this super competitive industry.
(G) Corporate Governance
The board of consists of all outsiders except for the Chief Executive Officer (CEO) of The Cheesecake Factory which indicates that it is an independent board and they are elected annually. Also, none of the board members have any relationship with the key executive of The Cheesecake Factory and all of the board members has attendance of at least 75%. Lastly, the executives are paid based on their performance.
Conclusion
In conclusion, there is still room for growth despite the harsh conditions in the fast-casual dining industry. By implementing the Fast Casual concept into existing and new areas would definitely bring in growth for the revenue. Additionally, by setting roots in Asia and the Middle East, The Cheesecake Factory could expand more rapidly in the future when the economy starts picking up. Hence, doesn’t The Cheesecake Factory future taste good?
Jia Yang
Research Analyst, Mind Kinesis Value Investing Academy
Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.
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