The below blog appeared originally at EcoCentric, a leading channel for sustainable food practices. Over the last few years, students in the Kellogg Analytical Consulting Lab, a popular lab class that I founded and teach, have undertaken novel research on the economic drivers and performance of the food industry. It is wonderful to see our MBA team of Jackie Laine, Shirely Xue, Iris Tan, and Ana Ananthakumar making such an impact!
Editor’s Note: Arlin Wasserman is the founder of Changing Tastes, a consulting firm that helps the food industry, trade and nonprofit organizations, and investors find and realize opportunities at the intersection of public health, sustainability and the changing nature what we eat. His firm has partnered with the Analytical Consulting Lab at the Kellogg School of Management at Northwestern University to conduct a multi-year study into protein and risk management in the food industry.
Wall Street investors have been writing some pretty harsh restaurant reviews lately, driving down the value of companies like McDonald’s and Chipotle by billions of dollars in just a few days, or showing how finicky they are by doubling value of Shake Shack just a few weeks after it went public – and then cutting the company’s worth down by more than half just a few months later.
Restaurant companies, no strangers to changing up the menu, have to keep offering up something different to investors, even if there aren’t many new ideas. Stock analysts are wondering if breakfast sandwiches in the afternoon at McDonald’s, Burger Pizza at Domino’s and hot dogs at Burger King will do the trick.
But as Wendy’s and other big food companies try to stem their stock slides and fuel their businesses by again asking “Where’s the Beef?,” a study by Changing Tastes and a team of researchers working at the Analytical Consulting Lab (ACL) of the Kellogg School of Management at Northwestern University finds the answer is: not at better performing companies.
The Changing Tastes and ACL study, What Drives Meatier Returns? (March 2016 ) finds that restaurant companies that choose to reduce the amount of industrially produced meat on their menus provide better returns to investors than their competitors do over a five-year period. And companies that reduce the total amount of meat they offer customers do the best.
Those that offer higher quality meat, such as antibiotic-free, grass-fed and natural beef, also do a bit better than others over the same time period. But over a shorter, one-year period, the switch to better beef didn’t drive better returns as new menus, supplier arrangements and costs all impacted revenue, profits and returns.
Authors Ana Ananthakumar, Jackie Laine, Iris Tian and Shirley Xue, along with Russell Walker, PhD and Arlin Wasserman, examined the historical shareholder returns and changes in menus for more than thirty publicly traded restaurant companies that own well-known casual and fast food brands, including publicly traded companies on the Quick Service Restaurants Top 50 list and those included in the NASDAQ’s BITE Index. Smaller companies with less than 63 restaurants were excluded.
The study found that for every one percent increase in industrial meat offered to diners, shareholder returns declined by 1.4 percent. Changing tastes among the dining public are one of the reasons why. Some additional takeaways:
According to Russell Walker, Clinical Professor at the Kellogg School of Management, “Managing risk is a core competency among well-run companies in any industry. This means diversifying products and offers, pricing in health and environmental concerns, and adapting to changes in the marketplace. The team found that companies that did this fared better. Selling hamburgers didn’t change the fundamentals of business.”
Relying on industrially produced meat also increases a host of financial and supplier risks for restaurant companies, according to a series of research studies by other teams at the Analytical Consulting Lab. Water scarcity, climate change and a number of other changes in the marketplace all make it harder for companies that rely on industrial meat to control costs and manage risk.
The Analytical Consulting Lab at the Kellogg School of Management at Northwestern University works with actual company data, developing meaningful analytical models for managerial decision-making, and presenting results and recommendations to company executives. Projects focus on developing economic models for decision-making, developing analytical processes, and using big data and analytics for improved enterprise decisions.
Changing Tastes helps food businesses, trade and non-profit organizations, and investors achieve greater success by using our data-driven approach to understanding and finding opportunities at the intersection of five key trends that are driving change in our food system: sustainability, public health, information technology, demographics, and the changing role of the culinary professional and foodservice industry.