Texas Roadhouse Inc. Smartly Enters Philippines Market With a Partner

By Markets Fool.com

Revenue from licensed (franchised) restaurants makes up less than 1% of total sales for Texas Roadhouse , but international expansion should help to change that. And while diners might most closely associate Bloomin' Brands' Outback Steakhouse with Texas Roadhouse, investors should look to Starbucks for a better international growth strategy.

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Source: TexasRoadhouse.

Internationalopportunity isabundant
Bloomin' Brands operates 649 company-owned locations in the U.S., compared with 392 for Texas Roadhouse, and has a significantly larger international presence. There are 217 Outbacks outside the U.S. and only 11 Texas Roadhouses. Being small can have its downsides in business, but in this case it should be music to investors' ears. The Texas Roadhouse growth story is far from over domestically, but the international opportunities have barely been tapped at all.

Nearly 75% of international Outback locations are company-owned, and nearly 70% are located in just two markets -- South Korea and Brazil. Texas Roadhouse is following a different international growth plan that should help it to expand more quickly, cover a larger number of markets, and benefit from the localized knowledge of its partners. It recently entered into an agreement with The Bistro Group, which operates a number of international chain restaurants in the Philippines, to bring Texas Roadhouse to Manila. Reports of the deal did not indicate how many restaurants might be opening as part of the deal, but noted that The Bistro Group was also adding Denny's and Moe's to its portfolio of roughly 10 and that The Bistro Group is aiming to open 15 to 17 branches in the first quarter.

Manila residents can soon choose their own steak. Source: Texas Roadhouse.

While revenue from licensing is less than 1% of total sales at Texas Roadhouse, this type of revenue is more valuable than others. Selling $10,000 worth of steak and receiving a $10,000 check from a licensee both are recorded as $10,000 of revenue, but there are a number of costs associated with the steak. The meat itself costs something, a cook grilled it, and a server brought it to the customer's table. The licensee's check is deposited right in the company's coffers. Hypothetically, let's assume that 95% of franchise royalties and fees are turned into net income. In this case, less than 1% of total sales contributed more than 15% of net income for Texas Roadhouse in 2015. This is the power of franchising.

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Bloomin' Brands has chosen to focus on two international markets, and to run the day-to-day operations as well. Texas Roadhouse is currently seeking international partners to open restaurants in 27 different countries, ranging in size from Panama and Guam to India, China, and Russia. It would earn more from each location if it were to be company-owned, but there are benefits to franchising. The volume and speed of new openings, the small amount of capital necessary, and the expertise of local partners makes franchising internationally the way to go.

Texas Roadhouse is currently a U.S. investment, but franchising could soon change that. It wouldn't surprise me to look up in a few years and see significantly more than 11 Roadhouses outside the country. Domestic growth, including two new concepts, is enough for Texas Roadhouse to be a winning stock. Successfully franchising hundreds of locations worldwide could make it a market-thumping stock.

Starbucks as blueprint
Starbucks is a vastly different company from Texas Roadhouse in a number of ways, but its international growth plan should be replicated and admired. It partners with local companies, such as Sazaby League in Japan, Tata in India, andPremium Restaurants of America in CentralAmerica, to bring its coffeehouses to new markets. Starbucks relies on the local knowledge that these companies have to know how best to grow in their markets. Texas Roadhouse is doing the same. Launching and operating an American steakhouse chain in Manila, Moscow, and Mexico City each presents its own set of challenges, and it's nice to have a local "guide."

Source: Starbucks.

Franchising doesn't mean a company is giving up on the possibility of one day owning the locations outright. Starbucks bought full control of its Japanese locations in 2014. It felt that it understood the market enough, had large enough scale, and could operate the stores effectively. There may come a time in Texas Roadhouse's future where it feels the same way about one particular area and reacquires those locations. At the same time, it might have no handle on how to operate in another locale. Then it would make sense to have the local licensee run the day-to day operations and for Texas Roadhouse to sit back and cash the royalty checks.

Follow the winners
By following the path of Starbucks more than that of Bloomin' Brands, Texas Roadhouse is positioning itself to have a lucrative international business. Bloomin' Brands is a more direct comparable, but Starbucks has been the superior company and investment. I like when the companies I own take their cues from huge winners such as Starbucks, and I look forward to seeing Texas Roadhouse's international expansion play out over the next 10 to 20 years.

The article Texas Roadhouse Inc. Smartly Enters Philippines Market With a Partner originally appeared on Fool.com.

James Sullivan owns shares of Starbucks and Texas Roadhouse. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Texas Roadhouse. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.