Barron's Streetwise - Pizza and Hard Seltzer: The Quarantine Combo

Episode Date: May 8, 2020

How the lockdown is affecting booze and takeout. Plus, a conversation with Rob Lynch, CEO of Papa John's. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. Pizza is actually one of the most food-safe types of food you can order, especially Papa John's. Everything that we make goes through 450 degree oven. Mmm, pizza. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The person you just heard,

that's Rob Lynch. He's CEO of Papa John's. His shares are up nicely this year, and so are those of a company called Boston Beer. Not because of beer, but because of soaring demand for hard seltzer. In a moment, we'll look at why investors seeking quarantine outperformers are filling up on pizza and hard seltzer. Hi, Meta. Hi. Meta, I seem to recall you being a healthy eater back when we were in the office. Have your eating habits changed during the shutdown?

We're definitely cooking more than we used to. We don't go out as much, obviously, and we are doing some takeaway, but mainly cooking at home. So restaurants are closed. You're eating at home. Some meals you're cooking. Some you're getting takeout. Are you eating more or less or the same? Oh, I'm eating more. I ordered new pants recently. Two pairs. It's not because I wore out my old pants from strenuous activity. I needed a little more room to maneuver. They have an

elasticized waist. It's kind of hidden, but they're a little bit stretchy in the waist. My five-year-old just outgrew his elastic waist pants. He's now on to big boy pants like jeans, and I'm taking over his role and going back to the elastic waist. So there's a real changing of the guard at our house. Food and drinks are a big part of the economy. With restaurants closed, there's been a profound shift in spending. Wells Fargo says that in a typical year, Americans spend $70 billion a month

at bars and restaurants, plus $50 billion at grocery stores. And now that relationship is flipped. Grocery sales have climbed from $50 billion a month to $70 billion a month, and restaurant sales have plunged. That's obviously a big change with implications for investors. Now, we can't get to the entire food world in one episode. Grocery stores will have to wait. We want to focus on two specific bright spots in food, but before that, there is a developing story in food that I want to say a quick word about because it's important, not just for investors, but also consumers. And I'm talking

about meat shortages. Fast food chain Wendy's becoming the latest company to feel the effects of a pandemic triggered meat shortage, reportedly not able to serve burgers, its hallmark item in some locations. Grocery stores have been rationing beef, pork, and poultry. Tyson, one of the country's biggest meat processors, says its pork capacity is down about 50 percent because of plant closures and plants operating below capacity. The company said it will continue producing less meat than usual and it will likely shut more processing facilities as it faces worker shortages and outbreaks of COVID-19 among its workforce. The president has ordered plants to stay open, but it's more difficult to make

sure that workers will show up. So the question is, will grocery stores run out of meat? How worried should we be? The good news is that Bank of America Merrill Lynch says there's plenty of supply in cold storage, meat cuts that were meant for restaurants but can be diverted to stores. That's going to help. Tyson was able to open one of its closed plants in Iowa through increased testing, face coverings, temperature taking, and worker distancing. We'll see how that goes, but it's helpful that some supply is being brought back online. If we need to get more out of the capacity we have, B of A says processors can always change the cuts of meat that they sell. Think

fewer rib steaks and more hamburger. So there's no reason to panic or hoard, but you might expect higher prices. Wells Fargo says prices are likely to rise on beef, pork, chicken, milk, and eggs, and that they might stay higher for some time. Financially, all of this is bad for farmers. It's mixed to negative for meat processors. They're going to have higher prices if they sell out in the stores, but they also have higher costs in the near term. It's potentially positive for companies that sell meat alternatives.

One of those companies is called Beyond Meat, but that stock has more than doubled since hitting its low in March. Earlier this year, UBS downgraded the stock to sell. B of A rates that it underperformed. Just keep in mind that while Beyond Meat may see rapid sales growth through grocery stores, it's also affected by the restaurant shutdown. That was a stressful subject, Meta. It's too early for a drink, but how about we unwind by talking about drinking? Sounds good. Did you already open that beer bottle? Yeah, I'm gonna put it in the fridge now. I've seen a lot of stories about rising alcohol sales, and I watched this video where a guy was walking around his neighborhood. Guy's out for a little run in the neighborhood.

It's recycling day. He was pointing to recycling bins, and he was laughing about how filled they were with empty bottles and cans from people drinking so much wine and beer. So the year was 2020, and everybody was just f***ing ham-sauced. So it's got me wondering, are we all drinking more during the pandemic? I mean, I'm not asking for me, I'm asking for the rest of you. And have there been any changes in what we're drinking that would be interesting to investors? So I called up Vivian Azer. Hi Vivian, it's Jack Howe from Barron's. How

are you? Hey, Iron's. How are you? Hey, I'm good. How are you? Vivian is an analyst with Cowen, and she covers a variety of consumer products I did some field research on back in college. This is a lot to keep track of, Vivian. It sure is. Energy drinks, liquor, beer, tobacco, grass. I don't know if anyone still calls it grass, but I still call it grass.

There's a lot here. Reminds me I have to mow the lawn. Let's save grass for a different conversation and focus here just on alcohol. I wanted to know whether we're all drinking more now that we're locked at home. In terms of the year-over-year growth, there was notable pantry loading in the weekend at March 21st, where total alcohol sales in Nielsen were up over 50%. The categories within total alcohol, beer, wine, and spirit all continue to be up year over year on a weekly basis, but the year over year growth has moderated some.

I feel good about that answer. I mean, we did some pantry loading, who can blame us, but now it sounds like we're only guzzling moderately more. So what are we drinking? Before the pandemic, Vivian says there were two clear share gainers, distilled spirits and hard seltzer. If you're not familiar with hard seltzer, it's a malt beverage, typically fruit flavored with low sugar and calories. Last summer, I heard a lot of people saying it was the summer of seltzer. Happy Seltzer Saturday. Spike's seltzers have been everywhere in 2019. I mean, I've tried them.

They had them White Claws at work a couple weeks ago. We're gonna have to taste these and then best out of six. There is another brand of seltzer out there that just dropped. Ain't no laws when you're drinking claws, baby. But will people still drink hard seltzer when they're stuck at home? I asked Vivian. Hard seltzer growth has actually accelerated in a post-COVID-19 environment. So where the category was growing already over 200%, most recently the category grew 288%. So a very healthy acceleration.

Hard seltzer continues to gain share of the category. It's now about 8%. We're very constructive about the outlook for hard seltzer. This summer, there's a ton of innovation that's hitting the marketplace. Meta, you want to hear about some seltzer innovations? Sure. I'll tell you as many as I can in one breath. Ready? Sure. I'll put on some music. We'll see new flavors from White Claw. That's a category leader with about a 60% share.

There's going to be a reformulation from the new number two player. That's called Truly Hard Seltzer, and it's made by Boston Beer. I don't know why they call the company Boston Beer. I mean, they make Sam Adams beer, but these days they make most of their money from seltzers, ciders, and teas. Anyhow, they're also coming out with Truly Lemonade Seltzer. That's going to go up against Mike's Hard Lemonade,

and it has lower sugar than Mike's. Meanwhile, Bud Light came out with a seltzer. Corona came out with a seltzer. Molson has something out called Vivi, which is supposed to have healthy ingredients and vitamins, but they've delayed Coors Light's seltzer from July to September. Should we do the whole podcast like that? We could do it in five minutes.

I think I called that Molson one Vivi instead of Vizzy, but please don't be upset, Molson. I was fighting for my life. I got to catch my breath. What I wonder is with so much stuff happening in Seltzer this year, is it going to take any business away from the market leaders? In particular, I'm thinking about Truly because it's owned by Boston Beer and that's publicly traded. Vivian says Boston Beer is one of her favorite stocks. And she points out that the company says Truly is the only brand to gain shares since the introduction of Bud Light Seltzer earlier this year. Hey, Bud Light made a seltzer? I wonder what it tastes like. Only one way to find out. Bud Light Seltzer, unquestionably good. And if you're wondering why people are drinking all this

hard seltzer to begin with, Vivian says seltzer drinkers in general skew younger and they're interested in health and wellness. And she has an interesting theory on why the category has suddenly taken off. They're also the generation, you know, that grew up drinking, you know, flavored sparkling water, non-alcoholic sparkling water. You know, that was certainly not a thing a couple of decades ago. But if you grow up drinking LaCroix, your palate has kind of been primed for a hard seltzer offering. You see LaCroix, it's all your fault. Metta, what are you drinking lately? Is it hard seltzer? I'm kind of over the hard seltzer offering. You see LaCroix, it's all your fault. Meta, what are you drinking lately? Is it hard seltzer? I'm kind of over the hard seltzer. I'm now drinking hard kombucha. Kombucha, did you say? Yeah. It's like a fermented tea.

Uh-huh. What's it taste like? It's kind of funky. It's definitely, you can taste it, that it's fermented. but I think when there's alcohol added it becomes a little more like can we just capture that audio and use it for a national ad campaign for the folks at big kombucha I think it's fermented it's a little funky I don't know it's not really that great but when you add alcohol to it I'll take it I really like it. Alcohol, no alcohol. Let's move from drinking to eating, specifically restaurants. Now, restaurants have obviously been hit hard by shutdowns, but some are coping and some are even thriving.

I spoke with Peter Saleh. Hi, Peter. It's Jack Howe from Barron's. Hey, Jack. How are you? He's an analyst with BTIG, and he says that big fast food chains like McDonald's and Wendy's did 70% of their business through drive-thru windows before the pandemic. So they're now doing better than casual dining chains that had mostly sit-down customers. One type of food stands out from the rest.

Even going further within the quick service space, we've been more bullish on the pizza space. Call it Papa John's and Domino's. You know, their sales are actually have accelerated in this environment and not contracted as we're seeing with the rest of the category overall. Peter says pizza is a communal food and a good value that you can feed a family of four for 20 bucks. He says sales trends for the big chains have been strong and that that might continue. More importantly, I think when we exit this period of the coronavirus, I think the pizza sector, the quick service pizza operators, both Papa John's and Domino's, have an opportunity to take some permanent market share.

Now, I'm definitely rooting for mom-and-pop pizza shops and the gourmet places, but for customers who buy on price, the big chains are hard to beat, especially when it comes to digital orders. Those are around two-thirds of sales for big chains. On a $20 sale, store franchisees pay about 25 cents to the corporate parent for the technology used to capture that sale. Independent shops have to rely on third-party ordering services like Grubhub or DoorDash. They might pay two to three dollars on that same $20 sale. That's a key advantage for the big guys. Papa John's and Domino's have been incredible stock market performers over the past decade. Papa John's

has returned more than 600% and Domino's more than 3,000%. Peter says he likes both, but that he prefers Papa John's. I think there's just more low-hanging fruit at Papa John's because it's a business that has struggled over several years and they now have a new management team. Domino's has been a fantastic story and just a really well-run company for the past decade, 15 years. So there isn't as much low-hanging fruit as there is at Papa John's. This past week, Papa John's reported a healthy rise in quarterly revenue. I recently spoke with Rob Lynch, who became CEO of Papa John's last year. Before that, he'd been president of Arby's, which had achieved record sales.

Rob says Papa John's has a no-contact business model, and he's been advertising that, and customers are responding. Here's Rob. Pizza is actually one of the most food-safe types of food you can order to begin with, especially Papa John's. Everything that we make goes through 450 degree oven. We don't have sandwiches that require fresh produce. And then once our food comes out of our ovens, it is then placed into its packaging and it's never touched. So it's a

very safe segment of the food industry to begin with. So is the growth outlook that you take, that you gain market share from the growth outlook that you take that you gain market share from the independents, you gain it from your competitors? Do we all eat more pizza? I mean, I can't imagine eating more than I am right now. My social distancing is turning to social fattening right now. But where does the growth come from for you over the long term? You know, we have 3400 restaurants in the United States or North America, our largest competitor has almost three X that we invest a lot in our cost of goods by buying fresh produce. We make our dough fresh every day. So we kind of live

somewhere in the middle, you know, delivering the high quality of kind of the local mom and pops, but also the convenience and value of the national players. I asked Rob if there's anything he learned back when he was president of Arby's that he can apply at Papa John's, and he mentioned product innovation. That was a key to turning Arby's around. Arby's had really only been known as the roast beef shop for a long, long time, but Arby's actually was built back in the 60s as a brand that provided a great alternative to burgers. Higher quality protein, an abundance of protein. Back when McDonald's was selling burgers for 20 cents, Arby's came out with a 69-cent roast beef sandwich.

And so we returned to that, and we're doing the same at Papa John's. At Papa John's, we're doing things that the brand has never done before. One of those new things Papa John's is doing is called the Papadia. It's a hot flatbread sandwich that looks like a folded over pizza. And Rob says it's selling well. Now, all that talk about Arby's triggered a memory for me from decades ago. And that memory gave Rob a marketing idea. This happened close to 30 years ago. I

haven't thought about this. At a mall in Albany, New York, I saw a guy taking a giant bite out of an Arby's sandwich. I thought, that guy's really going at that sandwich. I turned the corner. He turned his face to me. It was the boxer, Mike Tyson. You remember Mike Tyson? You know Iron Mike? Oh, yeah. Mike had really hit an Arby's sandwich. Let me tell you. He was going at that thing. Maybe we need to send him a Papa John's pizza so he can tie the two together. Now you're talking. Meta, how about a listener question?

Yep. We've got one from Seth. He's a freshman at Ball State University. Recently, during the pandemic, I have put money into Snapchat and I've seen some success come out of it. I just want to know how you feel the social media market for stocks will go in the future during then after this pandemic. Thank you, Seth. This is a tough one. My concern for Snap has been that a bigger player, namely Facebook, would just spend its way into replicating what Snap does. And now there's a new concern, which is that although social media usage is up during the

pandemic, for companies that want to save money, it's pretty easy to pull back on advertising spending. So we see that advertising spending is falling. Alphabet and Facebook just wait that out because they generate enormous amounts of free cash, whereas Snapchat doesn't. Snap has been an erratic performer on Wall Street, but its latest quarterly report was well-received and the shares jumped. One wild card, according to Susquehanna Financial Group, is that Snap could be bought by a big player like Alphabet to bolster its presence in social media. So that's what I know, Seth. I'm not going to tell you whether to buy or sell Snap stock. I want you to make your own decision, and I want you to think about two things while you do it.

The first is whether what Snap does is special enough that Facebook can't just come along and spend vast amounts of money and copy it and do it better and take those users. And the second related thing is I want you to watch carefully whether Snap is gaining users. For a small social media company that's not yet generating a ton of cash, that's basically oxygen. It needs to be gathering a large enough user base so that it can compete for big ad budgets. Good luck.

How about another question, Meta? Yep, we've got one from John from Falls Church, Virginia. He sent the same question twice because he said in his email that the first time around his wife criticized him for not doing a good enough job. Atta boy, John. Let's hear it. I have a question about bonds, specifically bonds held in an index fund. I've read that inflation can decrease the value of bonds. Does that apply only to new shares purchased during times of high

inflation? Or would it also reduce the value of the shares I purchased in times of low inflation? Thank you for explaining. Thanks, John. So you're asking how inflation affects the value of bonds in your portfolio. If inflation were to heat up, then a Federal Reserve might have to respond by raising interest rates. And rising interest rates tend to hurt the value of existing bonds in your portfolio. But right now, with the economy depressed, the latest reading on inflation was actually negative, and the Fed isn't expected to raise rates anytime soon. Yields for high-quality bonds might be pitifully low, but most investors don't buy bonds for their stellar return potential. They buy them for diversification so that they have something that can hold on to value during

times when stocks fall. If you're worried stocks might fall again, hang on to your bonds. Thank you, Seth and John, for sending in your questions. And everyone, keep the questions coming. Just tape on your phone, use the voice memo app, and send an email to jack.how, that's h-o-u-g-h at barons.com. Thank you for listening. Meta Lutzoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, please leave a review. Follow me on Twitter to find out about stories and new podcast episodes. That's at jack how h-o-U-G-H. See you next week.