Motley Fool Hidden Gems Investing - Asian Food Chains Moving Stateside

Starting point is 00:00:00 Emily Flippen. We're eating up the tastiest trend in restaurants, Asian food chains expanding across the United States and what this means for investors. Today on Motley Fool Money. I'm Emily Flippen and today I'm joined by analysts Jason Hall and Samit Deo to discuss the rise of Asian food chains in the United States and if they're expanding reach and changing palates offer up an opportunity for investors to take a bite out of something new. We'll be discussing Luckin' Coffee, of course, but also some businesses that you may be less familiar with. That includes Kura Sushi and Heidi Lau Hot Pot. We'll be discussing their unit economics, the franchise versus company-owned models, brand power, and if these concepts actually

Starting point is 00:00:48 do transition across cultures. But we have to start with one of my favorites on the list today, and that's Jollibee. For anybody who's unaware, Jollibee is this Philippine-based fast food chain, perhaps best known for its fried chicken and what they call their Jolly Spaghetti, which is, yes, spaghetti topped with this unique banana ketchup-style sauce. It's really hard to oversell what a big name Jollibee is in the Philippines and across Southeast Asia. They have over 1,300 locations in the Philippines alone, nearly 500 more internationally, including over 100 in North America. Although across all the brands this company owns, they have more than 10,000 stores nationwide. It's a really thinly traded stock. It's on the pink sheets here in the United States

Starting point is 00:01:29 with the ticker symbol JBFCF. But when you include its Philippine listed shares, it has an enterprise value of nearly $6 billion. So I mean, is there a real growth thesis here for Jollibee? Or is it really just another example of a franchise model that's likely to flame out? I'm really upset that I haven't heard about this already. This is the first time I'm hearing about Jollibee and being in new york uh there's quite a few in queens and manhattan and all around new york city so um i'm coming around to this just now too but you know as i was looking into it you know it's a brand that is popular as mcdonald's and coca-cola in its home country well as popular as mcdonald's and coca-cola is here is how popular jollaby is is is in the philippines kids love the mascot

Starting point is 00:02:15 they have birthday parties there you know it's it's it's quite a thing its growth thesis really relies on expanding outside into North America, where it has only about 100 locations. They're looking to expand out to about 250 in the next few years through franchising. I was surprised to learn that their average unit volumes are 4.2 million a year. That is just for company-owned locations, which is what they have now. Filipinos are the third largest Asian origin group in the United States, but 60% of their customers in the United States are non-Filipinos. So while you know you think maybe is just appealing to the filipinos in america that you know maybe know the chain and are accustomed to the food it is gaining some traction with customers here as

Starting point is 00:02:58 well um so they have the ingredients to be successful um and grow it's just whether to be whether seen if it catches um and anecdotally with my own experiences you know i've seen a lot of korean fried chicken hot pot thai concepts gain a lot of wide appeal um although being in New York, I think I might be a little bit early exposed to those. Yeah. What's really interesting about Jollibee is that you and I live in places where there's Jollibee's actually near us. And it's not one of those brands that you can particularly hear about unless you're already exposed to it. But Jason, I know this is one that you've looked at before, and I know you have thoughts about the Jollibee menu and how that has transitioned from the Philippines here to the

Starting point is 00:03:38 United States. You know, I get it trying to find the balance between offering something new while not being quote-unquote weird. But this world does not need more mediocre mac and cheese and dehydrated mashed potatoes. I'm a little salty that they're doing some of the usual Southern sides to pair with their fried chicken in those U.S. restaurants. But I do think if you look beyond that, my one little quibble there, one of the things that's interesting about the model is the diversity of the food on the menu. You've got burgers, you've got fried chicken sandwiches, which are supposedly incredible. Sounds weird to American palates, the spaghetti you were talking about. It's a meat sauce with banana ketchup. It's supposed to be really sweet.

Starting point is 00:04:19 And then there's some of the other more Filipino-influenced things, rice and noodle dishes. So maybe it's kind of a something for everyone, which I think is compelling. Is it going to translate into the U.S.? I think that's only part of it. It is a big part of it, right? We talked about going from around 100 to 250 locations. But you also mentioned the global reality. There's more than 10,000 locations. Franchising is a big part of that model. They own some U.S. brands, Coffee Bean and Tea Leaf, which is a 40-year-old U.S.-based company that actually has more locations internationally. Smash Burger is a U.S. business they acquired recently. I think the point for me is that investors that are interested in

Starting point is 00:05:01 this, they need to know everything you own if you buy into this, what the global strategy is, because it's more than just opening a bunch of Jollibee locations in the U.S. And also know that you're along for the ride with the founding family that own a vast bulk of this company. It's very concentrated ownership. So it's not just thinly traded in the U.S. You're ponied along with the people that have controlling stakes in the business. Yeah, it's a little bit of a head-scratcher for me, because you see this Jollibee brand that you think can have so much power, but the company actually spends a very small amount of its total costs in terms of marketing, especially here in the United States. So despite the fact that its

Starting point is 00:05:43 brand is so pervasive in the countries where it got started, as they're expanding internationally, it doesn't seem like they're building up that same brand recognition. And I think that's a really big misstep on the part of management, because I think if you're spending less than two and a half percent of your total cost of goods on advertising as a franchise-based restaurant chain, especially as you're looking to expand and double your store locations in a new country, that is, in my opinion, a way to just ensure that your average unit volumes fall. But to your point, Jason, it almost feels like Jollibee is an afterthought for this company, because it's not so much about turning the United States into the next big market for Jollibee,

Starting point is 00:06:18 for fried chicken, for banana ketchup spaghetti. It's about what smaller, almost drink chains can we acquire to expand just total number of store units in the United States? Smashburger, Coffee Bean and Tea Leaf obviously being two good examples. But in my opinion, it's one of those head scratchers to me because it begs the question of, is this business too diverse to succeed? Are they just trying to grab any growth and losing focus on that core Jollibee brand in the process? Yeah, it strikes me as more empire building than a targeted focused growth. And again, there's more than a dozen different restaurant and beverage brands in the portfolio that makes it harder to, to focus your spend. Sandmeat, I think you're a good example. You,

Starting point is 00:07:00 where you live, that's where there is a concentration of their stores. And until we started talking about it, hearing it from Emily, you know, you didn't know about it and I didn't, I didn't either. Yeah. And I get lots of advertising and flyers and, you know, you see them all around as I, as I kind of go around in terms of like different concepts. And a lot of these other Asian concepts are very focused. I think, Emily, you hit on that point. They're trying to do too much. They've got to stay focused on who they are and demonstrating that in the market. Well, either way, I'm putting it on my to-do list to go visit Jollibee location. That's only a 20-minute drive for me and report back about exactly how I feel about this interesting

Starting point is 00:07:39 spaghetti. But up next, we're going to be transitioning from fried chicken to caffeine. Stick with us. Luckin Coffee is likely a stock that needs no introduction for anybody who's invested or lived through the pandemic. I mean, this is the Chinese-based coffee chain that pioneered the model for low-cost, quick-service coffee before, of course, blaming out due to fraud and scandals. Its shares were delisted to the pink sheets, but they still trade there under the ticker symbol LKNCY. And I'll tell you what, Jason, I mean, this business has made a voracious comeback from its fall from grace. They have over 20,000 locations globally, including a handful that are growing here in the United States,

Starting point is 00:08:18 and people are picking up on its model. From your perspective, is there really anything to get an investor excited about beyond caffeine, of course, with an investment in Luckin' Coffee or resetting ourselves up here for failure a second time in a row? Failure 2.0. Well, it's interesting. I think the big thing, I think a lot of people that maybe heard about the original story don't realize this wasn't just a fraud, right? The fraud was massive, but there was always a good core business. You just had some leaders that were cooking the books. Another takeaway I think is interesting is the fact that the PRC government, as much as we've seen a lot of autocratic things over the past few years,

Starting point is 00:08:57 they didn't try to sweep it under the rug. They let it play out in the public sphere. And investors, that should give you a little bit of confidence. I don't know how much, but maybe a little bit. But I keep coming back to, there's still two co-founders who were with the company and on the board when the fraud happened, they're still now, one of them is the CEO. That always just hangs in the back of my head. But if we look past it, I think we can probably trust its numbers better than any other coffee in the industry, business in the industry. The growth rates, man, they are something else. You mentioned that story. The actual store count surpassed 26,000 last quarter. They had a few

Starting point is 00:09:36 when all of this was first going on. They're opening like $2,000 a quarter. And here's the thing, the revenue growth is 47% last quarter. That wasn't just new locations. Comps are up by double digits, too. So, there's a lot of things that are really working well for their format, their go-to-market strategy. Chinese customers are coming to the stores and maybe not going to Starbucks anymore. Also, as much as the stocks run up, Emily, I'm not sure that I would really say that it's expensive. Sales multiple price to sales is kind of empty calories sometimes, but it can be useful directionally. And it's trades for a lower price to sales multiple than Starbucks, which we know is struggling and it's earning much higher margins. So

Starting point is 00:10:18 maybe there is something there. You know, that's eye popping growth for Luckin, but given his checkered history, as they say on Shark Tank, I'm out. I think that's a completely fair takes on me. I will say though, there were red flags to me at the time that made me more concerned for Luckin back in 2020 than I am for today. And there are some classic examples of fraud that I think investors can look for. For instance, when Luckin Coffee started launching vending machines. I mean, gosh, tell me more about the cash-based business that is vending machines. And I'm happy to see that their expansion here has seemed to be a bit more in good faith. We do not see a lot of the same missteps that I think colored their previous

Starting point is 00:10:59 run at public markets. But it's always a fair point that once you've broken somebody's trust, it's harder to build that up. In the case of Luckin, from a business perspective, their strategy was almost the opposite of what you built for Starbucks. They wanted the low brand recognition, which is to say they're the cheap brand. You're not walking around at the Luckin coffee to look premium and expensive. You're doing it because they offered you four free coffees when you purchased your one coffee and they were hoping you'd bring it to your coworkers. Whereas Starbucks was much more about larger format stores, higher priced drinks, a cachet associated with the brand and thus the drinks associated with their brands.

Starting point is 00:11:33 And then of course the idea of the third place where you'd go, you'd sit down, you'd work, you'd have coffee, you'd have a ceramic cup, which of course Starbucks is bringing back now. Fucking coffee says, to hell with all that. We don't need any of that. We're going to have these small format stores. You don't even engage with a barista. For the locations here in the United States, you can't walk in and just order at the counter. You have to place that order digitally. So it's almost the exact antithesis of the thesis that brought Starbucks to power. And it's really interesting to see how consumer dynamics have shifted so dramatically that it is now about speed, efficiency, and price, and less so about convenience, customization,

Starting point is 00:12:10 and connection. The smartphone influence on coffee ordering, maybe? Yeah, exactly. And also, I think there's a desire here from American consumers to be a little more to the point. I mean, we see the success for businesses like Dutch Bros and other drive-thru coffee chains where it's a little less about the experience and the location and a bit more about the convenience and accessibility and the cost associated with those daily purchases.

Starting point is 00:12:36 And I'm actually maybe more positive here on the future for Luckin' Coffee in the United States than I ever have been. I never thought I would have said that even just a couple of years ago. Their franchise expansion model is incredibly risky, to be very clear with that. but the business is driving much higher profits, expanding store count, and they seem to be doing something that is actually resonating with consumers, which in my opinion is a stark difference from where the company was even just a few years ago. Before we move on to discuss our last course, which is of course conveyor belt sushi and hot pot, I do have a quick note for

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Starting point is 00:14:21 food chains expanding across the United States. That is Kura Sushi and Heidi Lau Hot Pot, two of my favorites here, at least from a consumer perspective. But Samit, let's start with Kura. This is the conveyor belt sushi restaurant that's looking to capitalize on the desire for both dinner and a show to some extent. I'm not a huge sushi fan myself, but I do love how they gamify the process of eating. And even more, I like how this company is expanding not through a franchise model, but through actually a company-owned location model. It's a bit slower, but in my opinion, maybe a bit more lucrative for investors. Kura Sushi is actually headquartered and listed in Japan for the parent company, but investors can get a slice of Kura's U.S.-based arm by buying

Starting point is 00:15:01 shares of KRUS on the NASDAQ. Sammy, what do you think? Is there something to be excited about here for investors? Well, you're right, Emily. I've been to Kura with my family, and it's definitely a fun experience you know you get the touch screen ordering grab sushi off the conveyor belt robots serving drinks etc you know it's it's a fun you know a few like flashing lights almost feels like you're in a casino to some extent um but most importantly the food is quite good the sushi is very good the other food items they have is very good they have about 75 i don't i don't know if i would ever want to associate sushi and gambling though that's exactly what i was thinking there's no gambling involved it's just like a lot of uh a lot of fun lights and stuff but

Starting point is 00:15:40 But they have about 75 to 80 U.S. locations, so smaller than some of the other chains. They report around 70% to 18% restaurant-level operating margins, which is pretty good, and 4.2 million in AUVs. Very impressive as well. However, they aren't profitable because they just have very high expenses because they're pretty much building out for a larger footprint. They're aggressively pursuing unit growth of 20% plus. So it remains to be seen of this concept would kind of take off um it's fun and whether they'll make whether diners will actually make it a regular habit um it's not a one and done experience but i don't see it being a very often experience i think more like maybe like a benihana for special occasions so not sold

Starting point is 00:16:24 yet on on how much you'll gain traction uh the las vegas of sushi if you will i love i love the experience that is cura but i mean i'm curious when i think about these food chains that we've talked about today and the distinct brands that they've built, I think that Kura is maybe the area where I struggle the most because it feels like it's the most easily replicatable. I have probably a half dozen conveyor belt sushi places that are located near me. Now, granted, I'm in a major metropolitan area, but in your opinion, is there anything that's unique or special that would cause somebody to say, hey, I have to go to Kura to get my conveyor belt sushi. I can't go to that place down the street i mean it is relatively clean and and well organized and maintained so

Starting point is 00:17:08 that definitely helps i i think i'd be more suspect to go to a random conveyor belt sushi because that concept to me doesn't sound appealing in general they're trying to build up a little bit of their brand name which over time if they can then it might be kind of associated with that conveyor belt sushi concept yeah if the best we're coming up with is the restaurants are clean then part of me thinks that maybe investors can do a little better. Scalability is a challenge with that sort of format too. I think that's one of the things that can stand in the way. And part of the reason why you see it not generating profits yet. And Jason, the stock I want to talk to you about is actually one of

Starting point is 00:17:47 my favorites of the bunch. That's Heidi Lau Hot Pots. It's traded over the counter here in the United States with the ticker H-D-A-L-F. I spent four years of my undergrad living in China and I could never really afford to eat at Heidi Lau, but I did love it whenever I got the opportunity to have somebody else treat me to a meal there. There's a high-end staple for hot pots. They have a real rags-to-riches story, and it's founder and CEO. But there are over 1,400 locations across the globe, and they have more than a dozen here in the United States. They've been expanding pretty aggressively. Jason, I know I love to splurge here for some food, but is there anything to, I guess, whet the appetite of investors? I think the thing that stands out to me,

Starting point is 00:18:26 and this is to a certain extent the case for Kura Sushi as well, because you're starting to move into these more specialty restaurants where they're just not going to have the same mass market appeal. People either like sushi or they will never touch it. It's not like fried chicken where it's like the vast majority of people are going to be cool with it. And a hot pot is a little more specialty as well. And again, you talk about the price point. It can get pretty expensive before you know it. In the restaurant business, the fundamentals, just blocking and tackling are so important, especially compared to a SaaS company, where high margins is wallpaper over being mediocre operators. You just can't get away with that. And super high is the parent

Starting point is 00:19:06 company here. Its operating margins in the first half of the year were 3%. So that should make it really clear how important it is for restaurants to be disciplined growers, especially in this case if they're also the operators. You look at Luckin and Jollibee that we talked about earlier, they've made franchising a big part of their growth strategy, which means you get to pass along the bulk of the financial risk, offloading operational responsibilities, and just earn high margin freeze on franchising and a percentage of sales. I think that's one of the reasons we've seen growth slow here. Again, it's also niche. They have to be really thoughtful and mindful about where they do expand. They can't open a restaurant and maybe just come a little short

Starting point is 00:19:58 of expectations. There's a real risk here of failure. If you overestimate what the market can be worth for a specific location, they have not even 200 total locations. It's a small business. So, I think it's really important that they focus on executing, make sure they're in the right markets, and really have good operational strength. Because you just don't have the margin of safety you do with a coffee shop or a fast food joint. A completely fair point. And as we sign off here, I'm going to force you both into a somewhat uncomfortable position,

Starting point is 00:20:35 given the takes I've heard today about the companies we've discussed. But I would love to do a lightning round and force you both to put your metaphorical money where your mouth is. if you had to buy one of these Asian-style publicly traded companies that we discussed today, which one are you buying and why? And while you think about it, I'm happy to go first. I don't think this will be too much of a surprise, but I actually lean towards Jollibee out of the group that we discussed today. And the reason is, is because exactly what you were just talking about, Jason, what is a business that is doing something that is A, really scalable and profitable,

Starting point is 00:21:07 but is also really unique. And as I think about what makes a successful chain here in the United States, they have to be doing something that can't be replicated by their competitors, at least not effectively or efficiently. And as diverse as the strategy and as crazy as it seems to be, and as much as I think the Jollibee management team could do more, especially in terms of marketing, I also think there's a lot of value that exists in that brand that is untapped with an enterprise value of only $6 billion, given their thousands of store locations. Sendmeet, I think you're not picking Luckin' Coffee. So where are you going? You know, surprisingly before this, I had a different one in mind, but now after talking, I'm going with Jollibee too. I mean, I think their hurdle to clear, to be successful or do well is lower than some of the other chains. Betting on chicken is always a good thing. There can't be enough chicken places. I mean, America loves this chicken and all kinds of different flavors.

Starting point is 00:22:02 It has its unique appeal and flavor profile that I think once it's able to brand itself, get its name out, and demonstrate what it is, I think you can have some success. And especially the franchising bit will actually help accelerate their growth much more. So I'll put my bet on Jollibee. Sam, I bet I can get you to go try it this week. They have a special Korean fried chicken on the menu right now in Queens. Okay, I'm going to look up my closest one. Okay. There you go. All right. Done. So I, as much as I want to say, uh, Luckin, I'm just, again, I'm not comfortable there. You know, fool me once shame on you fool me twice.

Starting point is 00:22:42 So I, I'm not comfortable there. Kura sushi is of the cuisine types. It's the ones that I like the most, but their gross margins are less than 12%. Right. There's so thin margin of safety and it's probably the most binary food type for, uh, for tastes. So that, that concerns me. The thing that brings me back to Jollibee is scale. The size of their locations. They own food manufacturing facilities. You get to that point and scale really matters a lot. As much as we quibble about they're not spending enough to market, they can ramp that up. They already have things to give them lower costs. That is maybe the most important thing you can do as a restaurant is lock in low costs as a producer. They have scale. To me, I think that's probably

Starting point is 00:23:24 the driver. Plus, the stock is not expensive. You have some margin of safety built in there in terms of what the market's expecting. I love the fact that as we sit here and debate these foods, not only are we maybe getting a little hungry for some Jollibee, but also they just offer businesses and investment opportunities for investors who are looking to diversify their portfolios away from the Cava, Sweet Greens, or Chipotles of the world that tend to get a lot more coverage from financial media. There are a lot of really interesting, fast-growing concepts here in the United States that are worth exploring as potential investment opportunities. And I hope today's podcast was at least somewhat enlightening as to what those

Starting point is 00:24:02 opportunities may prevent investors over the course of the next few years. Listeners, you should be sure to join us tomorrow because Travis is going to be discussing OpenAI and the implications that its shopping initiative has from everyone from Etsy to Amazon. In the meantime, Jason and Samit, thank you both so much for joining me. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our

Starting point is 00:24:36 full advertising disclosure, please check out our show notes. For Jason Hall, Sam Mideo, and the entire Motley Fool Money team, I'm Emily Flippen. We'll see you tomorrow.

Motley Fool Hidden Gems Investing - Asian Food Chains Moving Stateside

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