Motley Fool Hidden Gems Investing - Buffett’s Buy and the Future of Restaurants

Episode Date: July 10, 2020

Retailers continue to struggle as Bed Bath & Beyond announces plans to close more than 20% of its stores over the next two years. Levi’s sales fall more than 60% for the second quarter. Berkshire Hathaway buys Dominion Energy’s natural gas assets. SiriusXM buys Stitcher. And Kraft Heinz makes mayonnaise ice cream a reality! Motley Fool analysts Ron Gross and Jason Moser discuss those stories and share two stocks on their radar: Zoom Video Communications and Rollins. Plus, food and beverage industry analyst David Henkes discusses the current state of the restaurant industry, Uber's acquisition of Postmates, and what restaurants will look like post-pandemic. Learn more about your ad choices. Visit megaphone.fm/adchoices

Everybody needs money. That's why they call it money. The best things in life are free. But you can give them to the birds and bees. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm Chris Hill. Joining me this week, Jason Moser and Ron Gross. Good to see you two. Hey, hey. Chris. We've got the latest headlines from Wall Street, restaurant industry expert David Henkes

is our guest. As always, we've got a couple of stocks on our radar, but we begin with the retail industry. In 2018, there were 5,700 store closings in America. This week, we got even more evidence that 2020 will be much worse. Bed Bath & Beyond announced they'll be closing more than 20% of their namesake stores in the next two years. Ascena Retail, parent company of Ann Taylor and other fashion brands, is likely to close 1,200 locations as it prepares to file for bankruptcy. This will only add to the already 8,700 store closings announced so far this year. And Ron Gross, I'll start with you. We keep seeing e-commerce sales rise, but in some cases, it's just not enough to offset the loss of those in-store purchases.

Now, if you're not filing bankruptcy like JCPenney, you're lucky, as we said, Brooks Brothers, J.Crew, Neiman Marcus, you're closing stores and you're trying to stave off a bankruptcy. And so, your Macy's and your Nordstrom's and your Children's Place and your Tuesday Morning, just a tremendous amount of closings in this industry. I think we had too much retail in the first place, and sometimes it takes a shock to the system to recognize that there has been an excess. I'm sorry to say, obviously, because there are folks employed at all these places, and a lot of investment dollars went into building up these establishments. But I just think, you know, certainly we're a consumer economy, but it got overextended,

I would say the same thing with restaurants, it got overextended just a bit. Too much excess, shock to the system comes, it kind of thins things out a bit, and hopefully the survivors can then resume growth and get back to maybe then expanding down the road if demand warrants it. Sometimes we build ahead of demand and that can be a mistake. Jason, what do you think? Yeah, I mean, on the one hand, I'm really actually curious to see the innovation that comes from all of this, right? I mean, we have seen, I mean, really an amazing amount of closures in what seems like a very short period of time. And you feel like even in retail, I mean, there's got to be some innovation or some new way of doing things that comes from this. Certainly

seeing a lot of retailers, a lot of fashion retailers bringing more immersive technology into their worlds, bringing augmented reality into their apps, digital dressing rooms where you can try clothes on virtually as opposed to having to go to the stores. I mean, it'll be interesting to see how fashion retail shapes out that way. But, you know, as bad as things are on the closure side there, and they're not good. You know, Matt Frankel and I talk a lot about Simon Property Group on the Monday Industry Focus shows. And that's a really interesting story right there, because this is a real estate investment trust. And they're the biggest mall operator in the country. And so, they've basically gotten all of their malls back

open. And even in the face of these stores closing, you look at their longer-term strategy with these properties, it's actually to bring more uses into the properties, whether it's entertainment venues or office space or even apartments. So, you see, certainly, on one side, the real estate market is a bit tricky, the retail market is a bit tricky. But you look on the other side and you see the companies that are innovating, thinking about it a little bit differently, something like Assignment Property Group, for example, they could actually come out of this being even more productive with real estate that right now looks like it might not be all that attractive. Before the pandemic, for the last couple of years, companies have been moving to

we call this multi-channel distribution strategy, which basically is in-store, online, what have you. And what I think the pandemic has done, it has served to accelerate that move significantly, because if you don't innovate in those regards, you die. So, things like the buy online pickup in the store, curbside pickup, all of these things have become so increasingly important that those folks that have been able to move to that more quickly than others are seeing this big bump in their online sales revenue and the revenue in general, certainly kind of mitigating what could have been this incredible disaster. Those folks who couldn't move, whether they don't have the investment or they're not innovative, are really just feeling the pinch in a double

whammy kind of way, having store closures as well as not being innovative. Well, and Ron, you look at a business like Bed Bath & Beyond. We were talking before the show started about CEO transitions. And I think you and I were both pretty excited at the end of 2019 when Mark Tritton, who had a lot of success as an executive at Target, took over Bed Bath & Beyond, cleaned house in the executive ranks, you know, part of their report this week, you know, and it was a brutal report, but part of it was the store closings. I mean, he's trying to pull every lever he can, but in the midst of a pandemic, it makes the odds of success even tougher. Yeah, I'm a big fan of Mark Tritton, and I will acknowledge that not every

Chief Merchandise Manager can make the transition to CEO. It's a different job, but I continue to have faith in what he can do. I think the pandemic has certainly, to say, muddied the waters would be an understatement to put this turnaround a bit into the longer tail, longer time horizon than we would have hoped. But as you say, he's doing the right things. He cleared out the executive suite, brought on new folks. He's closing 200 of the 950 bed-bath stores, which was absolutely essential. The footprint was way too big. We've said it for a long time. He needs to re-merchandise those stores. That's what he does best. So I can't wait to see what he does there. This quarter, despite the fact that sales were down 49% because the stores were closed, nothing much you can do

about that, we did see sales from the digital platform increase by 82%, actually 100% sales growth in April and May. Online sales accounted for two-thirds of total sales. Again, not surprising because the stores were closed. But what we talked about, those innovations, the buying online and picking up in stores and the curbside pickup service is really serving to help this business, and Tritton is doing what he did for Target now at Bed-Bath. So let's wait and see. Let's let the economy firm up a bit, retail firm up a little bit, then let Tritton do his thing. Jason, it's kind of a similar story with Levi's this week in the sense that online sales looked great, but that couldn't make up for the fact that the bulk of

their stores were closed for more than a couple of months. Yeah. I mean, it's a really difficult time to be a fashion retailer today. I mean, it's really difficult to be a fashion retailer in good times. And this has obviously been a tough stretch for everyone. Levi, no exception. It's not had the Greatest Life is a publicly traded company. I think the stock has been cut in half, essentially. It's one that tugs at my heartstrings a little bit, Chris. I still wear Levi's jeans. Am I just an old guy? Does Levi's still have that sort of brand cachet? I don't know. But clearly, the business is suffering. Revenue is down 62%. That translated to big losses on the earning side. Now, you did mention direct-to-consumer and online. They do have a few different levers

in their wholesale and direct-to-consumer e-commerce business. Direct-to-consumer is now more than 40% of their total business. That's up from under 30% just five years ago. E-commerce has seen that same type of growth doubling, more than doubling over the last five years. Management is doing what they can. They've certainly got the company in a good liquidity position. They're back to about 90% of the stores open. Last quarter, they were keeping the dividend. This quarter, they went ahead and acknowledged that they're not going to pay a dividend for the third quarter. They'll reassess in the fourth. Honestly, I was impressed to see the inventory number not out of control. Given the drop in

revenue, inventory only grew 10%. That's something you really want to keep an eye on, because when those inventory levels get really bloated, that's when margins really start suffering. A really tough time, no doubt. I feel like maybe there's some light at the end of the tunnel with Levi because of that brand, but they've got some work to do, no doubt. So, before we wrap up, Ron, when you look at Levi's down around 15% in just a few days, you look at Bed Bath & Beyond down more than 20% in the past week. There are people who look at that and think, okay, these are brands that I think are going to survive. I can buy it on the cheap. Do you jump in at this point or do you think, you know what, there are still too many

X factors, give it another quarter? As a somewhat traditional value investor, those thoughts are kind of near and dear to my heart, buying a stock that looks cheap and maybe I have a disparate view of the market as a whole. And so, it is tempting. And for selected opportunities, I think it's fine. I bought Bed Bath & Beyond in February before the pandemic hit on the fact that I thought Tritton could turn this around. I don't think it should be the majority of your portfolio, opportunities like that. I think most of one's portfolio should be really strong companies that you believe in that are continuing to putting up great numbers and great earnings and earnings growth. But I think there can be a portion, 5% of your portfolio that you put towards

value plays or turnaround plays with the caveat that most things don't turn, but the ones that do hopefully will generate a return in excess of the ones that didn't work out. Up next, Warren Buffett went shopping this week. It's Berkshire Hathaway's biggest acquisition in years, and we have a few thoughts on the matter, so stay right here. You're listening to Motley Fool Money. 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. Welcome back to Motley Fool Money. Chris Hill here with Jason Moser and Ron Gross. Berkshire Hathaway finally made an acquisition this week.

Berkshire is buying the natural gas assets from Dominion Energy for $4 billion. Ron, you throw in the debt, the enterprise value is around $10 billion, biggest deal for Berkshire Hathaway since 2016, although it kind of doesn't feel that big. You know, I'm a big Berkshire fan, a big Buffett fan, it's actually my largest holding, and I've been waiting for him to use that elephant gun that he likes to talk about. This doesn't feel like that. Now, $10 billion is still $10 billion, but he's got $137 billion to put to work. And I'm all for being conservative and I trust him, but as a shareholder, I do want to see more.

Having said that, I think this is a good acquisition. It will double Berkshire's market share in natural gas movement to around 18% in the U.S. I think he probably got a pretty good deal. Natural gas prices are historically low, partially as a result of the pandemic. They have bounced off their July lows. But when this deal was being negotiated, I would imagine that, you know, he got this on the cheap since things aren't looking that strong, but they likely will rebound. You know, biggest Berkshire acquisition in four years. So, as we said, $10 billion, all right, let's get moving though, buy back some stock, perhaps,

if you can't find anything else out there that you like. But sitting with that much cash, it's just a drag. And you see that in the fact that Berkshire stock is down 20% this year. Sirius XM is nearing a deal to buy Stitcher, the podcast division currently owned by EW Scripps. Sirius XM will pay $300 million for Stitcher, which includes the mid-roll ad network and Jason. This instantly gives Sirius XM business relationships with some of the biggest podcasts out there. Conan O'Brien needs a friend, WTF with Mark Maron, Freakonomics Radio. Yeah, I mean, Sirius XM needs a friend. I mean, WTF with this acquisition, Chris.

No, I mean, seriously, this is the same company that bought Pandora, and I don't mean that as a compliment. I've said all along, I mean, Sirius is playing defense as streaming takes over. They've been slow to the draw in a lot of ways there. Spotify and Apple Music are just really two formidable services with a lot of users. Sirius on its own is less than compelling. They are trying to pivot and become more, right? Podcasts are certainly part of the strategy there. But again, you kind of get back to the distribution thing, and they're not quite there.

You know, look at the mobile presence that SiriusXM has, for example. It's just not good. And that comes, I used to have SiriusXM. I mean, one of the reasons why I canceled it is because we just don't really use it anymore. I think the real story here is Scripps. I mean, they're selling this thing for $300 million. They bought it for like $5 million or something. But, you know, overall, Stitcher generated $72.5 million in revenue last year.

It's not a company that doesn't make any money. But Sirius is a subscription business. So this isn't about advertising. It's about buying more users and trying to figure out some compelling subscriptions to come from all of it. So I don't think the answer is going to be so clear in the near term. I think it's going to take a little time for them to figure out the strategy. But, again, I mean, they're playing defense. expect to see them try to do this to keep up. I'll just say as a potential silver lining,

people have asked me for years, hey, is Motley Fool money on SiriusXM? And we're on Stitcher, have been since the beginning. So, maybe now I can finally start telling people, yes, we are. More companies are innovating to help customers deal with the global pandemic. And Kraft Heinz is one such company. Kraft Heinz has developed a series of kits to enable customers to make their own ice cream in the flavors of Kraft Heinz condiments. That's right, guys. Ketchup, barbecue sauce, mayonnaise, creamy salad dressing. Now you can have these flavors in an ice cream kit. Ron Gross, are you in? As Mr. Wonderful would say, stop the madness. And I will add immediately, this is disgusting. Now, as I've said on the show before, I'm not a

condiment guy. Of all those things, the barbecue sauce is the only one that would interest me somewhat, but not in an ice cream, ever, and not for $17. I see it's only in the U.K. right now, I think, so around £15 for the kit. That's about £14 too much. You know what? I'm going to just give a shout-out to anyone in the U.K. who's listening right now. If you try one of these, drop an email to radioatfool.com. Let us know how it goes. were interested. Jason, I feel like, gun to my head, I would try the barbecue sauce ice cream. Well, that's the operative phrase right there, gun to your head. I'm with you. I'm with Ron. I don't see any reason in the world why I'd want to try this. I guess if I did, I would go barbecue.

I mean, it's funny when you actually log onto the website here, a little bot comes up and says, hi, quick question before you go. If you didn't purchase today, what stopped you? How about these things look disgusting? That's what stopped me. I mean, do I even need to say it? Let's get to the stocks on our radar. Our man, Dan Boyd, who I know is also no fan of this new endeavor from Kraft Heinz. Jason Moser, you're up first. What are you looking at this week? Yeah. Taking a look at Zoom video communication, what we're broadcasting on right now, actually, ticker ZM. This is obviously a wonderful story. It has been a wonderful performer for Foolish investors ever since we've recommended it. It's the second top performer in our augmented

reality service. And I think it really has a long way to go still. The news out this week, you know, we've got SaaS, there's even BaaS, banking as a service. Zoom this week announced their efforts to get into the, wait for it, Haas market. Hardware as a service. And I'm not kidding, either. They're actually coupling up with third-party providers to offer Zoom-integrated hardware that support their Zoom Rooms and Zoom Phone offerings. And I think this actually is a pretty smart idea, because they're not really on the hook for the hardware, they're just partnering up. And I think it makes it a little bit easier for either businesses on the fence or businesses looking to expand their Zoom services to really

something that they know, like Zoom says, just works. It's a very customer-centric company. You have to keep your eye on those. They can be wonderful investments over time. Dan Boyd, question about Zoom Video. Jason, in the HBO show Silicon Valley, the idea of creating a hardware solution for a tech company was considered a joke. Is this going to be a joke for Zoom? I think perhaps five years ago, we might have thought it would be, But given where we are today in remote work, I think this actually stands the chance of doing pretty well. Ron Gross, what are you looking at? I'm going back to Rollins, Dan. ROL, Pest and Termite Control Company, best known for

its Orkin and Western brands, steady performer, increased revenue and earnings quarter over quarter for a decade plus until COVID put a little bit of a halt to that. Serial acquire grows through acquisitions, 80% of sales are recurring. Commercial division took a hit because of the economy shutting down. But I think that will rebound. January made its 18th consecutive dividend increase of 12% or more, and they've taken a step back and cut the dividend for now.

Dan, question about Rollins? Not really a question, Chris, but more of a comment. When I find insects in my home, I just try to gently remove them and place them outside. I think that's the ethical thing to do. Would you consider yourself a humanitarian? I'd consider myself an insectarian, I guess. nice uh i think i know the answer but which of the two stocks you're going with dan uh well the

only rollins i acknowledge is of course henry rollins the former lead singer of black flag so i'm gonna go with zoom video chris all right jason moser ryan gross thanks for being here guys up next we'll dig into the current state of restaurants with industry expert david hankis stay right here this is motley fool money Welcome back to Motley Fool Money. I'm Chris Hill. David Henkes is a senior principal at Technomic, a global consulting firm for the food service industry. Earlier this week, I talked with him about the challenges facing restaurants and how the current pandemic might permanently change the ways in which we go out to eat. But I began by asking for his

thoughts on the current state of things. As a natural optimist, as I started to see restaurants reopen in May into June, and it seemed that there was a lot of consumer pent-up demand, and numbers were coming back. And listen, I mean, none of the sales numbers were great with the exception of a couple of delivery-focused concepts, Wingstop, Papa john's dominoes those types of players but you know i was starting to feel more optimistic but i think as we've forecasted the industry and you know again technomics been forecasting restaurants in the broader food service industry since the early 70s um you know we realize this is not a normal year and so we've been looking at scenarios and so one of our scenarios for the industry was

always that there would be a resurgence and some potential reclosures or, you know, or, or new shutdowns localized for sure. But, uh, and, you know, and so what we, I think our scene play out here is more, I don't want to say a worst case scenario, but it's certainly one of the scenarios where, um, you know, we're, we're, we're not, we're not trending toward a best case scenario. Sure. And so I think, you know, we're, we're almost back to where we were maybe when we chatted in March or, you know, when I would have talked to you in April that, you know, takeout delivery remains critical for restaurants. That's going to now in a lot of states, a lot of places continue to support the business for probably next several weeks, at least. And the dine-in

experience, which, you know, in most states had been limited to 25 or maybe 50% capacity is probably on hold in a lot of places for, you know, for the next month or so. And so restaurants are facing a continued uphill climb where, you know, all the fixed costs and all the labor and everything that was a concern back when the first shutdown happened are just exacerbated. And, you know, there's been some government support and the PPP and, you know, some of the other things that we've seen. But, you know, we're entering now a very dangerous phase where a lot of restaurants that made it through the first three months are realizing that you know it's just it's it's not working out and so we think there's still a lot of heartache to come a lot more challenges

and you know where where we had hoped that things would be starting to brighten up is you know maybe not as bright as we thought it would be you know a month or two ago when we were looking at the industry kind of a long-winded answer for you but it's you know it's it's hard to get a national read on the industry, because there's so many, I mean, you almost have to look at it now. And this is what we talked to a lot of our clients, but you have to look at it very regionally and almost on a state by state basis, because every state has, you know, different metrics and different opening rules, and some of them are closing. And then to your point, you know, even in cities within states, things are closing. And so it's hard to get a national read. But it's, you know,

there's no question the industry is still going to be down probably, you know, 20% to 30% at least for the year when all is said and done. Wow. Because the last time we talked, the range that you had given at that time was sort of best case scenario, industry down about 11% in 2020. Sounds like we're obviously, you know, and you had said at the time, 27% decline is worst case. And it sounds like we're absolutely trending towards that worst case scenario. Yeah. You know, I mean, and again, we're still kind of looking at scenarios, right? And it also depends on what type of restaurant you're talking about because quick service restaurants. And if you look at certainly the publicly traded restaurant chains, which I know you track,

I mean, you know, some of them have been posting decent numbers. Some of them actually really great and some of them okay. And even, you know, some of the larger full service chains have been able to pivot pretty strongly to, you know, to delivery, third-party delivery or their own delivery to curbside takeout or, you know, or takeout more generally. And so, you know, there's certainly pockets of restaurants that are doing better than we anticipated. But, you know, the big challenge, and especially in sit-down restaurants, full-service restaurants, is so much of that business are small business owners, small businesses, one, two, six location operators, you know, the big chains are generally speaking going to be fine, right? And so what's going to

end up happening more broadly is the business is going to be much more chain focused than it was last year or two years ago. And chains are going to have a bigger share. And it's really those independents where the continued challenges occur. And so sometimes the, you know, the better news is masked by some of the publicly traded chain reports that we see that, you know, that give us some hope on what's going on. But, you know, those Main Street mom and pop operators are the ones that are going to continue to get hammered by this. But even within some of the publicly traded restaurants, and I'll just use Darden as an example, I mean, you look at their most recent results, they own Capital Grill, a high-end steakhouse. Those results were so much worse

than the results of Olive Garden and the other brands under the Darden umbrella, whether it's chains like Capital Grill or Mom and Pop. Is it safe to assume that higher-end restaurants that depend more on the in-restaurant sit-down experience, those are the ones to be the most worried about? 100%. There's no question that if you were in 2019 a high-end fine dining or even polished casual restaurants, generating $60, $70 check averages, you didn't put a lot of thought into an off-premise strategy. You didn't really think about delivery. You didn't think about a takeout strategy. Maybe you did it as sort of an ancillary business just to drive some incremental revenue, but it wasn't a core part of your strategy. And what's happened since

March is that that has, you know, those that haven't, hadn't had that beforehand have been severely disadvantaged. And it's very hard to replicate that in, in store, in restaurant experience for a higher end restaurant in a takeout or delivery platform. And so there's no question that, you know, some of the casual dining places, wing locations, obviously the pizza guys on the quick service side, you know, those are all easy menu categories, if you will, that had already had a, you know, some pretty strong off premise business. Um, but you're absolutely right. The, the higher end restaurants are, are most vulnerable and, and, you know, you, you see them trying to, to, to pivot to this now. Right. So, I mean, they're doing meal kits and,

and, you know, boxes and, and, uh, you know, selling things, you know, linear here in Chicago has, has had a strong focus on off premise over the last couple of years. I mean, nobody would have thought, you know, a year ago that Alinea, one of the, you know, Michelin starred restaurants in Chicago would have to do all of their business off premise, but you know, they've, they've shifted and, you know, they're doing, you know, boxes and things that I think are, you know, 40 to $50 per person, which, you know, is still higher end and you get, you know, some great food with it, but it's still hard to replicate that experience. And so, you know, those are the ones, and especially the, you know, fine dining, white tablecloth, independence, the true independence, you know,

those are the ones that probably, you know, we're going to see some significant unit closures, business failures, you know, and again, you know, within Darden or Brinker or any of the other ones, I mean, you see within their more traditional casual dining, you know, the parts of the business that perhaps, you know, had been struggling in years past, those are the ones that they had invested in some off-premise, you know, takeout or delivery capabilities previously. And they've been able to, you know, again, not, you know, not set the world on fire, but, you know, certainly at least maintain some levels of business that allow them to keep the lights on. We've touched a little bit on delivery in terms of delivery news, most recently Uber

buying Postmates for $2.6 billion. What did you think of the deal for Uber? And does that tell us anything about the future of delivery? Well, there's a couple of things. One is, it's still very hard in today's environment for these third-party delivery companies to make money, especially with Uber now. And when you think about Uber's, I don't know if you want to call it their core business, but obviously the transportation side of Uber is getting killed right now. And so, you know, this, this move into Postmates and, you know, and, and kind of what, what it allows them to do. And I think, you know, I was just reading something yesterday that they're now talking about. This is, it starts to get the, not only in a restaurant delivery,

but Postmates is so much more than that. And they do last mile delivery for a lot of different things for retail, grocery delivery, but, you know, pharmaceutical stuff. I mean, and so what this allows Uber and now with Postmates to do is to not only get into restaurant delivery and hopefully, you know, get some synergies and lower costs and hopefully get to, you know, some higher level of profitability, but it now allows them or at least gives them a greater platform to do delivery in a whole lot of other areas. Uh, and I think that's, you know, part of the future of, of delivery is that, you know, these restaurant only platforms that are having trouble making it, um, you know, may need to look into other industries. And I think we're still

going to continue to see, uh, uh, you know, continue transformation, um, you know, with, with the commission fees and we see, you know, Grubhub and, and, you know, especially Grubhub has been been at least charged with a lot of unfair business practices rightly or wrongly you know players like DoorDash seem to have a little bit more flexibility and and I you know I think what we're going to start to see is a little bit more of a you know sort of an a la carte system where they're going to need to offer a lot of different services at different price levels or different commission levels for restaurant operators because you know certainly the government crackdown on fees and commissions, the ability to make money. I mean, it's all coming

into this perfect storm where, you know, the bigger you are, at least the more synergy, more savings you can get, but it's still going to be really hard to make money in, you know, in this environment. And, you know, I think we're going to see expansion into other areas, like I said. Stay hungry. We've got more restaurant talk with David Henkes after this. You're listening to Motley Fool Money. Welcome back to Motley Fool Money, Chris Hill talking with David Henkes, Senior Principal at Technomic. Let's go into the future, 12, 18 months. Let's assume that America is past the pandemic, there's a vaccine. Things are starting to get, quote-unquote, back to normal.

And part of getting back to normal is entrepreneurs looking at the restaurant business and investing in it. What do you think we're going to see in terms of permanent changes out of this? Is it smaller footprints for actual restaurants? Is it more second kitchens within restaurants, more ghost kitchens outside of restaurants? Yeah, I think, you know, one of the trends we had already been seeing is this move towards smaller footprints, right? I mean, if you look at, for example, a typical cheesecake factory, I mean, that type of location now is going to be very hard to support on a going forward basis. These huge menus, you know, huge square footage locations. And so already, I think the movement was toward smaller footprints. And I think that's

only going to accelerate. And to your point, I think as delivery and off-premise more generally continue to take share, and it will continue to take share, even as people begin to dine in, they've now realized they can get pretty high quality restaurant meals at home. And so delivery, we believe, which had already been growing double digit even before the pandemic, is going to continue to eat into that on-premise share of consumption. And so what that means then is that, you know, when you're building a restaurant or you're building your operation, you need to have a solution for that. And so ghost kitchens, which, you know, really, we only started talking about ghost kitchens probably two years ago, right? I mean, this whole idea of a delivery only kitchen,

and there's a number of different ways it can work. You know, if you're a restaurant, you can run your own virtual brand out of your own kitchen. There's third party kitchens like kitchens united that that run them doordash has tested uh you know delivery only kitchens with some of the brands they work with and so there's a lot of different ways that these can uh function or or you know or work within the industry but there's no question that you're going to see a a huge surge in some kind of delivery only virtual kitchen you know i was just reading this morning that, you know, Chuck E. Cheese had for the last several months been selling their pizza under the name Pasquale's Pizza on delivery apps, right?

And so, and I've heard of some other chains that are doing something similar where they've developed their own virtual brand. There's no storefront for it, but if you're online, you can buy, you know, in this case, a Chuck E. Cheese pizza under a different name. Is that a virtual kitchen? Is that a delivery-only kitchen? It's certainly a virtual brand. But I think, you know, what it means is that, you know, the actual storefront, the actual location of a restaurant is less important than the location on the app or on, you know, how, you know, how much you've been able to drive interest in your brand, you know, either online or, you know, on a delivery app. And so it really changes the whole operation in terms of, you know, what the restaurant looks like and how it operates.

I applaud them for innovation, but I don't think changing the name is going to get me interested in Chuck E. Cheese pizza. That's just me. But if you don't know it and you're just pizza on a Saturday night, right. And you say, Oh, let me try this Pasquale's pizza. And I think that's the thing, right? I mean, I think, you know, a lot of, a lot of brands in trying to expand their, their, their reach, you know, if you're a casual dining bar and grill, and you want to get into the wing business, maybe you start or you want to focus on your wings, maybe you start a virtual wing concept online and market it under a completely different brand. And so, you know, it really opens up the opportunities for restaurants. And, you know, certainly as

researchers, then it challenges us to start thinking about, well, how do you actually find a brand, right? I mean, if Chuck E. Cheese is selling under Pasquale's and Pasquale's suddenly is 10% of Chuck E. Cheese's sales, does that count as a separate brand in our tracking of brands? Does it count under Chuck E. Cheese's revenue? And so there's just some interesting things that we as industry trend watchers have to sort of identify and figure out how to track it. But this whole move toward off-premise has some significant implications. And I think a lot of them aren't even going to be known, but there's no question that the investor money and just the interest level in operators opening or working with delivery-only virtual kitchens, whatever

you want to call it, ghost kitchens, is going to remain extremely high for the next three to five years and probably a significant investment opportunity for those that have the capital to do so. One more thing, and then I'll let you go. Last time we talked, you said that one of the most impactful things that customers can do for their local restaurants is to buy alcohol when they're doing takeout orders. Is that still the case? It is. I mean, beverage alcohol is such a high margin item for restaurants in normal times. Now, What has happened, obviously, is with the whole dine-in experience gone, that margin has disappeared with it. And so what we've seen is a relaxation of local regulations allowing most restaurants and bars to sell off-premise beer, wine, cocktails.

It looks like a lot of cities are going to continue those, perhaps in some cases indefinitely. um and you know the challenge though is that the experience the the price that you can charge for these is not the same as you're going to get in in the restaurants and so while the margin is still good it's not as great as it would have otherwise been if you're in the location right i mean a lot of places now that sell beer have shifted to packaged beer to cans sometimes they're selling six packs. And so you can't sell that for the same price you're selling a draft beer when you're sitting in the restaurants, right? And so the margin structure changes somewhat on that. And, you know, and similarly with, you know, cocktails or cocktail kits, I mean, it's an incremental

revenue for sure, but it's, it's not the margin that it used to be. And so, you know, certainly, you know, we do a lot of work with the beverage alcohol suppliers and, and, you know, listen, And when you look at the parts of the restaurant and food service business that are most significantly impacted, it's all the segments that serve alcohol, right? Casual dining, fine dining, hotels, recreational venues, you know. And so the beverage alcohol business more broadly is going to face some, you know, additional significant challenges that, you know, quick service restaurants or others aren't going to just because, you know, alcohol is sold in those segments that are most significantly impacted by the downturn. And so, you know, to the extent you can, you know, buy a cocktail or a glass of wine, a bottle of wine, a, you know, a beer from an operator, it certainly helps them incrementally. and you know I know I would continue to recommend doing so but it's you know it certainly is not as profitable as it is when you're sitting in the restaurant and you're paying eight dollars

for a craft beer well I'm going to do it anyway just because you recommended it David Hankins thanks for being here thanks Chris I appreciate it that's going to do it for this week's show I'm Chris Hill thanks for listening and we'll see you next week We'll be right back.