Motley Fool Hidden Gems Investing - Hungry for Experience

Episode Date: October 29, 2023

How do you build a restaurant chain with lines out the door?  Dylan Lewis caught up with Ron Shaich, the former CEO of Panera and Au Bon Pain, the current Chairman of Cava, and author of the upcoming book Know What Matters: Lessons from a Lifetime of Transformation. At a live Motley Fool member event in New York, they discuss: Past, present, and future cravings of the American eater Fighting against the “pervasive short-termism in our capital markets. And the future of automation in food Ticker discussed: CAVA Host: Dylan Lewis Guest: Ron Shaich Producer: Mac Greer, Mary Long Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. value creation is not something i can make when a ceo gets up here and tells you he's creating value and when he's manipulating it you want to run value creation comes out the other end by what by the end of having a better competitive alternative in my industry what's a better competitive alternative mean it simply means customers are going to walk past our competitors and choose to come to you that's it now it's hard to do but that's the objective i'm mary long and that's ron shake former ceo of panera and album pan the current chairman of kava and author of the upcoming book know what matters earlier this week dylan lewis sat down with shake

in new york at a special live event for motley fool one members they discuss 200 years of restaurant history and where the industry is headed next how to counteract the effects of pervasive short-termism and technology's role as an enabler of experience so you have fed a lot of people in your lifetime i kind of consider you an observer of the american eater in a lot of ways and i'm curious as you look out to this room of eaters many people who have eaten with you before what do you see what kind of trends are you interested in what are you what are you noticing from the american eater right now i think people want things that that help elevate them. They want things that help them relative to their diet. They want things that

are flavors that engage them, that excite them. They want things that are new and different, but more than anything else, they want things that are quality. I think at some level over the long period of time, there's a rejection of heavily processed commercial food and desire for things that feel like real food and served by real people in environments that engage them and that ultimately elevate them. In the book, I think you call that a drive for specialness? Yes, I think in some ways. So that, in a lot of ways, as my reading was,

kind of gave birth to the fast casual movement as we know it now? Yeah, I mean, I think if you take it back, we're going to do 200 years of restaurant history in the next 30 seconds. And everything, as investors, I'd say this to you, everything is about understanding the deeper trends. and trying to separate the wheat from the chaff, the signal from the noise. So here it goes.

Up until the 1950s, from the 1500s on, if you wanted to open a restaurant, you and your spouse opened the restaurant. It was an independent. One of the spouses was in the front, and one was in the back, and that's what you did. That occurred up until the 50s. In the early 50s, people began to wake up and say,

I could take one product. I could industrialize it. I could produce it. I could chase the interstates. I could take hamburgers. I could take pizza. And I could serve a lot of food for not a lot of money. At the beginning, those were specialty products. And that was the evolution of fast food, which was, in essence, a niche of the broader independent restaurant movement. And that took us from 1950 up until the early 90s. And by that point, in the early 90s, we had 60,000 fast food

restaurants in America. They were essentially self-service gasoline stations for the human body. You know, it's 4 o'clock in the afternoon, you're on a road show or you're hungry. It's the quickest way to inject nutrition into your system, hit the drive-thru, right? That's what that had become. And people began to wake up, I was really one of them, and began to say, you know, people wanted something more. Because fast food had become so dominant, people wanted to feel special in a world in which the only choices was fast food and fine dining.

And that led to somebody like me coming along and saying the deeper trend was a desire to feel special in a world in which nothing was special. And you began to see the development of specialty categories. Specialty beer, Anheuser-Busch and Miller lent itself to Sam Adams. Specialty coffee, Folgers and Maxwell House lent themselves to Starbucks and Pete's. You saw it in beverages, Coke and Pepsi, Ad Waldo to Snapple. We said the same thing was going to happen in food service. McDonald's and Burger King were going to lend themselves to specialty food. Now that's what I called it. The world eventually called it fast casual. Here's what happens next. Now specialty food is, fast casual has been built out, and that niche will continue to occur. Fast casual

is simply a niche of fast food, which was a niche of independent restaurants. The next major niche, where it's going to go from here, is into specialty fast casual. So just like it occurred specialty retail, where in essence, Sears brought the general store to America, and behind it became the big box specialty retailer. People, specialty food, fast casual has been brought to America, and behind that will become specialty branded products that define their category. Kava is a great example of it. Yeah. I want to hop in there for a sec. I mean, I heard you talk through that and that was about as succinct and perfect a timeline of food as I've ever heard. What do you think? Was that good for 500 years? I think that was a Ted talk right there in about three

minutes. And as a card carrying millennial with a craft beer and craft coffee interests, I appreciate all of that evolution. I do look at a lot of the fast casual concepts and I wonder if this continued push is in part because I look at a lot of what I see in the places that were supposed to be these third places in fast casual and they start to feel a lot more like fast food you wouldn't be talking about starbucks i'm not putting any names to it at the moment but but it does seem like as we've seen expansion in a lot of those concepts they start to get a little bit more into throughput into getting people in and out relatively quickly into mobile ordering and a lot of things that are a little antithetical to the third place concept you know i i think

there's a challenge in building a multi-unit chain. Ubiquity breeds contempt. And what ends up happening is something that's once special becomes every day. And unless, as the leader, you are very sensitive to that, unless you're very careful about that, you can fall prey to allowing efficiency to trump effectiveness. You know, I have a view of the world, and this is a you what happens to companies. When they first start out, somebody discovers something better. It's so hard to get a company off the ground, nearly impossible. All the scale economics are against you, but you get it up. And once you get it up, you begin to attract capital. And capital pours in. And it says, you know, we need a little more efficiency. And you start to bring in the

delivery people, as I call them. The delivery people are coming from a different kind of place. And delivery is about efficiency, prove it to me, and the language of this delivery, which is what begins to come to bear, works. It actually helps the place. But over five years, 10 years, and 20 years, the discovery, the delivery people drive out the discovery people. How do they do that? Because delivery is about the language of spreadsheets. It's basically prose. It's about prove it to me, numbers.

The language of discovery, what formed that business in the first place, is saying, this is what customers want. Imagine this. Imagine if we could do that. And it's not as precise and mathematical. And what's so important for a public company CEO is protecting that discovery. Because what ends up happening, and it's happened in my industry over and over and over, these companies get to be a billion dollars. They're wonderful at delivery. They're great at delivery.

but they've lost all the discovery capabilities and frankly they're focused on what the customer wanted yesterday and not today so it sounds like there's some benefits to the efficiency that happens there's absolutely benefits but it also in the book you talk about this notion of the growth monster this this monster that needs to be appeased in order for wall street to be happy is that part of where things start to turn well i i i think it's growth makes it that much harder and running a public company makes it infinitely harder. We can talk about the why of that, but both are conditions that you need to be prepared for

if you're undertaking. And if you're not prepared for either of those, what it means to provide growth, if you're not prepared for what it means to be a public company, it becomes a very unhappy experience for investors and ultimately a very unhappy experience for the folks running that company.

So you ran many public companies for a while. um you are now on excuse me for a while 27 years with one company i ran that company longer than cal ripken played baseball i stand corrected thank you uh you are now in the investor seat with act three yeah how has the time as an operator informed how you invest and the way you work with the people you invest with well first let me let me tell your your listeners the folks in the room about act three so after we sold panera um i i began doing a a fair bit of speaking around the country on the pervasive short-termism in our capital markets it's a real problem it forces management teams to do a lot of the wrong things but it's the way it is and as i

was speaking about it i began to say to myself i need to put my money where my mouth is and we began with a couple of partners to decide to set up an investment vehicle, all our own money, no LPs, evergreen funds, and to invest. And again, my whole view of business and investing is it doesn't work unless you have competitive advantage. If you don't have something distinctive, some point of knowledge that's distinctive, you don't add value to the situation. And I can tell you, we know the restaurant industry. We know consumer-facing businesses. We know how to build businesses. So what Act 3 is, is this investment vehicle that invested in CAFA, helped it hyperphase, made a bet on the Mediterranean niche. Secondly, we invested in a company called Life Alive.

Life Alive is positive eating, mostly vegetables. Again, the same thing. It's built to be the dominant brand in that category. We invested in, in, in, um, another company called Tate, which I mentioned. It's, it's, if you're in Boston or DC, you know what it is. It's powerful. It's got authority in bakery, authority in coffee. It's also got chefs in every cafe. It brings a, an Israeli, Lebanese, uh, Turkish, um, attitude to food. Again, it's a powerful niche, much more upscale with a chef in every establishment. We've got 38 of those. And then we've got a couple of public companies that have asked us to come in and provide strategic advice. And we come in and basically take warrants, the institutional investors who we've helped make billions.

But so when we go in as Act III, we've got three commitments. The first one is founder-friendly capital. What does that mean? We're not there essentially looking at our opportunity to get out, the next liquidity event. We're in it for the long term. When we're in it, we're in there to provide all the follow-on rounds of capital. I think the greatest fallacy for most smaller companies is the idea that fundraising needs to be an annual event like a birthday party. It's crazy, right? It's something that you really want to be cautious about. So we come in as founder-friendly capital, generally common stock, take all the follow-on rounds of capital and make a commitment to the company. Second, we practice what we call Sherpa management,

not venture capital. What does that mean? Every one of my 25 team members and partners are invested in this with their own money, but more importantly, only one of them is a financial person. Happens to be the activist that attacked Panera at one time. I couldn't tell anybody at the time, but I grew to like him. But at any rate, he came in as a partner with us. But everybody else is an operating guy. And when we sit in that boardroom, we're about not figuring out how to get out of the business. We're about helping them figure out how to grow. You know, there's an expression. Climbing Mount Everest is a very difficult process. Building a nationally dominant company is tougher than climbing Mount Everest. Nobody goes up Mount Everest without a

Sherpa, our role in the boardroom is to help guide them. So we allow all of our companies, we give them the right to draw on any of our capabilities. We have strategic capabilities, real estate, technology, operations, and we help them. We help them accomplish what they want to accomplish for their business. And then lastly, we only invest where we have competitive advantage. What do I mean by that? We only invest in food and consumer-facing businesses. Frankly, if you're investing against me, I know where the world is going. And otherwise, I'm giving my money to professional managers and I'm letting them manage it because they're going to beat me every time. So with everything you were just saying about the Sherpa mentality, what were the

conversations like when Kava went public and decided to go public? Well, you know, it's really interesting, this idea of what was the conversation. We had talked about Kava going public for years before Kava went public. The key to going public, 90% of the CEOs who go public ultimately live to resent it, resent the fact that they went public. It turns out to be a bad experience for lots of different reasons. Their nature of their constituencies change, the nature of their life changes, their ability to think long-term goes down. Kava was fully prepared to be a public is extraordinary it's a business in which we are in a category that has tremendous tailwinds and will have it for the for the very foreseeable future

we have a brand that we have built to be the dominant player in that category without exception it's the largest and most successful in fact I was very instrumental in helping them buy a public company called Zoe's that's how I I originally got involved. I helped them buy a public company five times their size, the hyper phase. But as well, they've been prepared to be public. We've been doing quarterly earnings reports for a year and a half internally. And we've actually had our own internal conference goals. They know what it means and what it takes to deliver as a public company. And it's really one of the reasons I think it's going to be a very good experience for both our management team

and for our investors. You mentioned Zoe's, and that was a really big part of how Kava expanded and has expanded so far. There are some gaudy location growth estimates being thrown out there. The goal is to get to a thousand locations, I think, in the next decade. What does that look like? Well, you know, I find these goals of a thousand stores or whatever, you know, a little crazy. What I think really matters in a public company is do you have the units to feed the growth monster for the next three years? That's really long-term thinking in a public, not in a public company, but long-term thinking by investors. That barely makes our investment criteria, by the way. I'm with you, but here's the point. Kava has clarity on where its growth

is coming from for the next 10 years. The key to kava's growth is it's not something that hasn't already been done. We're in 24 states. We're in urban locations. We're in suburban locations. We're doing strong volumes in all of them. And you don't have to be too bright to understand what drives kava is the number one diet in America, the Mediterranean diet. What drives kava are these flavors, these powerful flavors that are both familiar and somewhat more exotic. This is what people want. And it's very clear looking at the consistency of the volume. What I saw in Panera when I made the bet on Panera was consistency of volume from Portland, Maine to Portland, Oregon.

And Kava has those same characteristics, very stable volumes, very strong margins, and it has the potential really to be one of the industry-defining brands. Now, we could still mess it up, but if we stay true to our game, if we focus on execution and operations, we've got the tailwinds at our back and this will fulfill its possibility. If the line outside Cava in Columbia Heights in DC is any indication near me,

I think you guys are doing okay. Thank you. I think you're onto something. For folks that haven't seen that concept, maybe aren't as familiar, you mentioned some of the punchy flavors. What's one of your favorite things on the menu? Oh, I'll go in, I'll have specialty greens,

I'll have some lentils, I'll put on something we call crazy feta, which is really to die for. then I'll have these grilled lamb meatballs on top or falafel. I can have a half and half and I'll top it with a little Greek vinaigrette or something akin to it. I mean, this is great stuff and it tastes good. I can have it for lunch. I also can have it for dinner. Now, I'm trying to say to you, I'm not here to pump up coffee at all. I don't come from that. It's not my world. What I believe is look at the deeper trends. It doesn't take too much to figure out Mediterranean

is really real. It doesn't take too much to really understand that that company that dominates in that category usually wins. It doesn't take too much to see the lines outside the door. Make sense of it yourself. And then ask yourself, if it's working in Alabama, if it's working in Fredericksburg, Virginia, where's it going to be? How's it going to work in markets all over America? And that's the question, not where is it at today, but where will it be at three years and five years and seven and why is it going to be a sustaining, better competitive alternative at that point? I just want to share with your listeners and the folks in the room something. I think one of the biggest mistakes made in business is people don't understand the difference between means ends

and byproducts. It's one of the things I talk about in the book. And the difference is this, I'll tell you by way of a story. I have a friend who's a type 1 diabetic. His goal in life is to stay alive as long as you and me. But he can't make that happen. It's a byproduct. What's it a byproduct of? His end. Keeping his blood sugar between 80 and 180. When he does that, he has longevity. Like happiness, you can't make it happen. It's a byproduct. What's his means? Diet, exercise, and insulin control. Business is the same thing. Value creation is not something I can make. When a CEO gets up here and tells you he's creating value, when he's manipulating it, you want to run. Value creation comes out the other end by what? By the end of having a better

competitive alternative. In my industry, what's a better competitive alternative mean? It simply means customers are going to walk past our competitors and choose to come to you. That's it. Now, it's hard to do, but that's the objective. And the means are where we as management spend our time. And so the question as an investor I would challenge you to ask is not trying to model it out, but ask, is it truly a better competitive alternative? Is it attracting people past other establishments or certain people past other establishments for an experience? You know, I think back to Peter Lynch, and I think it was the walk on Wall Street, and he was an old original investor of mine back in Panera. And Peter used to say, listen to your own self. Listen to how

you respond to different brands and use that to help inform your investing strategy. As we were sitting on the side watching the AI session wrap up, one of my colleagues, Jason Moser, said that he was watching automation in food. And you said, I'll take the other side of that. Well, I think what I, what I think Jason was suggesting is this is going to be the big thing in food. Jason, I think you're wrong. All right. So, so I'll tell you why the food industry is the second oldest profession in the world. Okay. It's been around, it's been around a long time. People are coming for an experience. People are coming to socialize, to connect. And ultimately I heard about the demise, you know, I heard in the pandemic, everybody was going to

do delivery. That's going to be the way of the future. The cafe is going to go away. Dining experiences are going to go away. I now hear about AI and I hear about technology. Nobody ever went to a restaurant for its technology. They go for the food and they go for the experience. Where I could agree with Jason is technology is going to inform and enable how we operate, but it's going to be in the back. It's not going to be in the front. I don't want to deal with a machine. I want humanity. I want people and I want environments that engage me. Otherwise I, I, I, you know, there we go. You found, you found at least one and I think you're going to find plenty more by the time we wrap up. Thank you. A lot of fans out there. Jason, take that wherever you are.

On that, I think I'm going to throw a hypothetical at you. You can invest in a coffee concept and you can pick one of two things. You can't have both of them. You can either have wifi on location for free for all customers or you can have a top-of-the-line mobile app and ordering which one are you taking well i i would say it depends on when if you were asking me you know 20 years ago uh we built the largest free national wi-fi network in the country through panera that was the right thing for that time it's a whole nother discussion you got to read the book to hear the story and the rationale for it and how it worked but today i think you know wi-fi is simply an anti. Everybody has it. It's not a big deal. I think that a mobile app becomes a differentiator,

and I would bet on the mobile app as an enabler of my business. Not the end. I want to keep saying this. Same thing I said about technology, AI. People don't come to a restaurant for a mobile, it's a mobile app. People come because they lust it. Food is a sensual experience. They want it. They desire it. That's what restauranteurs focus on, hospitality and food. All the rest of it is an enabler and the enabler helps you if you have the desire. You have your name tied to a lot of different restaurant concepts out there. What is a concept that you aren't attached to, but you admire or you think is interesting there's a lot i'm attached to um um you know what i where i find inspiration is not in the big guys i'm obviously like a lot of people i respect the kathy's and

the folks at chick-fil-a i mean they i'll speak about them for a second um you know what what i love about them is their long term and you know if you go back 20 years ago 30 years ago chick-fil-a was worth just a a a percentage of what kfc was worth at that time you go forward to today it's worth magnitudes 10x 20x of what kfc is worth so what changed two things they had comps they built better same store sales over time but more importantly they supported and built a system that enabled and engaged that enabled associates that engage customers better that stuff works. The reality of the restaurant industry, it's not all that complicated. It's making a sandwich, it's frying a chicken patty, but it's just really hard to do over and over and

over through other people. Now, the other place I look for inspiration, and again, this is in the book, it's about empathetic listening and trying to hear and see what are the patterns, what is the generalizations. How do you discover today what's going to happen tomorrow? For me, it's looking at the smaller operations, the five and 10 store places. And what are they doing that's touching people? It's really hard for them to get off the ground. If they get off the ground and they build excitement, that's what I want to see. And I want to try to disaggregate that and then generalize that and then bring it over to something else. And if it's powerful enough, that's what I want to invest in. And that's what I want to scale.

As always, people on the program may have interests 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. I'm Mary Long. Thanks for listening. We'll see you tomorrow.