Motley Fool Hidden Gems Investing - Interview with Karat Packaging CEO Alan Yu: From Boba Tea Shop to Packaging Powerhouse

Episode Date: September 21, 2025

What began as a single Boba tea shop in 2000 has transformed into a leading supplier of sustainable packaging for local startups to national brands like Panda Express and Chipotle. Motley Fool CEO Tom Gardner and Chief Investment Officer Andy Cross talk with Alan Yu about the evolving business of packaging: Boba Tea beginnings Eco-friendly alternatives Partnership and leadership Strategic expansion Host: Tom Gardner, Andy CrossProducer: Mac GreerEngineer: Adam LandfairDisclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit ⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

even though our company has grown from a startup to almost half a billion dollar company we still act as a startup we treat our customer as our family as our core customer every customer is a vip that was alan yu co-founder and ceo of carrot packaging i'm motley fool producer matt greer Now, Carrot Packaging makes all sorts of food and drink supplies. The stock trades under the ticker KRT on the NASDAQ. Motley Fool co-founder and CEO Tom Gardner and Motley Fool chief investment officer Andy Cross recently had a chance to talk with Alan Yu about the business of Carrot. Hello, Fools.

Welcome to another Motley Fool conversation. I'm Andy Cross, joined here by the co-founder and CEO of the Motley Fool, Tom Gardner. And Tom, we're really pleased to welcome Alan Yu, the co-founder and CEO of Carrot Packaging, one of our recommendations across our Hidden Gems universe. And Alan is coming to us on Fool 24 here. Alan, great to have you here. Thanks for joining us. Thank you.

Also, thank you for inviting. Alan, maybe we can just start, Tom. Let's just start the conversation. Alan, just in your own words, talk a little bit about what is Carrot Packaging? I mentioned you're the co-founder of the company. You're the CEO. Just lay out its business and its strategy for us and for our listeners here. Sure.

Well, Carrier Packaging started in the year 2000. I mean, we originally started as a boba tea shop, and we expanded our offering not just to selling the raw material that actually made these boba milk tea, but we moved into transitioning to packaging. And we first started with the clear cup, and then we added additional utensils, straws, and napkins and paper product and packaging. And now we're into paper back, paper shopping back and SOS back.

So today we're actually a one-stop shop for any restaurant or chain or convenience store or supermarket. You name it, as long as you have a demand, we'll definitely cater and we'll bring a source for you. And also we not only bring the product and we stock it with all of our 10 warehouses throughout the U.S. We also manufacture some of these products here in Texas, as well as Chino,

and in Hawaii. So basically, people originally thought of us as a boba tea shop, but now our fork product has migrated, shifted into packaging. And our customers, actually, in every day of your life, if you go out and buy foods in restaurants, you will be using our product. You will see our name, Carrot, a lot of these lids and bags and containers, if you go to Panda Express, you go to Raisin Cane, you go to In-N-Out Burger, you go to Chili's, you go to Applebee's, Chipotle, even Burger King in Hawaii Islands or ABC's food stores, you'll see our product. We're everywhere that you can't miss our product. Alan, tell me a little bit about what did you see in the market opportunity that you

just didn't think was getting fulfilled? And as you were, again, making, moving from the boba tea side to the packaging side, was there something key in the market opportunity that you saw that said, wow, we can fill that? Yes, definitely. When we started as a small retail restaurant with just 100 stores, I mean, there was a need for custom printing design. We want to have our local, we want to have our name on our cups. And that's where we couldn't find someone who could do it quick enough, affordable enough, and fast enough for us.

So we went ahead and we developed a program for custom printing on everything that we do, on the cup, on the containers, on the bag, and other things. And we made it low minimum MOQ. So you don't have to be a large shoe corporation company with a thousand store, a hundred store. You could be a growing business with just five restaurants or a startup. You can have your own name brand on your takeout container, your soda cup. I mean, for example, we started with a company called Dave Hot Chicken at one store five, six years ago.

Today, they have over 200 stores. They're everywhere. And people love it. The kids love Dave Hot Chicken. And this is why I say that if you are one single retail startup, these large manufacturers will not even talk to you on that part. And it's hard. I mean, but this is your baby.

You founded the business, and you want to have your name printed on these container takeouts and deli wraps. So basically, they come to us, and we are basically, we will treat you as basically, regardless if you're a one-store or a hundred-store or a thousand-store, we'll definitely take care of you and meet your needs. And that's how we found a niche in our market is going through the smallest size restaurant. And now today, we're also servicing the larger national chain accounts. We think that every company, restaurant, I would say, in the food service sector, mainly uses a very similar concept in terms of packaging. But some of these startups are being very creative, and they have their desire and needs in certain types of packaging, making it more convenient. And having their food service served in a container, that can be well kept, better presentation, and basically they are more creative. And today, nowadays, these large national chain accounts, they want to move away from styrofoam.

They want to move away from plastic bags. So they're also being very creative in designing different type of packaging to enhance, to create a better appealing for their clients, to the customers, when they put their food in it. So I see that more and more, especially those companies moving away from styrofoam. And this is a huge market in the U.S., moving away from styrofoam. Most Asian countries have already moved away from styrofoam. And we're still, there's still a lot of companies in the U.S. are still using styrofoam. But I see that more and more are converting away from styrofoam into a more eco-friendly packaging. And that's where we see the opportunity.

And also, there's a lot of cities and states are banning styrofoam and plastic. That also creates opportunities for eco-friendly product packaging. And that's what we are good at. Trade ice skating at Nathan Phillips Square for ice cubes in your umbrella drink. Let Porter Airlines fly you from Toronto Pearson nonstop to 10 top sun destinations in Mexico, the Caribbean, and Costa Rica. Enjoy award-winning Porter service Toronto has loved for 20 years and start your vacation as soon as you're on the plane. Book your sunny getaway today at FlyPorter.com and actually enjoy a comedy. So you would say that you would be excited if you heard, and you are excited whenever you hear,

that a different district, city, a different locale has decided to ban plastic or styrofoam. That is both core to your mission and a great opportunity. If you heard that more and more over the next three years, that's a very good sign for Carrot, yes? Definitely. And we are seeing that. California, I believe, they just banned plastic bags starting 2026 January. So everybody has to start using paper. California banned styrofoam January of this year. And we're seeing opportunities started coming everywhere. The takeout containers into the paper container or even plastic container, but definitely not styrofoam containers. And why would a national chain come to Carrot Packaging rather than one of the major national or global competitors? Well, one key thing is we are very nimble and flexible. I mean, even though our company has grown from a startup to almost half a billion dollar company, we still act as a startup. We

treat our customer as our family, as our core customer. Every customer is a VIP. And basically, our sales are we actually go directly to our customers and i think for a large national a large uh the competitive our artists they only serve as national brands and they don't service these smaller mid-size chains we love to service these small we treat small chains mid-size change and large chain very similar i mean we have different sound type of sales rep that haters to different uh type of customers so that's the major difference between us and our competitors Alan, can you talk a little bit about just some of the recent innovation? So just for some context from Lister, you have almost 7,000 different SKUs out there,

I think, around there, SKUs, so different product offerings. I think you added like maybe 500 or so in the last year. Just talk about some of the innovation in packaging. You mentioned the move more towards cardboard and away from plastic. Are there other key innovations that Carrot is pushing into the marketplace? Yes, there are. As I mentioned earlier, if you go to a convention at the hotels, they're servicing your lunch not in a regular plastic container. They're now servicing in a barn box, a folded cardboard container.

And there are different types of cardboard containers. And they used to use those cardboard containers for just the chicken, Kentucky Fried Chicken. But now, there's a different design. You can actually put other stuff in it, and you can put a sandwich in it, and there's different type of bag, grease resistance bag. So we're seeing that people are being creative in terms of moving away from plastic, moving away from styrofoam, into a different type of packaging. And also, it's not only appealing to the public, it's also economic.

It is cheaper to have corrugated boxes or cardboard boxes versus plastic containers or eco-friendly containers. They're recyclable. And how do you do your research and development? How do you decide to make this kind of product versus that kind of product? Where are you getting your ideas from? How does that flow throughout the organization? I actually travel to Asia often, almost every month to visit our vendors overseas. And it just happened that in other countries like China and Korea, especially Korea, they're being very creative in terms of making different types of packaging.

A lot of times, a restaurant, a drink shop or a boba tea shop or a tea shop in Asia, they can actually attract customers not because of the drink. It's because of their packaging, their takeout packaging. So you'll see that there's different creative packaging out in Asia. And just like the foods, basically, a lot of these local foods that we see that are being popular, they have been popular in Korea and other places. And now they're coming abroad, overseas to the U.S. And this is where I get our creative concept. If this idea is good in Asia and sometimes it's actually great, I think we can do it here domestically too. I wanted to talk a little bit about the partnership in the business between you and Marvin.

And it's an unusual thing in public companies to find two founders who own more than half of the business. That's not a common thing in the public markets. And we generally at The Motley Fool view that as a very positive thing. Can you talk about your partnership between you and Marvin? Yes. And Marvin and I, we actually, we started, we met each other in high school, back in high school. And we went through a different type of business after the school. And we tried a different type of business, not just in restaurant business. And we worked very well in terms of me going out in the street, Marvin behind the scenes, working out with manufacturing, working with vendors in that part.

Like you said, it's not common to have a founder with over 50% in shares. I mean, in our case, we've been working diligently with our bankers, and we're trying to get more shares out in the market. So that's why in the past two years, we sold off some shares to our bankers, and so we can get more flow in the market. And that is one thing that we've been trying to do, and this is actually good for our company. And also, we have more employees that have ownership in the company. We've passed out, after we went public, we've given some RSU to our employees that have helped the company grow and continue working with the company. So these are avenues that we're working on in terms of pushing more shares out in the market. I just want to talk a little bit, Alan, about the distribution and manufacturing facilities.

You mentioned that. So Chino's, I think the latest one you just brought online, ironically, in California, which, as you mentioned, is a little bit tough on businesses in some ways these days. but you have the chino facility you have a hawaiian facility and i think you have 10 different distribution points almost in every region of the country so just talk about on a geography basis how your sales are evolving and is that are you feeling pretty good with that 10 right now or do you see over the next couple years you're gonna have to continue to expand that out well um we started with just california location because we thought that this is our home base And I live in California over almost 40 years in California.

And I love California. And California has changed today versus 40 years ago, of course. And one thing about California is where all the containers are mostly coming in from Asia into California. That's where most of our products are made from, into California. But we feel that the market, we want to grow the market into a different segment. And our online business is one of the key components of our growth of our company. Now, for an online business to be successful, we've got to have a distribution center that is closer to our customers. We realized back when we first started the online store, online business, back in 2004, a customer in New York, Boston, ordered a product online.

It would take them 12 days, at least 10 to 12 days to get their product shipped from California. And some of the customers, when they see that transit time, they cancel their orders. So that's why we opened up the New Jersey facility, and then we opened up the Texas facility and South Carolina facility to service customers. Because as our customer base grows, we feel that more and more customers are outside of California. And that's why we decided to set up different distribution centers in different states. But when we first started, we started small, in a smaller warehouse, much smaller warehouse. So today, we've grown double the size of most of our warehouse in that area, in the city and state. So instead of adding additional warehouse facilities, we're increasing our sizes of our current distribution center in the area that we have a concentration of customer base.

So we're putting a warehouse into Metropolitan City that we feel we have a good base of customers that we can get the product, order, receive, and ship, if not the same day. So the customer can receive their product within 20 hours. That really helped our business model growth. So it's a last mile. How fast can you get the product to the customer the last mile? That dictates the success of an online store. new from Nespresso blend wellness into your coffee routine with the coffee plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus

b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com and and talk a little bit about just the sourcing a product i know you've talked a little bit about this in the call but for those who are still um who don't follow carrot as closely talk a little bit about the china impact how you've been diversifying away from there and just what do you see going forward over the next year or so as you navigate this very uh tricky kind of environment that businesses are operating in today?

Sure. I mean, this sure has been challenging for everybody, that imports product. And also even for manufacturers, it's been challenging because they don't know where to get their source raw material. I mean, yes, we can manufacture domestically U.S., but we still need some raw material equipment from overseas. And we just have been moving around, waiting for the administration to figure out what is the final tariff rate it's going to be.

Even until today, there is no final rate because it could go up or down depending on how the talk is going on right now. But five years ago, four to five years ago, most of our product was coming out of China. Today, I would say only less than 10% of our product are from China. And we're trying to move away that 10% within the next 60 days because we don't know what's going to happen after 60 days. It's going to be 200% tariff out of China. in that case, basically nothing can be purchased, bought out of China. I heard that starting yesterday, you can't get anything out of India either, because India just went from 15% to 50%, paraphrase. Right now, luckily, we diversify into sourcing to Taiwan, Korea, Vietnam, Malaysia,

and now Indonesia. Now, we're starting to move some of our sourcing into Latin America. We feel like I think that the administration might punish all the Asian country, but might be still a good friend, ally with the Latin American country. So I think that's a good way to go to it. And also it's closer to U.S. So that's where we feel that we're going. I mean, even Canada is not safe anymore. So, yeah. Alan, and just very quickly, is it maybe on a scale of one to ten where it's nearly impossible and one is super easy?

How hard is it to shift those sourcing countries? Is it, I mean, it doesn't happen overnight, but it takes time. Like, what is the availability for you to be able to switch countries like that so quickly or not quickly? Well, as I mentioned earlier, we are very nimble. So the way that we were able to quickly find a new vendor is one way is send our equipment over to that vendors. So basically, they don't have to look for the specs and we have everything. So what we've done is we have some equipment that we can move around quickly, and we can just ship it, assemble it, and ship it to the country that we like, or buy and use equipment for one of our existing vendors and ship it to another country. So that will have the same spec and everything.

That is the best. Rather than having discussion with a new vendor, hey, can you make an investment? If you invest this much, we will buy this much from you. That will take years to transition, okay? The quickest way is we invest in the vendors, and we give them the equipment, we give them the tooling, and we give them the order. That will only take around two to three months, and we can start a new country. That's something we do. Other people do not do that.

Yeah, that's great. Alan, just talk a little bit about maybe just you're all in the United States. The United States is your market. Thoughts on international? Is that an opportunity? and we look over the next few years and how difficult would that challenge be for you? I always say that.

The market in the U.S. is so big. Why spend the time and effort to go to a market that we're not familiar with and we don't know how to compete in that market, like Mexico market or Northern Canada market? We try that market, it's different. We have to set up a company and then we have to spend more time and effort

versus the result. It's going to be better, faster, easier if we're just in the U.S.? And there's so much room to grow within the U.S. Why risk? Why even spend time to other countries? And how about technology, technology innovations? What are you investing into?

Is AI playing a part into your logistics or into your business at all? Yes, actually. We are, as a company, grow. I mean, we're going to say that four years ago, we have over 1,000 employees in the company. Today, we have a little bit under 700 headcounts. So every department, we haven't seen a major increase in terms of staffing, but we've seen a kind of steady declining of staffing, less paper, where we have become almost paperless in the company, more using tablets in terms of online ordering, it's mobile application.

And also, we do get over 1,000 inquiry questions a day, but 99% of that is answered by AI. So, you know, less customer service needed, required. So, and also push a button, 60% of our online order are processed through mobile application. So, we're seeing innovation and technology is actually helping the business to grow. I'm wondering what would happen, because you're so knowledgeable about the category. what would happen in the scenario where you became very acquisitive now i i want you you can please feel free to go with best and worst case scenario like here's why we're not yet doing that or haven't done that because these these these roll-ups and these efforts can spill i mean a lot of

acquisitions fail um and that's not maybe the the discipline and the focus that you want to have as a company alternatively uh we've known some companies generally in the category that you're in and in and around restaurants that have been acquisitive systematically because they see what the chains need in advance and they buy in advance and start making those acquisitions. So imagine the scenario where carrot packaging became very acquisitive. What would work and what would not work about that? Well, during the past 24 months, we've tried and made several offers to different companies. We've seen our categories.

Basically, our competitor, our peers, merging, acquiring a different company. There's a lot of merging activity out there in the marketplace. but a majority of them have not been very successful in terms of integrating. I think the key challenge is integration in that part. They spend a lot of money and they took a lot of debts and it has not been very rewarding for them. So we've been very careful in terms of how much we pay.

Is this company somewhere that has shared a similar culture with us? So we'll be very careful. And that's why instead of acquiring a different company, we actually just brought in more categories. We added more categories, adding 500 SKU. Again, why buy a company when we can just bring the product ourselves and having our existing sales rep represent ourselves and sell it? So we have been able to grow. This year, we're estimating growing over a double digit, 10%, versus our competitors are either declining 5%, 3%, or actually growing 2% or 3%,

we're actually the only company in our peer group that's actually seen a double-digit growth in volume and revenue-wise. Thank you. And Andy will have the final question, but I'll just say, Alan, how much I've really enjoyed this and thank you so much for the hour.

But Andy. Thank you, Tom. Well, I'm just going to wrap us up, Tom. I think that's a fun way to end. And Alan, I love to hear the focus on the sales growth. Obviously, sales growth is really the driver of so much towards a company's success and Carrot Packaging does more than $440-ish million in annualized sales. And we hope you can continue to drive that higher and higher as we are

investors in Carrot Packaging as you are as a very significant shareholder. And so we not only thank you for joining us today for this Motley Fool conversation, but we wish you and your team all the best success in the near future as we continue to be a long-term investor in Carrot packaging. Thank you, Andy. Thanks, Alan. Thanks, Tom. And thanks, Fools, for watching. 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 Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational

purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Matt Greer. Thanks for listening, and we will see you tomorrow.