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Zack Fuss

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71
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2021-01-12
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2021-01-12
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  1. “Reason that dominoes is inherently more profitable has a lot to do with the nature of the product that they're selling and delivering. Pizza is a very low cost of good cuisine. If you were to look at a pizza restaurant versus a burger joint, for instance, pizza generally starts with an 80% plus gross margin. The cost of dough, cheese, and sauce are just not that high, as opposed to a burger which is dealing with the expensive protein. That business is going to be starting at like a 65% gross margin. So if you consider the spread from that perspective, there are already at a competitive advantage. And what they do with that incremental margin is it affords them the ability to fund their delivery. The reason that Domino's has been so successful is because they lead with delivery. They've also invested heavily in the technology stack and their restaurants. Any potential franchisee is going to look at their restaurant return economics in comparison to the other opportunities out there. You look at a McDonald's or a wing stop or a Chick-fil-A or a”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “So I think the reason that the dominoes franchise ecosystem is so strong is because the unit economics are truly remarkable. So if you are a former employee that wants to open up their own store, you're going to pay a franchise fee, which is a nominal amount. But cumulatively to open up your store, it's going to cost you anywhere from $250 to $350,000. An average store in the US does about $1.1 to $1.2 million in top line. And if you look at the same store sales growth of those businesses, they're growing anywhere from, call it three to six percent in every given year on a same store sales basis. Because pizza is such a profitable category, the average store can do about $125,000 in cash flow. And so on a $300,000 investment, you're returning $125,000 without debt. So if you were to borrow from a bank in order to finance the build out of your store, you're looking at a 30% plus.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Look at a Domino's piece of enterprises, which is the Australian franchisor that's a $6 billion market cap company. You look at Domino's London, which is the United Kingdom franchisor. That's a $2.5 billion company. You look at Alsea, which is the Mexican franchisor. That's a $3 billion company. Jubilant Foods, a $4 billion company. So there is an incredible amount of wealth being created throughout the Domino's ecosystem. And even in the US, if you were to look at the profitability of the restaurant owners, cumulatively, they probably do about a billion dollars in EBITDA. That's worth $6 or $8 billion alone. What's so amazing about the dominoes business model is it's really creating more value than it captures in a lot of ways.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “An important nuance. I like to take a step back and think about dominoes as really three businesses in one. It's a restaurant with a captive delivery arm. A lot of people refer to it as kind of the original ghost kitchen. It's a supply chain business because they own and distribute all the cheese sauce and dough to their restaurants. And maybe most importantly to answer your question, it's a brand manager, a franchisor. There are nuances between the US and the international system. So in the US 95% of the restaurant owners are former domino store level employees. So they either worked or managed the store. Internationally, the franchisees are institutional master franchisors. It's another level or layer that's helping to manage the brand. What that means is there are franchisees which are less institutionalized internationally that work under the master franchisors. And most of the large established ones are public companies.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Domino's is a restaurant system that does $15 billion in sales. About half in the US, half internationally. They have $17,000, around 6,000 in the US, 11,000 globally, and they sell anywhere from three and a half to four million pizzas a day. So we're talking about a lot of food here.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Customer, you'll go and get yourself from a local and independent provider. Cloud kitchens are really no different. We've talked in the past about businesses like Domino's, which are effectively the original cloud kitchen.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Dark stores and cloud kitchens are kind of two derivatives of the same thing. You lower your rent costs and you use the savings from those rent costs to fund other value-added services. The reality is that a legacy grocery store requires the consumer themselves to pick and the items. Now, when you shift that labor cost onto your own people, it requires an incremental wage cost. The idea of a dark store is that you shift a location somewhere where you have less costs that can fund the cost of delivery, the cost of fulfillment, and over time you no longer need the footprint in these high traffic areas, but instead kind of serve as a cognitive referent for your customer. The idea of going to Kroger is no longer driving to the store, but instead you're popping up on your phone, you're reordering the 80% of items that are occurring in nature, and maybe the 20% of items that are more discerning is”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “Comes at a very high cost. What's going to have to happen over time is more of the traditional grocery store is going to become industrialized. It's going to become more like a fulfillment center. So today maybe you walk into a grocery store, 80% of it is walk by shoppers, and the future becomes 60%, 40%, 20%. And the center of store items probably become completely commoditized and fulfilled through something like order ahead. And what I would postulate is as we observe this evolution of the store footprint, we get more dark stores or de facto warehouses and less desirable real estate and much like Amazon uses its fast fulfillment centers to fulfill its online orders, a grocery store is going to operate in the same way. And so that's just one example of how technology and the way with which customers are acquired are disrupting legacy industries throughout food.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “The Costco, the Albertans of the Worlds, you have Amazon on one hand, and then you've got this longer tale of more focus, more digitally enabled businesses, like a farmstead in the US or a picnic in Europe. They're all doing very different things in order to capture this opportunity in time where share is going to shift between incumbents and upstarts, or maybe the incumbents are going to continue to capture their disproportionate amount of share because they're willing to embrace changes in technology. Grocery stores like restaurants are also located in highly trafficked areas with strong access points and require a fairly big footprint, probably, I don't know, 70 to 100,000 square feet. So they face pretty significant real estate costs. Buy online, pick up in store is having its moment throughout consumer. But the reality is having human labor walk the shelves of a conventional grocery store to pick and pack your order.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “In that $1.8 trillion food at home and food away from home industry, the trends go back and forth, but we're trending towards about 55% of food consumed away from the home and 45% at home. That's probably flipped due to the pandemic. Grocery, typically a very low margin, high turnover business. Traditional grocery store has something like 40,000 SKUs, many of which are perishable and others that have very little turnover. If you consider a hundred dollar basket of groceries, a retailer keeps, I don't know, $2 to $4. It's not an easy business by any means, but it's a massive category. So despite low margins, you still have this enormous profit pool to go after. Two to four percent of $800 billion is still a 20 to $30 billion annual profit opportunity. And so you have this battle between the upstarts and the incumbents. You have the Walmart, the crow.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “Yeah, I mean, I think that in a lot of ways it's that classic example of distribution over product. If you think about downstream food players like restaurants, those with the strongest footprint in the best areas that can quote unquote distribute their products most effectively in the most timely nature tend to win. Those that embrace technology tend to win. Areas of the market where there's a more interesting push and pull between those that are willing to adapt and Henry Ellenbogen of TRO calls it Second Act, management's ability to innovate in such a way where they can capture whatever technological innovation or disruption is facing their industry, leverage that to become a more successful, more dominant player. I think if you consider grocery as an example, it's a really fluid and interesting dynamic playing out. As we alluded to, grocery plays”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Of the supply chain integrate, segregate, and disaggregate, that's where disproportionate amounts of the product pool are often captured.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “$3 billion in sales and a 50% share. And I think we can say with confidence that in certain markets and at a certain basket side, both the restaurants themselves and the aggregators, the delivery providers, can both make money. And in urban areas specifically, if you have enough route density or drops per trip, take rates can be lowered. So a scale economic share type dynamic between the restaurant and the aggregator where everyone is participating in a larger profit pool. Delivery can hypothetically be done at a very positive contribution margin. What we continue to learn within all these profit pools is that if enough people want something, there are ways to figure out an economic model to do it very profitably. But over time, it's kind of that Barksdale, Bundley, and unbundling and modularizing and commoditizing different parts of the profit pool. And as different aspects”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Consider the margin structure of a restaurant, which is probably food cost of 25 to 30 percent and labor cost of 25 to 30 percent and rent costs of 5 to 10 percent. At the end of the day, best case scenario, you're left with 10 to 15 percent margins if you're a strong operator. So in the event that you decide to outsource your delivery and lead generation to a third party like an Uber ETS or a DoorDash and they're looking to take 20 to 30 percent on top of that And in the event that it's replacing or cannibalizing your current sales, it's a bad economic trade. But I think what we've learned is lead generation is a great business. Logistics, historically not, but if you want the lead generation business, you're kind of forced into logistics business. So you better do it at break even or better. This is just such a great and timely example. If you look at the DoorDash S1 that was recently filed, they're tracking towards”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “I think we'll stay on the topic of restaurants just given the context of the conversation. Today, food delivery is kind of a canonical example of disruption that's reorienting a value chain. On the technology side, we have an exceptional operators with deep pockets all looking to carve out a portion of the food away from home profit pool. There are incumbent players that are embracing that and also others that are fighting back. But there's this vast pool of participants looking to get their share. You have aggregators like a DoorDash or an ETS or a postmates. You've got third-party logistics companies, ghost kitchens, digital-only locations, technology providers like an OLA or a Chow Now. You've got dark kitchens like cloud kitchens, incumbents, Chipotle and Starbucks who are opening digital-only stores. Conventional wisdom was always that restaurants historically are in quotes bad businesses.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Almost definitionally a commodity. If you think about food distribution on the local level, it's a very rich business. A regional oligopoly with the benefit of route density. It's more capital intensive to scale and it's somewhat constrained by its local markets. Fast food, McDonald's as an example, is an international licenser. Almost obvious which are the least commoditized players in that value chain and which are the most differentiated and thus capture a disproportionate amount of the economics.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “Provides some canaries in the coal mine per se. Clayton Christensen Wright is widely recognized for his work on the innovator's dilemma. But I think in the context of current business analysis, it probably deserves more attention for his work on the law of conservation of attractive profits, as I mentioned, which is as relevant today as it was 20 years ago. Start with the idea that the route of value chain, a certain player captures a disproportionate amount of the economics. There's a reason that McDonald's is a $200 billion business that trades at 20 times EBITDA and Tyson is a $35 billion business that trades at eight times EBITDA. And Cisco is a $50 billion business that trades at 13 times EBITDA. They all participate in the same value chain. The value they capture for their investors is inherently different based upon which aspects of the value chain have become more commoditized. So if you think about chicken production,”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “Is a pretty interesting construct that I like to think about when evaluating these businesses. The law of conservation of attractive profits and how it impacts wherever we interact in the value chain. When I think about the last decade, the world has probably come to accept Mark Injuries' thesis that software is in fact eating the world. I think we probably don't spend enough time contemplating what the implications are for the value chains of these legacy industries that we participate in. So as I said earlier, we sit at the intersection of consumer goods, logistics, infrastructure, restaurants and food retail, upstream to downstream and throughout the life cycle of businesses. Technological advances in some way, shape, or form impact all of our businesses. We're involved with public and private businesses and sleepy industries like protein and animal feed and fast food, as well as more disruptive and early stage ones like nitrogen fixation and restaurant point of stealth technology. So the spillover between the two hypothetical”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “What they eat and how they do so and where they get their food are going to continue to be different. But we're talking about in the US a $1.5 trillion market between food at home and food away from home. And there's just so many places in the value chain you can play as a function of that.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “About the value chain. At the top, you have large producers, industrial farms. They interact directly with companies like John Deere or Abargill. And you go all the way downstream, just like energy assets. So you go from the soy and the corn and the animal protein to the producers to the processors like Tyson Foods, and they sell into the distributors and the restaurants, so a Cisco and a performance foods and a US foods who sell to a McDonald's and a Burger King and a Chick-fil-A who sell to people like you and I. And everything in between that ecosystem, the grocery stores, you have the cult storage businesses. It's just such a rich ecosystem with so much change and dynamicism. But the reason that we find it to be so interesting is because at the end of the day, people are going to need to eat. And the form factors”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “Hello and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.”

    2021-01-12 · Invest Like the Best · Zack Fuss – Breaking Down the Food Ecosystem – [Invest Like the Best, EP.208] · IDENTIFIED FROM THE TRANSCRIPT · source