Invest Like the Best with Patrick O'Shaughnessy
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: Which became even more apparent once we... [00:00:00] S2: Once we simplified the business. Exactly. And they were basically spending overhead that exceeded EBITDA, and CapEx was about half the EBITDA, despite the fact that it was 90% franchised at the time. And so we felt like we would be able to run the business more efficiently, fix some of these problems, and we could create a lot of value. And look, in hindsight, yes, it was a great deal and as mentioned like, 25 times return. But at the time, these were real issues. And I think we had an early appreciation for the strength of the franchise business model that the broader market subsequently more greatly appreciated in the years to come. But look, at the time, no one else showed up. And there was a go-shop, window shop, whatever they call it, and no other private equity firm showed up. And I'd say the consensus at the time was that we overpaid. [00:00:00] S1: As the newspaper headlines... [00:00:00] S2: Yeah. [00:00:00] S1: ...communicated. [00:00:00] S2: We bought it from extremely savvy investors who had made a great return on their investment, too. I think they made five-plus times their money on the acquisition of Burger King that they did a decade prior. [00:00:00] S0: Maybe the same question I asked – I liked how you gave such a simple, elegant explanation of Hunter Douglas. Why is Burger King and the franchise model a good business in the first place?
· Patrick O'Shaughnessy, Alex Behring, Daniel Schwartz
[00:00:00] S0: Maybe the same question I asked – I liked how you gave such a simple, elegant explanation of Hunter Douglas. Why is Burger King and the franchise model a good business in the first place? [00:00:00] S1: Because if you happen to own a brand that is large and meaningful enough that you can have entrepreneurs around the world put their capital and their work into growing the business, investing to grow the business, and help finance the marketing to maintain the brand sharp and current. I think to the extent you own such a business, it's just a great business model and something that can grow in a very efficient way globally. However many businesses you look at, it's hard to find those traits in the business. [00:00:00] S2: It's a highly free cash flow generative, royalty-based model centered around these iconic brands that we get to own. [00:00:00] S1: And again, you have entrepreneurs aligned with you all over the world, really. 140 countries, that are… [00:00:00] S2: Great operators who are going to grow the brand and they will earn their profits and they'll grow the size of the brand for us as the brand owners. [00:00:00] S0: Maybe just as like a little vignette in this story, how did you take it from zero to two billion in France? What was the literal story of what happened?
· Patrick O'Shaughnessy, Alex Behring
[00:00:00] S0: Maybe just as like a little vignette in this story, how did you take it from zero to two billion in France? What was the literal story of what happened? [00:00:00] S1: Obviously, everything starts with how lucky we were to find the partner that we did. I mean, Olivier Bertrand has been an incredible partner of ours. And there was someone that had some affiliation with the Stella Artois business at some point in Paris, had a record of buying restaurants in France and turning them around and understood how to operate with excellence in France. He was involved with the Quick brand for years. And someone that knew two core skills of a franchisee, which is to find the best locations and to find the best managers. So he had a demonstrated record of that.
· Daniel Schwartz
[00:00:00] S2: I think it's just worth talking about our model, though. So, as Alex mentioned, we bought the business, and some countries had company stores, some countries had multi-franchise stores, some countries had master franchise partnerships. And we developed this master franchise joint venture model, where we said, look, the best way for us to run the best restaurants, manage the brand in a way that's going to be great for the guests and grow the brand the fastest would be to have well-capitalized local entrepreneurs as our partners. And we proved that out through the creation of these master franchise joint ventures in places like Brazil and in China and in India. And in France, which is one of the best burger markets in the world, I think we had opened our first restaurant in an airport in the south of France. And it was an absolute hit overnight. And so we went to France to look to find a partner to manage that country. And as time went by, we found Olivier Bertrand. And he's an incredible restaurant operator. And collaborating with him, we built this 2 billion Euro plus business.
· Patrick O'Shaughnessy
[00:00:00] S0: I'd love to talk about Kraft Heinz and the lessons learned from it. It's an interesting one, because, as we've talked about before, if you just looked on a piece of paper, you'd be like, ah, it was another investment you made, didn't do as well as RBI, it was fine. Everything underneath the surface is far more interesting. So I'm curious for your perspective on the story, now looking back on it. But most especially for just what you take away from the experience that altered how you think about your business, investing, or anything else.
· Alex Behring
[00:00:00] S1: If you look at the Kraft Heinz story for us, the Heinz investment turned out to be a pretty decent one. We made almost three times our money on it and were able to return our investors' capital. And the Kraft investment which didn't do, obviously, as well. And Patrick, I think the lesson for us there is basically, I don't know that we underwrote the quality of the business well. Meaning there were significant portions of the Kraft portfolio which were relatively commoditized, and therefore overly exposed to this changing dynamic where private label and the big retailers were essentially getting into the business and taking share. And I think we didn't fully understand that from the get-go. Looking at past financials would not show you that, really. And I think that was the main issue with it. Did we have some execution issues? Yes, but we fixed those. And I don't think those were determinant to the investment not having done so well. In fact, we have many years ago already, several years ago left our involvement there. I think the company has decent people working there and doing a good job managing it, but it's not like the stock did particularly better, frankly. The lesson for us is, again, how much more difficult and how much more diligent therefore we need to be in evaluating business quality in the investment process, which I think helped us beef up the process to make both the Hunter Douglas and its investment, and then subsequently the Skechers investment.