Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Daniel Schwartz, Patrick O'Shaughnessy, Alex Behring
[00:00:00] S2: Even if a business has great historical financials, I think today we likely wouldn't be willing to take big customer concentration risk. And then that goes back to that likelihood of, or potential of being disintermediated, and an inability to price risk. [00:00:00] S0: What was the concentration issue in that specific case? [00:00:00] S1: Pretty much any CPG company in the U.S. is going to have a third of the business or so, sometimes more, with Walmart. Or another big chunk with Costco. And it's true in other countries as well, where between one and three retailers, you're going to have the bulk of the business. [00:00:00] S0: Is it ever fair to just apply like the thing you did with McDonald's market cap versus Burger King's, and just say – I used to do this for Spotify. It's like, I pay X for Spotify. I think I'd pay 3X really easily. And that's pricing power. [00:00:00] S2: With Skechers, you could do something similar to that. I mean, Skechers is the third largest sneaker company in the world. [00:00:00] S0: That surprised people, I bet. [00:00:00] S2: It surprised many people, including us, the first time we... [00:00:00] S0: First two being Nike and Adidas. [00:00:00] S2: And the numbers are a little skewed in that I'm referring to sneakers only, and a lot of these companies, like Nike and Adidas, have apparel businesses, and Skechers is 99% footwear. [00:00:00] S1: It's also surprising the distance, because Skechers sells $9 billion a year in sneakers, and Adidas sells $14. [00:00:00] S0: Yeah, I would not have gotten that right.
· Patrick O'Shaughnessy, Alex Behring, Daniel Schwartz
[00:00:00] S0: Yeah, I would not have gotten that right. [00:00:00] S1: In most people's minds, I mean, back to the McDonald's-Burger King analogy, most people would be surprised by those figures. [00:00:00] S2: Yeah. [00:00:00] S0: Is this the case where the business is ahead of the brand? [00:00:00] S2: No. [00:00:00] S1: Because it's growing so fast. [00:00:00] S2: Two thirds of the business is already outside of the U.S. And when you look at who is buying the brand and the market share the company has within those customer cohorts, it's actually pretty good. Broadly speaking, we like footwear. We like athletic footwear. We believe there is a casualization and an athleisure trend within society. [00:00:00] S1: That's why the industry is growing 7% a year.