Invest Like the Best with Patrick O'Shaughnessy
· Nick Kokonas
[00:00:00] S1: Food costs money, so that's one of them. But the way that everyone looks at food costs and paying for food is very weird in that every restaurant ... And this happened when COVID started so it's a good segue to that, every famous chef that went on TV said, "This is the kind of business where this week's revenues pay for bills from a month ago." And when we started to bring in money through deposits and prepaid reservations, tickets, I suddenly looked and had a bank account that had a couple million dollars in it of forward money. Like a lot of other businesses. Like the computer business. If you buy a computer then they ship it to you five days later kind of thing. So you have a float. So I started calling up some of our big vendors for big expensive items. Proteins, meat, fish. Luxury items like caviar, foie gras, that sort of stuff. And wine and liquor. And just said, "I don't want net 120 anymore. I want to prepay you for the next three months." And they had never had that phone call from a restaurant before. So basic economic theory would say well, how much should they discount it? Let's say we're going to buy steaks and they were $34 a pound wholesale for dry aged ribeye. We're going to pay $34 a pound wholesale, get net 120. And I called the guy and said, "I'm going to use 400 pounds of your beef a week for the next four months for our menu, which is about $300,000 of beef. What do we got if I prepay you?" And he was like, "What do you mean?" I'm like, "I want to write you a check tomorrow for all of it for four months." And he was like, "Well, no one's ever said that." So he called me the next day. He said, "$18 a pop." Half. Half price.
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: Wow. [00:00:00] S1: That's what I said. I went, "I'll pay you 20 if you tell me why." And he said, "Well, it's very simple. I have to slaughter the cows. Then I put the beef to dry. And for the first 35 days I can sell it. After 35 days there's only a handful of places that sell it for more than 35 days. Dry aged. And at 60 days I sell it for a dollar a pound for dog food. Literally." So his waste on the slaughter and these animals’ lives and the ethics of all of that are because of net 120. Seems like someone should have figured this out. As soon as he said that, everything clicked and I just went, "We need to call every one of our vendors every time and say we will prepay them." Now, I know huge restaurant groups, huge restaurant groups that look at their float as more valuable to have that money in the bank and to pay their vendors net 90, net 120, whatever. What are you earning in interest these days? 1% a year or something like that? It makes no sense to do that. It makes sense to get ahead of that curve, estimate your next month's sales, and prepay for the food. Now, there's risk involved in that, but you've mitigated that risk by much, much better food prices. At the Michelin three star level we've been able to take our food costs down to a level that honestly our chefs never thought was possible. But we've done that partly through the efficiency of not having no shows, but then the other flip side of it is that we've also worked on creating forwards contracts for all of our big vendors.
· Patrick O'Shaughnessy
[00:00:00] S0: You have to do at least one more. This list is amazing. What's one more thing? And then we'll move on.
· Nick Kokonas
[00:00:00] S1: People can't buy what you don't sell. Stranger danger. You don't know who your customers are. So, in the restaurant business anyone can walk in and you have no idea who they are. It's really obvious that that's the case. If you have a casual restaurant, people walk in. Who is this person? You have no way of knowing them. Almost any other business you are going to have some information about that customer so that you can re-market to them. You can take that customer and aggregate them into a pool of customers, upload them into Facebook and Instagram and say create a like customer list within three square miles of my restaurant. So all of these tools exist. They're largely free to use as well. And all you need to do is get your customer's email address. Not their cellphone number, their email address. It's the unique identifier. Other businesses and other booking systems don't want you to have that. Just like the publisher saying, "Yeah, we won't tell you how much that book costs to print or we don't know." Which is a weird thing to say. These other booking systems go, "Yeah, yeah. People don't like giving their email address. It's much better to have a cellphone number." It's like, "No. Actually it's not." And that's why Amazon and Netflix and HBO and everyone else uses your email address as your unique identifier. I call that stranger danger. Your customers cannot be strangers. You need to know who they are. And what are you going to do about it? Very simple. When they arrive, you get their email address. It's not that hard.
· Patrick O'Shaughnessy
[00:00:00] S0: When COVID happened it represented obviously an existential crisis and still does for a huge swath of the restaurants in the US. And I think one of the most interesting things that's happened with you and with Tock is how you responded and reacted to that. Now that we've laid that groundwork, just love all the lessons you've shared with us so far, talk us through that episode, which is of course ongoing, and what you did and what you've learned.
· Nick Kokonas
[00:00:00] S1: The first thing that I did was I realized ... You said it's an existential danger. You can realize that somethings an existential risk or danger at any point along the curve of it being an existential risk. The trickier part is to realizing that something could be an existential risk, has a small chance of happening, but it's nonzero. So right now it's very obvious that to the restaurant industry, to software companies that serve the hospitality industry, that COVID is an existential risk. We started talking about that February 28th. Because at the time there was evidence in Asia and Italy that this was a very, very serious potential pandemic. Then when Seattle started having some cases at senior care facilities, that's the moment, that was March 8th, where I went, "The whole industry is totally screwed if this happens. And it seems like it's going to happen." As a trader and a trader in an era where you look at other people and you can tell whether they're telling the truth in how panicked they look, every time I saw senior officials on TV saying that this is nothing to worry about I worried more and more. They wouldn't even be talking about it if it was nothing to worry about. I immediately went into like, kind of a footing of what happens if tomorrow every restaurant in America is shut? What happens if I have to shut down all of my restaurants and can't serve anybody? What happens if they just go to 50% occupancy? Or what happens if my employees begin getting sick? How do we protect ourselves? That was a moment where ... I don't want to use the word panic. I didn't panic. But I got very, very concerned and serious. And when you're the only guy in the room saying the sky is falling, or the sky's about to fall, you can look a little unhinged. I tried to explain to everyone if something has a 10% chance of happening but if it happens it wipes you out, you need to mitigate that risk. Even if you're wrong and it doesn't happen, great. But at least we were prepared. And I called some other restaurant owners and whatnot and honestly, people thought I was off my rocker a little bit. My own employees were kind of snickering behind my back because we instituted a five minute call time, meaning everyone had to come within five minutes. We instituted mandatory temperature checks and hand washing and mask-wearing.