Business Breakdowns
· Markus Hansen
And there the idea was, moving into this idea of the growing middle class in South America, who a) have had experience with the US like I mentioned. These are people who have come and studied in the US to get their degrees, they've gone back to foreign businesses or work there, sent their kids who come back and tell everyone about it, and/or have come here as tourists and spent some time and realized there's this opportunity. But the club store idea doesn't really exist, and it's the right pricing. So 45 bucks you get this, like I mentioned if you move up to the platinum, which is the high end one, that's 90 dollars, that gives you some cash back as well. The ability for a system to run that had to come from outside because internally that concept wasn't there. And like I mentioned the actual nature of the store, the big box, how it's set up, if you go to a PriceSmart it's a very similar layout to a Costco. Nothing too fancy but good lighting, big wide aisles, everything is clear, you can be in and out very quickly because you can find what you're looking for. You don't have to sit there and figure out, of the ten ketchups, which one do I want. There's one or two. And by the way, have you tried our private label one, which is on average 25-30% cheaper, generally has the same attributes and that drives that interest as well. And you can only find that there as well, so once you're hooked on the private label, you go back for it. And then a good mix like I said of, if you include staples food and fresh food – they're doing very good on the fresh food side by the way, expanding very nicely. Chicken is a big one as well, they were commenting on that in the recent numbers. You're talking about 45% of sales are related to food, and the other 55% of general merchandise which is a combination of clothing and then you get seasonal products so around gardening, or you have the different holiday seasons, particularly around Easter Christmas and various other things where you bring those things in. And you bring a lot of American stuff down there, Halloween products, spreading the word of all the famous holidays we do here. That is resonating well in South America, and then I'll give you a little teaser here – the next step in South America is – to give you an idea of the 61 stores today, the biggest single market right now is Colombia. They have about 11 stores there.
· Markus Hansen
The nature of the footprint if you look at the average, because it's actually versus the population potential and the targeted market, Colombia itself – and they don't give you a guidance on this but it very much fits with their their algo – could easily be about 25 stores. So even if they don't grow in the other markets, you can see the growth, but they're obviously growing in the other markets as well. But the next one is Chile. Chile further south is from a GDP perspective the second largest economy but a slightly smaller population. If you haven't been to Chile it's very developed it actually should be up there with DM. It has a fantastic solid banking system, pension system, savings system, per average capita which is one of the highest across. And again there, what they go in, and this is the other thing with PriceSmart that reminds me of these family companies that grow at a sustained but manageable pace, is they like to own the real estate or where they can't own the real estate, enter into long-term agreements, because they go and build the store format very much to the same standard of everywhere else, which is at a US type level in terms of safety, in terms of solid of build, with its own distribution backup behind. And then once they get to about four or five stores they actually go and set up their own DC. Very much controlling the logistics here, and I think we talked about this in the Casey's call, but also if you look at Sam Walton's history, the one thing he realized is control your logistics and you control your future. Because inflation comes and goes, or prices go up and down, supply chains, truckers go on strikes. So you control your logistics and some have argued – and actually look at another great company like Coca-Cola, these are effectively logistics platforms that have something on top of it. In the case of Walmart, it's Walmart. Coke it's a beverage company. I can't remember if it was these guys or someone else, it may be the guys at Casey's, but for the history buffs – General Pershing, he led the US Expeditionary Force during World War One, but learned his lesson in the Mexican incursion in 1916. But here's a famous quote, which is soldiers win battles, but logistics wins wars.
· Markus Hansen
Controlling your supply chain, particularly when you're stretched out, is the single most key important factor to determining your margins and your costs. It was a buddy of mine actually in private equity who told me that story. It's very important because this is the nature of why it's maybe at a slower rate than some people would like. Lord knows they've had consultants come in and told them, you could grow so much faster. But a very controlled manner. And one area where this comes back and is very important is in the area like the Caribbean, which is subject to some pretty heavy weather conditions sometimes. In Jamaica they have two stores right now. When the hurricanes hit Jamaica, they were very bad this last season, pretty much wiped out everything else. Their level of construction is to such a level of importance and sustainability that their stores survived and remained open. They're opening another two. So again, I mentioned this in the sense that they're very focused on the longevity of the products, the store, and the ability to service their customers through any ups and downs. And when you're a customer, when you're paying to be that member, you suddenly understand how important that is going forward. So these are the less tangible benefits of this offer, but also explains to you why the credibility of the brand and the products in the store, to the local customer, is very important.
· Matt Reustle
[00:00:00] S0: It certainly makes sense, in terms of also being very thoughtful and calculated about how they approach the growth. On the logistics point, in terms of having this international presence, it requires the import logistics as well. How much do they control in terms of that and import logistics. I'm thinking five billion in terms of size, I'm not sure how much they can do in that regard. So how far does it extend?
· Markus Hansen
[00:00:00] S1: When they started out with this, basically they had one big distribution cargo base out of Miami, and they've since moved in recent times. They're opening actually – so San Diego has as well, but Miami was the main center primarily for their Caribbean expansion at the time. And then locally they'll have distribution for bringing stuff in. So they ship it using someone else's shipping. They're a major customer for that shipping, so they tend to get good pricing, and then they send it down. It's interesting actually, they were asked recently about tariffs. They actually are effectively an exporter from the US, so they don't bring anything into the US, they don't sell. So no real impact there. And generally in a lot of the markets they're operating, there are some local – it's funny when the tariff tantrum happened, essentially when you speak to international companies, in a lot of parts of the world, there are tariffs. They've been around for a while. It was just, it was new to the US coming in. So a lot of these companies have a playbook of how they manage tariffs and pass it through. But for these guys, it's really setting up, and they're now setting up on the western seaboard of Central America down, as they expand their ability. And what's interesting in terms of the product they sell, on average in most of the stores, close to half of the fresh will be sourced local. So let's say fresh is about 25% overall. And then the other stuff, which tends to be things like the staples. So they sell private label peanuts. So all the mixed peanut, the big things. They're things called Members Club, but it's very similar to the ones you find at Kirkland. Those things are shipped from the US, non-perishable kind of foods. They do bring stuff in from Asia, particularly related to lower cost but good quality clothing and toys and so forth. And then the seasonal products on the gardening side. But more often than not, particularly in a place like Colombia, for instance, and this is true of the larger economies they're going into, or Costa Rica where there is a farming base – they're able to work with local partners to get scale and bring local product in. And you're seeing a mix of local combined with US stuff.
· Markus Hansen, Matt Reustle
The other thing they're learning is they're actually taking stuff that they're finding sells, say in Costa Rica and Panama, and bringing it to Colombia. We think of Latin America as one entity, but if you go to each economy, there's a different taste vibe, and they're finding stuff which is working well. Which again, not to go back to our previous one, but the example that Casey's are discovering, is the interest in spicy foods they're learning from Texas and southern states and bringing it further up north, closer to the cold, the borders where people are discovering. And so really smart retailers are very good at finding the SKUs that can differentiate and keep that cost within their system. And every little bit they're doing on that side is margin accretive. [00:00:00] S0: Yeah. Tell an Argentinian and a Chilean that they're similar and they'll argue with you for a long time. But yes, I think it makes sense in terms of what does translate across geographical lines. And on the point about expansion, the impression that I'm getting is that yes, there is an opportunity, there are markets that over time they can enter into, but it is very much about them being thoughtful and calculated and not overexpanding too quickly before they have the logistical thing figured out.