Business Breakdowns
· 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.
· Markus Hansen
[00:00:00] S1: One of the key things we talk about is if they can own the land and the property, and we've seen this before, going back to logistics – if you're in control of that operation, yes, it's slightly asset heavier. But once you can do that, the fact is your retail operation will evolve over time in terms of how that's set up. So an example right now is they are still doing more on the omnichannel side, which they have an e-commerce platform. Most of the time we've seen the success outside the US. Here in the US, we're used to getting a lot of stuff delivered. Actually, if you go outside of the main city areas, we're seeing this interesting thing like we saw in Europe, which is the idea of ordering and then pick it up on your way home as you drive home, pick and collect. That's the same thing we're seeing in Central America. They're doing some of that, but they're using part of the store, which they now can remodel because they own it and they run it as a distribution, where they set that up separately without impacting. If you're leasing that, you then have to speak to the owner. Can I do this? Can I not? So that controlling of the logistic backdrop is actually a key moat going forward, and it gives them lots of optionality in store as to how they do layouts and control of that. Coupled with the fact that you as a customer, there's certain markets where there's parking, it's safe, there's a security perimeter around it. You're more than willing to bring your family then to go shopping. If you bring family, guess what? The kids are gonna wanna go buy this. So making it a convenient, safe, tidy, clean, air-conditioned environment can be a big driver in markets where a lot of that is actually harder to come by. We take it for normal here. And then access – the locations are important. They tend to be near major roadways so people can go home and head off, but it also plays into your distribution that you can get that in from the port coming in. So a country like Colombia, if you ever travel there, is very mountainous. The geography is very much harder. So being particularly picky around that makes a lot of sense. They're also very much aware of things like property rights.
· Markus Hansen
So there would be certain economies that naturally right now they're stepping back from, because once you invest money, particularly if you're going in ownership of hard assets, you want to make sure that if there is any legal issues, there is some sort of right to coming back again. But one interesting economy I mentioned is Venezuela. Venezuela, with all the political action that's going on right now, is sparking a lot of interest. It's a large population country, if you include the people who've left and would eventually maybe come back. It used to be a very dynamic and rich economy right next to the border with Colombia. That would be the kind of economy with the right political backdrop that they maybe would look at, but they're not saying anything right now. But it makes a natural kind of fit with what they're doing. And there is no club store system there either. Chile, they were looking at for a while, and they never give you the exact details, but I think they've been working on the Chile thing for the last 5 years. And really it's getting to know – they'll send people down, learn, they'll get to know the regulator. And what they're looking for is a regulatory environment where there's someone they can actually speak to and understand the rules. That it is a rules-based economy. The ability to find the right locations and then do work on, get me to the first 5-10 stores, put a DC in, and once I'm there, hire and teach local management. This comes back to Sol Price's original – one of the things he was a big fan of is this idea of retaining and training a lot of employees and bringing them up through management as well. And it's very strong at these club stores, in terms of the relationship between the employees and the ownership is extremely strong. Keep in mind in these markets, these are good jobs, very stable, and bring many benefits with them, including things like pensions, healthcare coverage, and so forth. And driving that to bring management up and through. And then there is a symbiotic effect, which is the families of all the employees become customers because there is this loyalty factor as well. So it works very well. In Central America, they've done very well.