Business Breakdowns
· 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.
· Markus Hansen, Matt Reustle
The only other thing – you go back to the difference as well – is dealing on the FX side, there are some economies they're in where they actually have some inability to get their cash. They're doing so well, they like to bring the cash back in dollars back to the headquarters. And a place like Trinidad has some FX gates, in the sense that you can't find enough dollars to convert the local currency. So again, a bit of savviness here, which is keep what you need to there, run it from there, and then try not to put too many dollars in, but your business is very profitable and doing very well. So for a company of its size, it does seem a lot complex. The fact that they're being able to do this in this type of environment with that added volatility and be successful does give me even more confidence that this is going to be a good success story going over time as they get larger. [00:00:00] S0: Absolutely. In terms of the revenue and earnings volatility, as you deal with countries that – there's just more underlying macro volatility sometimes and different dynamics than just pure US exposure. How has that trended historically? Are there major swings in cycles and how much macro sensitivity exists? Obviously taking into account there's some diversification just in terms of regional exposure.
· Markus Hansen
[00:00:00] S1: Exactly. I think you hit the nail on the head there. Right now, the scale of the company, given that it's in these 12-odd markets, $5 billion of revenues – most of it, if you have one market going through a bit of volatility, it's more than managed by all the others. Colombia is interesting because it is the largest in terms of single footprint. And like I mentioned, this is a market where I think, based on the analysis I've done of GDP, the addressable market in terms of middle class and upper spending and the ability to broaden across a large economy could easily be by itself 25 stores. So that could more than double. Then within the group, it gets bigger. That one actually then could be a bit more volatile, but in a place like Chile, which actually is less volatile relatively, could offset that, which I think is how they're thinking about it. So far, they've generally managed it. There'll be maybe 1 or 2 quarters where you see a bit of a wobble, but over the course of the year, the actual compounding is pretty relatively stable. Part of that I think is that they are targeting a less volatile part of the consumer complex, who generally has a wealth that is going to go and shop anyway. Remember, we're talking about this isn't the only place they'll shop. For a lot of other things, they're going to go to other supermarkets, but this is going to be their core go-to. And then the beauty of this is the single biggest driver of operating earnings right now, about 40% of their operating earnings, comes from the upfront payment of the membership. So already at the beginning of the year, as you subscribe, you already have locked in about 40% of your earnings. That's a great visibility to have as you're negotiating the rest of the year. The real driver, I think, the only contingency here would be this idea of not just recruiting new members, which is growing quite nicely, but getting members to move up to the higher tier. Right now, to give you a mix, just under 20% of their membership base is the higher paying $90, what they call the Platinum card. And then the rest is the $45. But that has grown from 12% just 5 years ago. And what they're doing there is more and more explaining the benefits of this, that it sort of pays for itself with the cashback. There's about a 2 or 3% cashback you get, on top of the added benefits you get.
· Markus Hansen, Matt Reustle
Where this is really resonating though is they're becoming a go-to supplier for small and medium enterprises. Think little restaurants, small hotel chains who are looking for that quality, really targeting American tourists or people who like a Western-style standard. They're bringing stuff in from Europe, but mostly American-type snacks or food products as part of that offer they're getting. And that's driving another area where they're leaning into more as well. So right now, $5 billion of revenues, I think it's very manageable across their diverse base. Hopefully we're having this conversation 5 years from now, there'll be $10, $15 billion plus. Then I think once we get to that scale, it could be. But right now it is manageable and they've done very well on this. The only thing has been this trapped cash issue. It's a high-class problem to have. You are producing way too much cash in the market, you want to get it out, but they're managing it in a good fashion. [00:00:00] S0: Is it a similar story in terms of the gross margin stability and general approach or sensitivity on margins? You mentioned some of the FX dynamics and how they approach these things, but how would you compare it to just the US price clubs?