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Foreign.
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We'Re eating up the tastiest trend in restaurants, Asian food chains expanding across the United States and what this means for investors. Today on Molly Fulmoney. I'm Emily Flippen and today I'm joined by analysts Jason hall and San Mig Deo to discuss the rise of Asian food chains in the United States and if their expanding reach and changing palates offer up an opportunity for to take a bite out of something new. We'll be discussing Luckin Coffee, of course, but also some businesses that you may be less familiar with. That includes Kura Sushi and Heidi Lau hot pot. We'll be discussing their unit economics, the franchise versus company owned models, brand power, and if these concepts actually do transition across cultures. But we have to start with one of my favorites on the list today, and that's Jollibee. For anybody who's unaware, Jollibee is this Philippine based fast food chain perhaps best known for its fried chicken and what they call their jolly spaghetti. Yes, spaghetti topped with this unique banana ketchup style sauce. It's really hard to oversell what a big name Jollibee is in the Philippines and across Southeast Asia. They have over 1300 locations in the Philippines alone, nearly 500 more internationally, including over a hundred in North America. Although across all the brands this company owns, they have more than 10,000 stores nationwide. It's a really thinly traded stock. It's on the pink sheets here in the United States with the ticker symbol jbfc. But when you include its Philippine listed shares, it has an enterprise value of nearly $6 billion. Sadhmeet, is there a real growth thesis here for Jollibee or is it really just another example of a franchise model that's likely to flame out?
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A
I'm really just, I'm, I'm really upset that I haven't heard about this already. You know, I, this is the first time I'm hearing about Jollibee and there's, you know, being in New York, there's quite a few in Queens and Manhattan and all around New York City. So I'm, I'm coming around to this just now too. But you know, as I was looking into it, you know, it brand that is popular as McDonald's and Coca Cola in its home country. Well, well, as popular as McDonald's and Coca Cola is, here is how popular Jollibee is, is, is in the Philippines. Kids love the mascot. They have birthday parties there. You know, it's, it's, it's quite a thing. Its growth thesis really relies on expanding outside into North America, where it has, you know, only about 100 locations. They're looking to expand out to about 250 in the next few years. The through franchising, I was surprised to learn that their average unit volumes are 4.2 million a year. That is just for company owned locations, which is what they have now. Filipinos are the third largest Asian origin group in the United States, but 60% of their customers in the United States are non Filipinos. So while, you know, you think maybe it's just appealing to the Filipinos in America that, you know, maybe know the chain and are accustomed to the food, it is gaining some traction with customers here as well. So they have the ingredients to be successful and grow. It's just whether to be, whether to see if it catches. Anecdotally with my own experiences, you know, I've seen a lot of Korean fried chicken, hot pot, Thai concepts gain a lot of wide appeal. Although being in New York, you know, I think I might be a little bit early exposed to those.
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B
Yeah. What's really interesting about Jollibee is that some you and I live in places where there's Jollibee's actually near us and it's not one of those brands that you can particularly hear about unless you're already exposed to it. But Jason, this is one that you've looked at before and I know you have thoughts about the Jollibee menu and how that has transitioned from the Philippines here to the United States.
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You know, I, I get it. Trying to find the balance between offering something new while not being quote unquote weird. But you know, this world does not me need more mediocre Mac and cheese and dehydrated mashed potatoes. I'm a little salty. That they're doing some of the usual southern sides to pair with their fried check chicken in those US roster restaurants. But I, I do think if you look beyond that, my little, one little quibble there. One of the things that's interesting about the model is the diversity of the food on the menu. You've got burgers, you've got fried chicken sandwiches which are supposedly incredible. Sounds weird to American pallets. The spaghetti you were talking about, that's. It's a meat sauce with banana ketchup. It's supposed to be really sweet. And then there's some of the other more like Filipino influence things, rice and noodle dishes. So maybe it's kind of a something for everyone, which I think is compelling. Is it going to translate into the U.S. i think that's only part of the story, it is a big part of it. Right. We talked about, you know, going from around 100 to 250 locations. But you also mentioned the global reality. This is, you know, there's more than 10,000 locations. Franchising is a big part of that model. They own some, some US brands, Coffee Bean and Tea Leaf, which is a 40 year old US based company that actually has more locations internationally. Smashburger is a US Business they acquired recently. So I think the point for me is that investors that are interested in this, they need to know kind of everything you own, if you buy into this, what the global strategy is, because it's more than just opening a bunch of Jollibee locations in the US and also know that you're along for the ride with the founding family that have them. They own a vast bulk of this company. It's very concentrated ownership. So it's not just thinly traded in the U.S. you're, you're, you're ponied along with the people that are, have controlling stakes in the business.
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Yeah, it's a little bit of a head scratcher for me because you see this Jollibee brand that you think can have so much power, but the company actually spends a very small amount of its total cost in terms of marketing, especially here in the United States. So despite the fact that its brand is so pervasive in the countries where it got started, as they're expanding internationally, it doesn't seem like they're building up that same brand recognition. And I think that's a really big misstep on the part of management because I think if you're spending less than two, a half percent of your total cost of goods on advertising as a franchise based restaurant chain, especially as you're looking to expand and double your store locations in a new country, that is in my opinion, a way to just ensure that your average unit volumes fall. But to your point, Jason, it almost feels like Jollibee is an afterthought for this company because it's not so much about turning the United States into the next big market for Jollibee, for fried chicken, for banana ketchup spaghetti, it's about what smaller, almost drink chains can we acquire to expand just total number, number of store units in Smashburger, Coffee Bean and Tea Leaf obviously being two good examples. But in my opinion it's, it's one of those head scratchers to me, because it begs the question of like, is this business too diverse to succeed? Are they just trying to grab any growth and losing focus on that core Jollibee brand in the process.
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Yeah, it strikes me as more empire building than a targeted focused growth. And again, there's more than a dozen different restaurant and and beverage brands in the portfolio. That makes it harder to focus your spend. Sand Mead, I think you're a good example. You where you live, that's where there is a concentration of their stores. And until we started talking about it, hearing it from Emily, you know, you didn't know about it and I didn't. I didn't either.
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Yeah. And I get lots of advertising and flyers and you know, you see them all around as I kind of go around in terms of like different concepts. And a lot of these other Asian concepts are very focused. I think Emily, you hit on that point that they're trying to do too much. They gotta stay focused on what who they are and demonstrating that in the market.
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Well, either way, I'm putting it on my to do list to go visit the Jollibee location. That's only a 20 minute drive for me and report back about exactly how I feel about this interesting spaghetti. But up next, we're gonna be transitioning from fried chicken to caffeine. Stick with us.
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Luckin Coffee is likely a stock that needs no introduction for anybody who's invested or lived through the pandemic. I mean this is the Chinese based coffee chain that pioneered the model for low cost quick service coffee before of course flaming out due to fraud and scandals. Its shares were delisted the pink sheets, but they still trade there under the ticker symbol lkncy. And I'll tell you what Jason, I mean this business has made a voracious comeback from its fall from grace. They have over two 20,000 locations globally, including a handful that are growing here in the United States. And people are picking up on its model from your Perspective. Is there really anything to get an investor excited about beyond caffeine, of course. With an investment in luck and coffee or resetting ourselves up here for failure a second time in a row.
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Failure 2.0. Well, it's interesting like I think the, the big, like the big thing. I think a lot of people that maybe heard about the original story don't realize this wasn't just a fraud. Right. The fraud was massive, but there was always a core, a good core business. You know, you just had some leaders that were cooking the books. Another takeaway I think is interesting is the fact that the PRC government, they just as much as we've seen a lot of autocratic things over the past few years, they let this, they didn't try to sweep it under the rug. They let it play out in the public sphere. And investors, that should give you a little bit of confidence, right? I don't know how much but maybe, maybe a little bit. But I keep coming back to there's still two co founders who were with the company and on the board when the fraud, fraud happened. They're still now one of them is the CEO. And that, that always just kind of hangs, hangs in the back of my head. But if we look past it, I think we can probably trust its numbers better than any other coffee in the business. In the industry. The growth rates, man, they are something else. You mentioned that store, the actual, the store count surpassed 26,000 last quarter. They had a few thousand when all of this was first going on. They're opening like 2000 a quarter. And here's the thing, the revenue growth 47% last quarter, that wasn't just new locations. Comps are up by double digits too. So there's a lot of things that are really working well for their format, their go to market strategy. Chinese customers are coming to the stores and maybe not going to Starbucks anymore also. And you know, as much as the stocks run up, Emily, I'm not sure that I would really say that it's expensive sales, multiple price to sales is kind of empty calories sometimes but it can be useful directionally and it trades for a lower price to sales multiple than Starbucks which we know is struggling and it's earning much higher margins. So maybe there is something there.
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You know, that's eye popping growth for Luckin. But given his checkered history, as they see on Shark Tank, I'm out.
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I think that's a completely fair takes on me. I will say though, there were red flags to me at the time that made me more concerned for luckin back in 2020 than I am for today. And there are some classic examples of fraud that I think investors can look for. For instance, when Luckin Coffee started launching vending machines, I mean, gosh, tell me more about the cash based business that is vending machines. And I'm happy to see that their expansion seem to be a bit more in good faith. We do not see a lot of the same missteps that I think colored their previous run at public markets. But it's always a fair point that once you've broken somebody's trust, it's harder to build that up. In the case of Luckin from a business perspective, their strategy was always almost the opposite of what you built for Starbucks. They wanted the low brand recognition, which is to say they're the cheap brand, right? You're not walking around the Luckin Coffee to look premium and expensive. You're doing it because they offered you four free coffees when you purchased your one coffee and they were hoping you'd bring it to your co workers. Whereas Starbucks was much more about larger format stores, higher priced drinks, a cachet associated with the brand and thus the drinks associated with their brand. And then of course the idea of the third place where you'd go, you'd sit down, you'd work, you'd have coffee, you'd have a ceramic cup which of course Starbucks is bringing back now. Fuckin Coffee says to hell with all that, we don't need any of that. We're gonna have these small format stores. You don't even engage with a barista for the locations here in the United States. You can't walk in and just order at the counter. You have to place that order digitally. So it's almost the exact antithesis of the thesis that brought Starbucks to power. And it's really interesting to see how consumer dynamics have shifted so dramatically that it is now about speed, efficiency and price and less so about convenience, customization and connection.
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The smartphone influence on coffee ordering maybe?
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Yeah, exactly. And also I think there's a desire here from American consumers to be a little more to the point. I mean we see the success for businesses like Dutch Bros. And other Dr. Through coffee chains where it's a little less about the experience and the location and a bit more about the convenience and accessibility and the cost associated with those daily purchases. And I'm actually maybe more positive here on the future for Luckin Coffee in the United States than I ever have been. I never thought I would have said that even just a couple years ago. Their franchise expansion model is incredibly risky, to be very clear with that. But the business is driving much higher profits, expanding store count, and they seem to be doing something that is actually resonating with consumers, which in my opinion is a stark difference from where the company was even just a few years ago. Before we move on to discuss our last course, which is of course Conveyor Belt Sushi and Hot Pot, I do have a quick note for our listeners. David Gardner, the co founder of the Motley fool and chief rule breaker here at the Motley fool, just released his newest book, Rule Breaker Investing how to Pick the Best Stocks of the Future and Build Lasting Wealth. It's a great read and it speaks a lot to the mentality behind how we think about investing here at the Fool. But there is even more. David will be serving as a strategic advisor for our newest portfolio service here at the Fool Supernova. The original Supernova Portfolios closed in 2021 and averaged a nearly 22% annualized return across nine years. The good news is that Supernova will be reopening for the next few days. Listeners can go to supernovaisback.fool.com to get some more information.
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The show today, we have to talk about two of the more experiential style Asian food chains expanding across the United States. That is Curra Sushi and Haidila Hot Pot, two of my favorites here, at least from a consumer perspective. But Samit, let's start with Kura. This is the Conveyor Belt Sushi restaurant that's looking to capitalize on like the desire for both dinner and a show to some extent. I'm not a huge sushi fan myself but I do love how they gamify the process of eating. And even more I like how this company is expanding not through a franchise model but through actually a company owns location models. A bit slower but in my opinion maybe a bit more lucrative for investors. Kura Sushi is actually headquartered and listed in Japan for the parent company. But investors can get a slice of Kura's US based arm by buying shares of KRUS on the NASDAQ samit. What do you think? Is there something to be excited about here for investors?
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Well, you know, you're right Emily. I've been to Kuro with my family and it's definitely a fun experience. You know you get the touchscreen ordering, grab sushi off the conveyor belt, robots serving drinks, etc. You know it's, it's a fun, you know, few like flashing lights. Almost feels like you're in a casino to some extent. But most importantly the food is quite good. The sushi is very good. The other food items they have is very good. They have about 75.
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I don't, I don't know if I would ever want to associate sushi and gambling though.
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That's exactly what I was thinking.
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There's no gambling involved. It's just like a lot of, a lot of fun lights and stuff. But, but they have about 75 to 80 US locations so you know, smaller than some of the other chains. They report around 17 to 18% restaurant level operating margins which is pretty good. And 4.2 million in auvs. Very impressive as well. However, they aren't profitable because they just have very high expenses because they're pretty much building out for a larger footprint. You know, they're aggressively pursuing unit growth of 20% plus. So it remains to be seen if this concept would kind of take off. It's fun. And whether they'll may whether diners will actually make it a regular habit. It's not a one and done experience but I don't see it being a very often experience. I think more of like maybe like a Benihana for special, special occasions. So not sold yet on, on how much it'll gain traction.
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The Las Vegas of sushi if you will. I love, I love the experience that is Curra. But I mean I'm curious when I think about these food chains that we've talked about today and the distinct brands that they've built, I think that Curr is Maybe the area where I struggle the most because it feels like it's the most easily, easily replicatable. I have probably a half dozen conveyor belt sushi places that are located near me. Now granted I'm in a major metropolitan area, but in your opinion, is there anything that's unique or special that would cause somebody to say, hey, I have to go to Kura to get my conveyor belt sushi. I can't go to that place down the street.
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I mean, it is relatively clean and well organized and maintained, so that definitely helps. I think I'd be more suspect to go to a random conveyor bell sushi because that concept to me doesn't sound appealing. In general. They're trying to build up a little bit of their brand name which over time, if they can, then it might be kind of associated with that conveyor bell sushi concept.
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Yeah, the best we're coming up with is the restaurants are clean. Then part of me thinks that maybe investors could do a little better.
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C
Scalability is a challenge with that sort of format too. I think that's one of the things that can stand in the way and.
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Part of the reason why you see it not generating profits yet. Jason, the stock I want to talk to you about is actually one of my favorites of the bunch. That's Heidi Lau hot pot. It's traded over the counter here in the United States with the ticker hdalf. I spent four years of my undergrad living in China and you know, I could never really afford to eat at high D Lau, but I did love it whenever I got the opportunity to have somebody else treat me to a meal there. There's a high end staple for hot pot. They have a real rags to riches story and its founder and CE but there are over 1400 locations across the globe and have more than a dozen here in the United States. They've been expanding pretty aggressively. Jason, I know I love to splurge here for some food, but is there anything to I guess whet the appetite of investors?
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I think the thing that stands out to me, and this is to a certain extent sort of the case for, for Kura Sushi as well, because you're starting to move into these more specialty restaurants where they're just not going to have the mass market appeal. Same mass market appeal. People either like sushi or they will never touch it. Right. It's not like fried chicken where it's like, like the vast majority of people are going to be cool with it. And hot pot is a little more specialty as well, and again, you talk about the price point, it can get pretty expensive before you know it. In the restaurant business, the fundamentals, just blocking and tackling are so important, especially compared to like a SaaS company where high margins just wallpaper over being mediocre operators. You just can't get away with that. And super high. As the parent company here, its operating margins in the first half of the year were 3%. Right. So that should make it really, really clear how important it is for restaurants to be disciplined, disciplined growers, especially in this case if they're also the operators. You look at Luck and Jollibee that we talked about earlier, they've made franchising a big part of their growth strategy, which means you get to, you know, you get to pass along the bulk of the financial risk offloading operational responsibility and just earn high margin, freeze on franchising and a percentage of sales. So I think that's one of the reasons we've seen growth slow here. And again, it's also niche. So they have to be really thoughtful and mindful about where they do expand because they can't open a restaurant and maybe just come a little short of expectations. There's a real risk here of just failure if you, you know, miss, you know, underestimate or overestimate what the market can, can be worth for a specific location. And they have what, a hundred, not even 200 total locations. It's a small franchise, a small business. So I think it's really important that they focus on executing, make sure they're in the right markets and really have good operational strength because you just don't have the margin of safety you do with a coffee shop or a fast food joint.
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A completely fair point. And as we sign off here, I'm going to force you both into a somewhat uncomfortable position given the takes I've heard about the companies we've discussed. But I would love to do a lightning round and force you both to put your metaphorical money where your mouth is. If you had to buy one of these Asian style publicly traded companies that we discussed today, which one are you buying and why? And while you think about it, I, I'm happy to go first. I, I don't think this will be too much of a surprise, but I actually lean towards Jollibee out of the group that we discussed today. And the reason is, is because exactly what you were just talking about, Jason. What is a business that is doing something that is a really scalable and profitable. But it's also, and as I think about what Makes a successful chain here in the United States, they have to be doing something that can't be replicated by their competitors, at least not effectively or efficiently. And as diverse as the strategy and as crazy as it seems to be, and as much as I think the Jollibee management team could do more, especially in terms of marketing, I also think there's a lot of value that exists in that brand that is untapped. With an enterprise value of only $6 billion, given their thousands of store locations. Send meats. I think you're not picking luck and coffee. So where are you going?
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You know, surprisingly, before this, I had a different one in mind. But now after a com talking, I'm going with Jollibee too. I mean, I think their hurdle to clear to be successful or do well is lower than some of the other chains. Betting on chicken is always a good thing. There can't be enough chicken places. I mean, America loves this chicken in all kinds of different flavors, and it has its unique appeal and flavor profile that I think once it's able to. To brand itself, get its name out and. And demonstrate what it. What it is, I think you can have some success. And especially the franchising bit will actually help their. Accelerate their growth much more. So I would. I would. I'll put my bet on Jollibee.
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Sam Mead. I bet I can get you to go try it this week. They have a special Korean fried chicken on the menu right now in Queens.
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Okay, I'm gonna look up my closest one.
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Okay. There you go.
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All right.
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Right, Done. So I. As much as I want to say Luckin, I'm just, again, I'm not comfortable there. You know, fool me once, shame on you. Fool me twice, so I'm not comfortable there. Kura sushi is of the cuisine types, it's the ones that I like the most. But their gross margins are less than 12%. There's so thin margin of safety, and it's probably the most binary food type for tastes. So that concerns me. The thing that brings me back to Jollibee is scale. The size of their locations. They own food manufacturing facilities. You get to that point, and scale really matters a lot. As much as we quibble about they're not spending enough to market, they can ramp that up. They already have things to give them lower costs. That is maybe the most important thing you can do as a restaurant is lock in low cost. As a producer, they have scale. To me, I think that's probably the driver. And plus, the stock is.
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Is.
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It's not expensive, so you have some margin of safety built in there in terms of what the market's expecting.
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B
I love the fact that as we sit here and debate these these foods, not only are we maybe getting a little hungry for some Jollibee, but also they just offer businesses and investment opportunities for investors who are looking to diversify their portfolios away from the Kava Sweet Greens or Chipotle's of the world that tend to get a lot more coverage from financial media. They're are a lot of really interesting, fast growing concepts here in the United States that are worth exploring as potential investment opportunities. And I hope today's podcast was at least somewhat enlightening as to what those opportunities may prevent investors over the course of the next few years. Listeners, you should be sure to join us tomorrow because Travis is going to be discussing OpenAI and the implications that its shopping initiative has from everyone from Etsy to Amazon. In the meantime, Jason and Samit, thank you. Thank you both so much for joining me. As always, people in the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for Jason Hall, Samit Dayo and the entire Motley fool money team. I'm Emily Clippin. We'll see you tomorrow.