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Interview with Karat Packaging CEO Alan Yu: From Boba Tea Shop to Packaging Powerhouse
00:26:00
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- [00:05]
Alan Yu
Even though our company has grown from a startup to almost half a billion dollar company, we still act as a startup. We treat our customer as our family, as our core customer. Every customer is a vip.
- [00:22]
Matt Grier
That was Alan Yu, co founder and CEO of Carrot Packaging. I'm Motley fool producer Matt Grier. Now, Carrot Packaging makes all sorts of food and drink supplies. The stock trades under the ticker KRT on the nasdaq. Motley fool co founder and CEO Tom Gardner and Motley Fool Chief Investment Officer Andy Cross recently had a chance to talk with Alan Yu about the business of Carrot.
- [00:48]
Andy Cross
Hello fools. Welcome to another Motley fool conversation. I'm Andy Cross joined here by the co founder and CEO of the Motley Fool, Tom Gardner. And Tom, we're really pleased to welcome Alan Yu, the co founder and CEO of Carrot Packaging. One of our recommendations across our Hidden Gems universe. And Alan is coming to us on Fool 24 here. Alan, great to have you here. Thanks for joining us.
- [01:09]
Alan Yu
Thank you. Also thank you for inviting Alan.
- [01:12]
Andy Cross
Maybe we can just start. Tom, let's just start the conversation. Alan, just in your own words, talk a little bit about what is Carrot Packaging. I mentioned you're the co founder of the company, you're the CEO. Just lay out its business and its strategy for us and for our for our listeners here.
- [01:26]
Alan Yu
Sure. Well, care packaging started in the year 2000. I mean we originally started as a Boba tea shop and we expanded our offering not just to selling the raw material that actually made these Boba milk tea, but we move into transitioning to packaging. And we first started with the clear cup and then we added additional utensils, straws and napkins and paper product and packaging. And now we're into paper bag, paper shopping bag and SOS bag. So more today, today we're actually a one stop shop for a any restaurant or chain or convenience store or supermarket, you name it. As long as you have a demand, we'll definitely cater and we'll bring a source for you. And also we not only bring the product, we stock it. And with all the, all of our 10 warehouses throughout the U.S. we also manufacture some of these products here in Texas as well as Chino and in Hawaii. So basically people originally thought of us as a Boba tea shop and but now our core product has migrated, shifted into packaging and our customers actually in every day of your life, if you go out and buy foods and restaurants, you will be using our product. You will see our name Carrot on a lot of these lids and bag and containers. If you go to Panda Express, you go to Raisin King, you go to In N Out Burger, you go to Chili's, you go to Applebee's, Chipotle, even Burger King in Hawaii Islands or ABC Food Stores. You'll see our product. We're everywhere that you can't miss our product.
- [03:03]
Andy Cross
Alan, tell me a little bit about what did you see in the market opportunity that you just didn't think was getting fulfilled. And as you were again making moving from the boba tea side to the packaging side, was there something key in the market opportunity that you saw that said wow, we can fill that?
- [03:20]
Alan Yu
Oh yes, definitely. When we started as a small retail restaurant with just 100 stores, I mean there was a need for custom printed design. We want to have our local, we want to have our name on our cups. And that's where we couldn't find someone who could do it quick enough, affordable enough and fast enough for us. So we went ahead and we developed program for custom printing on everything that we do on the cup, on the containers, on the bag and other things. And we made it low minimum MOQ so you don't have to buy be a large Hue corporation company with a thousand store, 100 store. You could be a growing business with just five restaurants or one a startup. You can have your own name brand on your takeout container, your soda cup. I mean for example we started with a company called Dave hot chicken at one store five, six years ago. Today they have over 200 store. They're everywhere and people love it. The kids love Dave Hot Chicken. And this is how why I say that if you are one single retail startup, these large manufacturer would not even talk to you on that part. And it's hard, I mean but this is your baby. You, you founded the business and you want to have your name printed on these container takeouts and deli wraps. So basically they come to and we are basically we will treat you as basically your Regardless if you're one store or 100 stores or a thousand store, we'll definitely take care of you and meet your need. And that's how we found a niche in our market is going through the smallest size restaurant. And now today we're also servicing the larger national chain accounts. We think that every company restaurant I would say in the food service sector mainly use a very similar concept in terms of packaging. But some of these startup are being very creative and they have their desire and needs in certain type of packaging making more convenient and having their food service served in a container that can be well kept better. Presentation and basically they're more creative. And today nowadays these large national chain account, they want to move away from Styrofoam, they want to move away from plastic bag. So they're trying, they're also being very creative to designing different type of packaging to enhance, to create better appealing for their clients to the customers when they put the service, their food in it. So I, I see that more and more especially those companies moving away from Styrofoam and this is a huge market in the US moving away from Styrofoam. Most Asian country have already moved away from Styrofoam and we're still, there's still a lot of companies in the US are still using Styrofoam. But I see that more and more are converting away from Styrofoam into a more eco friendly packaging and that's where we see the opportunity. And also there's a lot of cities and states are ban Styrofoam and plastic. That also creates opportunities for eco friendly product packaging. And that's what we are good at.
- [06:18]
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- [07:19]
Tom Gardner
So you would say that you would be excited if you heard and you are excited whenever you hear that a different district, city, a different locale has decided to ban plastic or Styrofoam. That that is, that is both core to your mission and a great opportunity. If you heard that more and more over the next three years, that's a very good sign for carrot.
- [07:40]
Alan Yu
Yes, definitely. And we are seeing that California, I believe they just banned plastic bags starting 2026 January. So everybody have to start using paper. California banned Styrofoam January of this year and we've seen opportunities started coming everywhere. The takeout containers into the paper container or even plastic container, but definitely not Styrofoam containers.
- [08:03]
Tom Gardner
And why would a national chain come to carrot packaging rather than one of the major national or global competitors?
- [08:13]
Alan Yu
Well, one key thing is we are very nimble and flexible. I mean even though our company has grown from a startup to almost half a billion dollar company, we still act as a startup. We treat our customer as our family, as our core customer. Every customer is a VIP and basically our sales are we actually go directly to our customers. And I think for a large national, a large competitive artist, they only service national brands and they don't service these smaller mid sized chains. We love to service these small. We treat small chains mid size change and large chain very similar. I mean we have different type of sales rep that haters to different type of customers. So that's the major difference between us and our competitors.
- [08:59]
Andy Cross
Alan, can you talk a little bit about just some of the recent innovation? So just for some context from Lister, you have almost 7,000 different SKUs out out there I think around their SKUs. So different product offerings. I think you added like maybe 500 or so in the last year. Just talk about some of the innovation in packaging. You mentioned the move towards more towards cardboard and cardboard and away from plastic. Are there other key innovations that carrot is pushing into the marketplace?
- [09:32]
Alan Yu
Yes, there are. As I mentioned earlier, if you go to convention at the hotels, they're serving servicing your your lunch not in a a regular plastic containers. They're now servicing in a barn box a folded cardboard containers and they're different type of cardboard containers and it used to be they used to use those cardboard container for just the chicken, Kentucky Fried Chicken but now there are different design. You can actually put other stuff in it and you can put sandwich in it. And there's different type of bag, grease resistance bag. So I, I, we're seeing that people are being creative in terms of from plastic moving away from Styrofoam into a different type of packaging. And also it's not only appealing to the public, it's also economic. It is cheaper to have a corrugated boxes or cardboard boxes versus a plastic containers or eco friendly container. They're recyclable.
- [10:27]
Andy Cross
And how about, how do you, how do you do your r and your research and development? How do you decide to make this kind of product versus that kind of product? Where are you getting your ideas from? How does that flow throughout the organization?
- [10:38]
Alan Yu
I actually travel to Asia often almost every month to visit our vendors overseas and just happened that in other countries like China's and Korea, especially Korea, they're being very creative in terms of making different type of packaging. A lot of time a restaurant, a drink, a drink shops or a boba tea shop or tea shop in Asia, they can actually attract customer not because they drink, it's because they're packaging their takeout packaging. So you'll see that there's different creative packaging out in Asia. And just like our, the foods basically a lot of these, the local foods that we see that are being popular, they have been popular in Korea, other places and now they're coming abroad, overseas to us. And this is where I get our create a concept in terms of if we can, if this idea, it's good in Asia and sometimes it's actually great. I think we can do it here domestically too.
- [11:34]
Tom Gardner
I wanted to talk a little bit, a little bit about the, the partnership in the business between you and Marvin. And it's an unusual thing in public companies to find two founders who own more than half of the business. That's not a common thing in the public markets. And we generally at the Motley fool view that as a very positive thing. Can you talk about your partnership between you and Marvin?
- [11:56]
Alan Yu
Yes. And Marvin and I, we actually we started, we. We met each other in high school, back in high school. And we've went through different type of business doing after the school and we try, you know, different type of business not just in restaurant business. And we work very well in terms of me going out in the street, Marvin behind the scenes, working out with manufacturing, working with vendors. In that part, like you said, it's, it's not common to have a founder with over 50% in shares. I mean in our case we've been working with diligently with our bankers and and we're trying to get more shares out in the market. So that' why in the past two years we sold off some shares to our bankers and so we can get more flow in the market. And that is one thing that we've been trying to do. And this is actually good for the, the our company because. And also we have more employees that have ownership in the company. We pass out after we went public. We've given some RSU to our employees that have helped the company grow and continue working with the company. So these are avenue that we're, we're working on in terms of putting more shares out in the Market.
- [13:10]
Andy Cross
I just want to talk a little bit, Alan, about the distribution and manufacturing facilities. You mentioned that. So Chinos, I think the latest one you just brought online, ironically in California, which as you mentioned is a little bit tough on businesses in some ways these days. But you have the Chino facility, you have a Hawaiian facility. And I think you have 10 different distribution points almost in every region of the country. So just talk about on a geography basis how your sales are evolving and is that. Are you feeling pretty good with that 10 right now or do you see over the next couple years you're have to continue to expand that out?
- [13:44]
Alan Yu
Well, we started with just California location because we thought that this is our home base and I live in California over almost 40 years in California and I love California. And California has changed today versus 40 years ago, of course. And one thing about California is where all the containers are mostly coming in from Asia into California. That's where most of our products are made from into California. But we feel that the market, we want to grow the market into different segment. And our online business is one of the key components of our growth. Our company. Now for online business to be successful, we got to have a distribution center that is closer to our customers. We realized back in. When we first started the online store online business back in 2004, a customer in New York, Boston, ordered a product online. It would take them 12 days, at least seven or actually 10 to 12 days to get their product shipped from California. But. And that's when. And that some of the customer, when they see that transit time, they cancel their orders. Okay. But. So that's why we opened up the New York, New Jersey facility and then we opened up the Texas facility and South Carolina facility to service customers. Because as our customer base grow, we feel that more and more customers are outside of California. And that's why we decided to set up different distribution center in different state. But when we first started, we started small in a smaller warehouse, much smaller warehouse. So today we've grown double the size of most of our warehouse in a certain. In the. In that area in the city and state. So instead of adding additional warehouse facilities, we're increasing. We're actually increasing our sizes of our current distribution center in the area that we have concentration of customer base. So we're putting a warehouse into metropolitan city that we feel we have a good base of customers that we can get the product ordered, received and shipped if not the same day, so the customer can receive their product within 40 hours. That really help our business model growth. So it's the last mile. How fast can you get the product to the customer? The last mile that dictate the success of an online store? Race the rudders. Raise the sails. Race the sails. Captain, an unidentified ship is approaching. Over. Roger, wait. Is that an enterprise sales solution? Reach sales professionals, not professional sailors. With LinkedIn ads, you can target the right people by industry, job title and more. Start converting your B2B audience today. Spend $250 on your first campaign and get a free $250 credit for the next one. Get started today@LinkedIn.com campaign terms and conditions.
- [16:32]
Andy Cross
Apply and and talk a little bit about just the sourcing of product. I know you've talked a little bit about this in the call, but for those who are still who don't follow care as closely, talk a little bit about the China impact, how you've been diversifying away from there. And just what do you see going forward over the next year or so as you navigate this very tricky kind of environment that businesses are operating in today?
- [16:58]
Alan Yu
Sure, I mean this sure has been challenging for everybody that imports product and also even for manufacturers have been challenging because they don't know where to get their source raw material. I mean, yes, we can manufacture domestically, us but we still need some raw material equipment from overseas. And we just have to have been moving around waiting for the administration to figure out what is the final tariff rate. It's going to be even till today. There is no final rate because it could go up or down depending how the talk is going on right now. So but five years ago, four and five years ago, most of our product would come out of China. Today, I would say Only less than 10% of our product are from China. And we're trying to move away that 10% by within the next 60 days because we don't know what's going to happen after 60 days. It's going to be 200% tariff out of China. In that case, basically nothing can be purchased, bought out of China. I heard that starting yesterday you can't get anything out of India either because India just went from 10, 15% to 50% paraphrase. So right now we luckily we diversify into sourcing to Taiwan, Korea, Vietnam, Malaysia and now Indonesia. And now we're starting to move some of our sourcing into Latin America. We feel like, I think that the administration might punish all the Asian countries but might be still a good friend ally with the Latin American country. So I think that's a good way to go to it. And also it's closer to us. So that's where we feel that we're going. I mean even Canada is not safe anymore. So.
- [18:34]
Andy Cross
Yeah, Alan, and, and just very quickly is it maybe on a scale of 1 to 10 where it's nearly impossible and 1 is super easy, how hard is it to shift those sourcing countries? Is it. I mean, it doesn't happen overnight, but it takes time. Like what is the availability for you to be able to switch countries like that so quickly or not quickly?
- [18:57]
Alan Yu
Well, as I mentioned earlier, we are very nimble. So the way that we are able to quickly find a new vendor is one way is send our equipment over to that vendors. So basically they don't have to look for the spec and we have everything. So what we've done is we have some equipment that, where we can move around quickly and we can just ship it, disassemble it and ship it to the country that we like or buy news equipment for one of our existing vendors and shift it to another country so that will have the same spec and everything outfit that is the best. Rather than having discussion with a new vendor. Hey, can you make an investment? If you invest this much, we will buy this much from you. That will take years to transition. Okay. The quickest way is we invest in that vendors and we give them the equipment, we give them the tooling and we give them the order. That will only take around two to three months and we can start a new, new, new country. That's something we do. Other people do not do that.
- [20:03]
Andy Cross
That's great. Alan. Just talk a little bit about maybe just you're all in the United States. The United States is, is your market. Thoughts on international. Is that an opportunity? When we look over the next few years and how difficult would that challenge be for you?
- [20:17]
Alan Yu
I always say that. Why? Why? I mean there's the market in the US Is so big. Why spend the time and effort to go to a market that is that we're not familiar with and we have. We don't know how to compete in that market. Like Mexico market or northern Canada market. We tried that market. It's different. We have to set up a company and then we have to spend more time and effort versus the result is going to be better, faster, easier. If we're just in the US and there's so much room to grow within the US Why risk? Why even spend time to other countries?
- [20:50]
Andy Cross
And how about technology? Technology innovations? Where, where. What do you, what are you investing into? Is AI playing a part into your, into your logistics or into Your business at all?
- [21:00]
Alan Yu
Yes, actually we are as a company grow. I mean I, we're going to say that four years ago we have over a thousand employees in the company. Today we have a little bit under 700 headcounts so every department. We haven't seen a major increase in terms of staffing but we've seen a kind of steady declining of a staffing. Less paper where we have become almost paperless in the company. More using tablets in terms of online ordering it's mobile application and also we do get over a thousand inquiry questions a day but 99% of that is answered by AI so you know, less customer service needed required so. And also push a button. 60% of online order are processed through mobile application. So we're seeing innovation and technology is actually helping the business to grow.
- [21:54]
Tom Gardner
I'm wondering what would happen because you're so knowledgeable about the category what would happen in the scenario where you became very acquisitive. Now I want you, you can please feel free to go with best and worst case scenario. Like here's why we're not yet doing that or haven't done that because these, these, these roll ups and these efforts can spill. I mean a lot of acquisitions fail and that's not maybe the discipline and the focus that you want to have as a company. Alternatively we've known some companies generally in the category that you're in and in and around restaurants that have been acquisitive systematically because they see what the chains need in advance and they buy in advance and start making those acquisitions. So imagine the scenario where carrot packaging became very acquisitive. What would work and what would not work about that?
- [22:39]
Alan Yu
Well, during the past 24 months I've, we've tried and made several offers to different companies. We've seen our, our, our, our, our categories basically our competitor, our peers merging, acquiring different company. There's a lot of merging activity out there in the marketplace but a majority of them have not been very successful in terms of integrating. I think the key challenge, the integration in that part they spend a lot of money and they, they took a lot of debts and it's not rewarding for them. So we've been very careful in terms of how much we pay is this company somewhere that it's the similar cast share the similar culture with us. So we'll be very careful and that's why instead of acquiring different company we, we actually just brought in more categories, we added more categories adding S500SKU. Again why buy a company when we can just bring the product ourselves and having our existing sales rep represent ourselves and sell it. So so we we to grow this year we're estimated growing over a double digit 10% versus our competitors are either declining 5%, 3% or actually growing 2 or 3%. We're actually the only company in our peer group that's actually seeing a double digit growth in volume and revenue wise.
- [24:03]
Tom Gardner
Thank you. And Andy will have the final question but I'll just say Alan, how much? How much? I've really enjoyed this and thank you so much for the hour. But Andy.
- [24:09]
Alan Yu
Thank you Tom.
- [24:10]
Andy Cross
Well, I'm just going to wrap us up Tom. I think that's a fun way to fun way to end. And Alan, I love to hear the focus on the sales growth. Obviously sales growth is really the driver of so much towards a company's success. And Carat Packaging does more than 440ish million dollars in annualized sales. And we hope you can continue to drive that higher and higher as we are investors in Carrot Packaging. As you are as a very significant shareholder. And so we not only thank you for joining us today for this Motley fool conversation, but we wish you and your team all the best success in the near future as we continue to be a long term investor in Carrot Packaging.
- [24:49]
Alan Yu
Thank you Andy.
- [24:51]
Andy Cross
Thanks Alan. Thanks Tom. And thanks Fools for watching.
- [24:54]
Matt Grier
As always, people on 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 Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provides it for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley fool money team, I'm Matt Creer. Thanks for listening and we will see you tomorrow.