Asian Food Chains Moving Stateside

0:05Jason Hall: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 Motley Fool Money.

0:20Jason Hall:I'm Emily Flippen, and today I'm joined by analysts Jason Hall and Samit Deo to discuss the rise of Asian food chains in the United States and if their expanding reach and changing palettes offer up an opportunity for investors 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.

0:54Jason Hall: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, which is, yes, spaghetti topped with this unique banana ketchup-style sauce. It's really hard to oversell what a big name Jollopy is in the Philippines and across Southeast Asia, they have over 1 ,300 locations in the Philippines alone, nearly 500 more internationally, including over 100 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 JBFCF.

1:32Jason Hall:But when you include its Philippine listed shares, it has an enterprise value of nearly$6 billion. Sanmeet, 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?

1:46Sanmeet Deo:I'm really upset that I haven't heard about this already. This is the first time I'm hearing about Jollibee and being in New York, there's quite a few in Queens and Manhattan and all around New York City. So I'm coming around to this just now too. But as I was looking into it, it's a brand that as popular as McDonald's and Coca-Cola in its home country. Well, as popular as McDonald's and Coca-Cola is here is how popular Jollibee is in the Philippines. Kids love the mascot. They have birthday parties there. It's quite a thing. Its growth thesis really relies on expanding outside into North America where it has only about 100 locations.

2:26Sanmeet Deo:They're looking to expand out to about 250 in the next few years 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 think maybe it's just appealing to the Filipinos in America that 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.

3:03Sanmeet Deo:It's just whether to be seen if it catches. Anecdotally, with my own experiences, I've seen a lot of Korean fried chicken, hot pot, Thai concepts gain a lot of wide appeal. Although being in New York, I think I might be a little bit early exposed to those. Yeah.

3:20Jason Hall:What's really interesting about Jollibee is that you and I live in places where there's Jollibee's actually near us. It's not one of those brands that you can particularly hear about unless you're already exposed to it. But Jason, I know 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.

3:39Emily Flippen:I get it, trying to find the balance between offering something new while not being quote-unquote weird. But this world does not 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 chicken in those U.S. restaurants. But I do think if you look beyond that, my 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 palates, the spaghetti you were talking about.

4:15Emily Flippen:It's a meat sauce with banana ketchup. It's supposed to be really sweet. And then there's some of the other more Filipino-influenced 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 going from around 100 to 250 locations, but you also mentioned the global reality. There's more than 10 ,000 locations. Franchising is a big part of that model. They own some U.S. brands, Coffee Bean and Tea Leaf, which is a 40-year-old U.S.-based company that actually has more locations internationally.

4:55Emily Flippen:Smashburger is a U.S. 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, um, what the global strategy is, because it's more than just opening a bunch of Jollybee locations in the U S 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.

5:30Yeah.

5:30Jason Hall: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 costs and in terms of marketing, especially here in the United States. So despite the fact that its brand is so pervasive and 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 and 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.

6:10Jason Hall: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 of store units in the United States? Smashburger, coffee, bean, and tea leaf obviously being two good examples. But in my opinion, 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 of Jollibee brand in the process?

6:43Emily Flippen:Yeah. It strikes me as more empire building than a targeted focused growth. And And again, there's more than a dozen different restaurant and beverage brands in the portfolio. That makes it harder to focus your spend. Sam Mead, I think you're a good example. 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 didn't know about it and I didn't either.

7:10Sanmeet Deo:Yeah, and I get lots of advertising and flyers and you see them all around as I 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. They're trying to do too much. They got to stay focused on who they are and demonstrating that in the market.

7:31Jason Hall:Well, either way, I'm putting it on my to-do list to go visit 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 going to be transitioning from fried chicken to caffeine. Stick with us.

7:45Sanmeet Deo:But what I wanted to tell you, my daughter is very good at studying. It's a semester, a laptop, books, software, internet. So a master is really expensive. Say her, she can get it back. You mean from the tax? But she doesn't pay. No. It's a loss of a divorce. She makes it very simple with Visa Steuer. And if she works, it's kaching. That's all? Safe.

8:08Jason Hall:Visa Steuer.

8:09Sanmeet Deo:Hol her your money back.

8:10Jason Hall:Now, try it out. Luck and 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 to 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 20 ,000 locations globally, including a handful that are growing here in the United States and people are picking up on its model.

8:47Jason Hall:From your perspective, is there really anything to get an investor excited about beyond caffeine, of course, with an investment in coffee or resetting ourselves up here for failure a second time in a row?

8:57Emily Flippen:Failure 2.0. Well, it's interesting. I think 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 good core business. You just had some leaders that were cooking the books. Another takeaway I think is interesting is the fact that the PRC government, as much as we've seen a lot of autocratic things over the past few years, 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. I don't know how much, but maybe a little bit.

9:34Emily Flippen:But I keep coming back to, there's still two co-founders who were with the company and on the board when the fraud happened. They're still now. One of them is the CEO. And that always just kind of 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 industry, business in the industry. The growth rates, man, they are something else. You mentioned that story. The actual store count surpassed 26 ,000 last quarter. They had a few when all of this was first going on. They're opening like$2 ,000 a quarter. And here's the thing, the revenue growth is 47 % last quarter.

10:11Emily Flippen: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, 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's 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.

10:48Sanmeet Deo:You know, that's eye popping growth for Luckin, but given his checkered history, as they see on Shark Tank, I'm out.

10:55Jason Hall:I think that's a completely fair take. I mean, I will say though, So 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 here has seemed 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.

11:26Jason Hall: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 at 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 coworkers. Whereas Starbucks was much more about larger format stores, higher price drinks, a cachet associated with the brand, and thus the drinks associated with their brand.

11:59Jason Hall: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. Fucking coffee says, to hell with all that. We don't need any of that. We're going to 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.

12:38Emily Flippen:The smartphone influence on coffee ordering, maybe?

12:43Jason Hall: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 drive-thru 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 of years ago. Their franchise expansion model is incredibly risky, to be very clear with that.

13:17Jason Hall: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.

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15:03Jason Hall: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-owned location model. It's 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 U.S.-based arm by buying shares of KRUS on the NASDAQ. Semi, what do you think? Is there something to be excited about here for investors?

15:33Sanmeet Deo:Well, you're right, Emily. I've been to Kuro with my family and it's definitely a fun experience. You get the touchscreen ordering, grab sushi off the conveyor belt, robots serving drinks, et cetera. It's a fun few flashing lights. It 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...

15:56Emily Flippen:I don't know if I would ever want to associate sushi and gambling though.

15:59Sanmeet Deo:That's exactly what I was thinking. there's no gambling involved it's just like a lot of uh 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 um they report around 70 to 18 percent 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 They're aggressively pursuing unit growth of 20 % plus. So it remains to be seen if this concept would kind of take off.

16:35Sanmeet Deo:It's fun. And 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 occasions. So not sold yet on how much you'll gain traction.

16:53Jason Hall:The Las Vegas of sushi, if you will. I love the experience that is Kura, but 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 Kura is maybe the area where I struggle the most because it feels like it's the most 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.