In this episode of Market Foolery, host Chris Hill chats with fool.com's Dan Kline about entertainment, restaurants, and the food service business.
- Sysco (SYY 2.89%) popped on earnings, and it looks like the company's long turnaround plan is starting to work.
- Meanwhile, it looks like CBS (CBS +0.00%) (NYSE: CBS-A) and Viacom (NASDAQ: VIA) (VIAB +0.00%) are finally biting the merger bullet. The combined entity will have tons of content and IP but not much in the top tier -- and what will that mean for the new media giant?
- Chick-fil-A announced a fitting new addition to its menu, calling into question what the heck the executives at Chipotle (CMG 0.41%) were thinking when they launched their notorious queso. Listen to learn more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Aug. 12, 2019.
Chris Hill: It's Monday, August 12th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, the man from Florida, Dan Kline. Thanks for being here!
Dan Kline: Thanks for having me!
Hill: Notice I called you the man from Florida, not Florida man. You're not a Florida man.
Kline: There's a lot of "you can only believe this happened in Florida" stories. And I'll tell you, a lot of them are true.
Hill: [laughs] We are going to talk restaurants. We're going to talk entertainment. Let's start with a little earnings from Sysco Corporation. This is not Cisco Systems. Often confused. This is Sysco Corp.
Kline: Oh, I researched the 90s singer.
Hill: [laughs] Global leader in the food service industry. Stock moving a little bit higher today because fourth-quarter profits came in higher than expected. Seems like a pretty decent end of the fiscal year for Sysco Corp.
Kline: It is. They're in the middle of a transformation. But this is a meat-and-potatoes company. They own brands, they deliver food service products. You haven't heard of most of the brands. It's really execution play. They're in the middle of a pretty big transformation. That's not like what you would see with a retail store -- like, you go in, and it looks really different. It's changing how they operate behind the scenes -- putting more people in the field, making technology more the key of what they're doing, going to the cloud. They're in the period where they've shed some of the pain from that -- some of the layoffs, some of the cost of people leaving because their roles transitioned. And now you're starting to see some of the benefit, hitting up against the headwind of, trucking and distribution is getting more expensive in general. That actually caused about a 5% increase in U.S. expenses.
Hill: It's going to be interesting to see what the next couple of quarters looks like. As you said, on the one hand, Sysco has gotten some of the pain of this transition behind them. And if you look at how this stock has performed, over the last five years, it's basically doubled. But it's basically flat for the last year. I think that as much as anything speaks to the investments that they've had to make. I'm rooting for them, I just don't know that I'm buying this stock today.
Kline: I don't know that I'm buying the stock, but there's one thing I like about it. The overall restaurant industry has struggled a little bit, but it's picked up. But this company is so diversely spread across major chains, all the way down to single-store independents. If we have another trend -- remember when fast casual was hurting the sit-downs? Like, the Friday's level of casual restaurant was being hurt by Chipotle because it was cheaper and the food was better? They have exposure to both of those. It doesn't matter where you spend your food dollar, and they're still going to do well. I'm not saying this is an unassailable company, but this is a company the bottom is not going to fall out of.
Hill: Yeah. And, as you said, in terms of the brands that they have, I just think of the 18-wheelers that are branded Sysco Corporation pulling up to a hotel, unloading anything from actual food to kitchen materials, appliances, etc. But, as you said, that is both the blessing and the curse of Sysco Corp. They are so diversified, which is great, it spreads out their risk. And if they are able to execute at a high level, then that rewards shareholders.
Kline: Yeah. And they're getting smarter about their execution. Let's pretend you run the kitchen at a Marriott and you buy food for them. They're making it much easier -- so, you go, "Oh, my god, I need three new soup pans," or ladles, or whatever it is. To be able to tack that stuff onto your order, and for them to have the behind-the-scenes logistics to make that happen efficiently. This is one of those, like, company that looked at Amazon and went, "What did they do right? Oh, they worked on every aspect of their supply chain, so they can now get most things to you in a day." Sysco was behind in that, and now they're catching up.
Hill: We've been talking a lot lately about the entertainment industry, most recently last week with Disney's earnings and the unveiling of the streaming bundle. Sticking with entertainment, as we speak, CBS and Viacom are finalizing --
Kline: [laughs] Locked in a room.
Hill: Locked in a room, reportedly finalizing their merger agreement. The resulting company is going to combine everything that comes with CBS along with Comedy Central, Nickelodeon, BET, just to name a few, along with Paramount Pictures, major movie studio.
Kline: Let's put that in quotes, given their lineup.
Hill: I was going to say, this isn't Disney buying Twenty-First Century Fox, but in terms of entertainment, this is a pretty nice group of assets.
Kline: Aside from CBS the network, which is still, I would say, an A-plus property, it's a whole collection of second-tier properties coming together. And that does enhance their value. One of the random pieces, I was just reading about, they own Pluto TV. Have you ever heard of Pluto TV?
Hill: Not until you just said it, no.
Kline: Pluto TV is like a Sling, but it's free. And it basically collects all of the stuff that's on the internet that's free. I've appeared on Cheddar, a financial news service. I know Jason Moser appears there all the time. Well, you can get Cheddar on Pluto. You can get selections from different networks that make stuff available online. They have 12 million subscribers. So, you say, well, CBS maybe has five million for CBS Interactive. Now they have this other thing that has 12 million. And all these little things -- Comedy Central has subscribers, MTV has subscribers. As you aggregate all these services, it becomes more popular.
But what I worry about here, and I think it's a big, big concern, is as we break away from traditional cable, and I think that's going to take another 8, 10 years before older people are gone, mostly -- are you going to get the Disney bundle, the Netflix bundle, are you also going to get the No. 3 bundle? And you could argue that this is the No. 4 bundle after Comcast. It's better. They'll fix some back-end costs. They'll end what's been three years of intrigue. I've done about nine Industry Focus episodes on this since 2016, when they started talking. It's good for that. But I don't see a ton of upside because nothing they own is all that great. You mentioned Paramount. Paramount has the fading Transformers, the probably peaked Mission Impossible -- though I've said that before and they've come and done better --
Hill: How dare you bet against Tom Cruise?
Kline: SpongeBob SquarePants, the live-action Dora movie, Sonic the Hedgehog. These are not Star Wars. They have a lot of third-tier, aged properties. They don't own theme parks. It's better. I guess it's better to own Shasta and RC Cola. But... [groans].
Hill: It is going to be interesting to see. I can't remember if I said this on Motley Fool Money or just in conversation last week with someone. You look at Disney's bundle. The original timeline for the unveiling of Disney's bundle was about a year and a half ago. You go back four or five years, like, early 2018, this thing's coming out. They delayed it. In my opinion, it was the correct move. It looks like they have it right in terms of being ready for launch. But just in terms of this whole landscape, I've already moved past the Disney bundle to see -- I'm already looking forward to, what's the rollout of Apple+ going to look like? In 2020, assuming they stick to the timeline, what is the rollout of NBC Universal's streaming app? To your point about CBS, unlike music streaming, where I think that actually is a zero-sum game -- if you have one music streaming service, I can't imagine you would pay for a second one. But video streaming? Yeah, it's easy to imagine people having multiple. To your point, how many multiple?
Kline: I have all of them for the most part, but I consider that a hazard of work. I think the average person is going to have somewhere between two and five. If you've totally cut the cord and you have a family of four, there's every reason to believe you might, for different reasons, need different things. The Disney bundle pricing makes it incredibly attractive. I was very on the fence about ESPN+. I dropped Hulu recently. The second that bundle is available, I will pay the extra money to have all three, even if it's only to watch a UFC once a year. It just becomes a great value.
I think there's another shoe that's going to drop with CBS Viacom. This puts them in a position to buy Sony Pictures or Discover, or, who knows? Starz, Lionsgate, AMC. They're going to need more content. If you look at the CBS audience, it's older. Discover, in my opinion, is the logical target. But they don't have very much. I can't imagine anyone is paying for CBS All Access unless there is an NFL reason for it and they don't live in the right market or something --
Hill: Or they're a huge fan of The Twilight Zone.
Kline: Yeah. The people who watch The Good Fight don't know how to work a streaming service. [laughs]
Hill: Chick-fil-A is a private company. It is, however, also the third-largest restaurant chain in the United States by sales. Today, Chick-fil-A is rolling out a new menu item: mac and cheese. I think this is noteworthy for two reasons. You and I were talking this morning, and you were like, "This is a private company." Yes, it is. What they have done on the sales front is very impressive. Also, they rarely shake up their menu. This is the first time in three years they've added something to their menu. And I can't believe it's not going to be a hit. I would be stunned if, six months from now, it's like, "That didn't work."
Kline: I think you get a strong benefit of the doubt when you're a company that has this level of love. And this is a very smart menu addition. If I had told you that Chick-fil-A had mac and cheese, and has had it for three years, and you just never noticed, you would have believed me.
Hill: Yes.
Kline: It's a very logical addition. It also speaks to increasing options for kids. Mac and cheese is going to be a side dish for adults, but it's going to be a meal option for children. We both have kids. I know my son went through a period where mac and cheese was one of like four foods he would eat. And he didn't like the chicken at Chick-fil-A. It is a little... I don't want to say spicy as hot, but it has a different, bolder taste than, say, a chicken McNugget. And maybe mac and cheese would have put Chick-fil-A back into our rotation. So, I think it's a really smart move.
Hill: When I saw this story, I was reminded of the fact that a couple of months back, McDonald's, an independent group of franchisees put together a letter to company management and basically said, "Your No. 1 priority should be developing a premium chicken sandwich." And without mentioning Chick-fil-A, it was 100% aimed at Chick-fil-A because, among other things, McDonald's are open on Sundays and Chick-fil-A is not.
Kline: And there was very mixed reactions to that. McDonald's has had premium chicken sandwiches. I would argue that if you have a family that was considering between McDonald's and Chick-fil-A, they are debating burgers and McDonald's food versus Chick-fil-A, they are not going to be appeased by McDonald's adding a chicken sandwich.
Hill: Although, if it is a Sunday, and Chick-fil-A is closed... I don't think McDonald's needs to necessarily get as good a premium chicken sandwich. I just think they need to get close.
Kline: What I'd rather see with McDonald's, and they've gotten away from it, is, they were never a Taco Bell. They were never a company that put out gimmicky, 20 new product launches a year. But they were always a company that you'd be excited like, "Oh, what's McDonald's doing? There's a BBQ bacon burger?" Now it's more product lines that are designed to be permanent menu additions. They've lost some of that excitement of, I'm going to go to McDonald's once a year to get a shamrock shake because it's only available at certain McDonald's for certain times. They still do that, but, I don't know, I don't like the shamrock shake as much as I used to.
Hill: You used a phrase that I think Chick-fil-A has earned, and it is the benefit of the doubt. It is the fact that they rarely shake up their menu, and the fact that, to put some more numbers around this, they're third in the U.S. in terms of restaurant chain sales. They're behind McDonald's and Starbucks. And they've got roughly one-seventh the number of locations. One-sixth, one-seventh the number of locations in the U.S. as both of those.
Kline: And they're closed on Sundays.
Hill: And they're closed on Sundays, making it even more impressive that they've been able to do what they have done.
Kline: There's something to be said for doing something well. Chipotle is a prime example. They bled off a lot of their goodwill -- unfairly, in my opinion -- with their food safety scandal. That got blown up, and people were afraid to go. But they almost took it to an extreme. They never added anything new. It was years and years and years. And when they did add things new, their sausage did not go over well. I actually thought it was great, but it wasn't popular. And then they finally came out with queso, and it was a bomb. You have to actively introduce products your customers don't like to bleed off some of that goodwill. And I think, with Chick-fil-A, they're not going to do that. I'll give you an example of how thoughtful a company they are. I was on a panel with one of their vice presidents. We were talking about facial recognition. And he said, "We could absolutely have the technology so, when you walk into a Chick-fil-A, we know your order, what you got last time, and we greet you with, 'Would you like... '" And he said, "We're probably not going to do that because people will find it a little bit intrusive." They think really long and hard about what they're doing. I bet they've tested mac and cheese for a year, maybe longer. There is no way this comes out and it isn't what people hope it is.
Hill: That's something that I've gotten increasingly interested in in the restaurant industry. I'm sure there are long-form articles that I can go out there and find. I'm probably going to do that. I'm interested in what goes into the testing of these things. You mentioned, it was two years ago that Chipotle came out with their queso. This was September of 2017. At the time, they said, "We've been testing this in Colorado, we've been testing this in California, and we're rolling it out nationwide." And, as you said, it was a bomb. And I look at that, and I think, wait a minute. What happened in Colorado and California? What testing was going on? Or, was it always going to happen, that no matter what feedback you got from customers, you weighed the pros and the cons, and you thought, "Even if this bombs, it's worth it to us"?
Kline: Sometimes it's how you ask the question. I will point out that Chipotle has a new CEO and has entirely revamped its product innovation. They have a test kitchen in New York, they have a fan-it-out system. They're being very thoughtful. This is an old process we're damning. But, if I hand you two quesos and say, "Which do you like better?" And you show me the one you like better, and you keep showing me that one you like better, but I never ask you, "Do you like it?" [laughs] There's a lot of ways to frame a test that gives you the result you want because maybe -- and I don't know how this works at any given company -- maybe you're the head of new product development, and if you don't get a few things on the menu every year, there's going to be a new head of product development.
And nobody wants you to come back and keep saying it didn't work. And, there are also going to be some products that do test well but then, for whatever reason, don't connect. I think the queso issue wasn't taste, it was that it doesn't look like the processed cheese queso that people expect, and that puts Chipotle up against a wall because they use only a certain level of product. That's why they stayed away from it, they couldn't have that artificial texture. That's what people want. I honestly think they should have said, "Here's what you expect. It doesn't meet our standards, but you've asked for it. Just like we sell Coke, which isn't super healthy for you, we're going to sell queso and just make it neon."
Hill: That's a great point. You mentioned Coke. I believe that was part of the issue with New Coke. When they were testing New Coke, they were only offering it to people in small samples. And if you're only drinking one or two ounces of it, it's a little sweeter than the original formula of Coke, and it's like, "Oh, it's great." But then, once you give people a 12-ounce can, that's when they're like, "I don't like this."
Kline: This is a chapter in one of my books. I covered the whole New Coke fiasco. Part of the issue, as well, was they did not tell you, "If we launch this, we're going to get rid of Coke." So, if I said to you, "Hey, do you like mushroom pizza?" And you're like, "Yeah, I don't mind mushroom pizza. That's pretty good every now and then." And I said, "OK, we got rid of pepperoni!" [laughs] That's sort of what happened with that one. Of course, you have to give credence to the conspiracy theory that the idea was that they were going to launch this new product, people would be outraged, and it would make the original formula more popular than ever, which most people say is an unintended consequence, but there is a whole camp that thinks that was the intention from the get-go.
Hill: Wow! That sounds like an exhausting way to try and make your existing product more popular. Dan Kline, always good talking to you! Thanks for being here!
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. That's going to do it for this edition of Market Foolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
