In this episode of Industry Focus: Consumer Goods, host Jason Moser and Motley Fool analyst Emily Flippen look at some companies and updates in the consumer-goods industry lately. Emily explains how HaiDiLao's business works, and why it's so exciting for investors. Then, the hosts look at the recent split between Amazon.com (AMZN +1.25%) and Nike (NKE +0.09%) -- what this is about, and what it means for the companies involved, including adjacent competitors like Shopify (SHOP +5.40%) and Levi's (LEVI +0.00%). Also, a recent survey found that kids these days are really into Apple (AAPL +3.26%), Nike, and... Louis Vuitton? Plus, some companies the hosts will be watching this holiday season, some of their most recent stock buys, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Nov. 19, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Tuesday, Nov. 19. I'm your host, Jason Moser. Joining me in the studio today is Emily Flippen. Thanks for being here!
Emily Flippen: Thanks for having me!
Moser: On today's Consumer Goods show, we're going to dive into Nike's recent decision to break up with Amazon. Didn't seem like breaking up was that hard to do in this case, Emily, but I guess we'll find out. We've got the top items, it seems, on everyone's holiday list this year. We've got more of the last stock you bought and why.
But we're going to lead off today's show with a tweet, Emily. Let me read. "HaiDi-how does HaiDiLao Hot Pot sell so much food per square foot? I hear getting free manicures while you wait can work up quite the appetite. This might be the biggest, bestest restaurant you've never heard of. HDALF." That's the ticker.
Now, Emily, and I know, that was your tweet.
Flippen: It was. Maybe my third tweet. [laughs]
Moser: We finally got you on Twitter. I'm going to tell you what, I love that tweet! No. 1, I had never heard of this company before. No. 2, I know how well you know the Chinese market. And No. 3, your enthusiasm to work up such a cleverly worded tweet, it had everything, so I felt like it was worthy of leading today's show. I guarantee you our listeners would like to know more about this company and what has you so excited about it?
Flippen: Well, I will admit that getting that pun, HaiDi-how, took me way longer to come up with than it should. HaiDiLao Hot Pot is a chain of Chinese hot pot restaurants. If there's something I know, it is food and China. This combines both of them for me. I will say that ticker HDALF, unfortunately, while it trades over the counter here in the U.S., it's Rule 144. So unless you are an institutional buyer, you'll need to buy it on the Hong Kong Stock Exchange. But it is an extremely impressive company. And I do think it's worth looking into if you are interested in buying international companies. It has over 500 restaurants across the world, the vast majority of which are in China. For anybody who might not be familiar, hot pot is... I've heard it described as Chinese fondue. I feel like that's a bit of a misnomer. There's no cheese involved. In fact, you're actually given raw vegetables, raw meats, you put them in boiling water, you pull it out, put a little sauce on it, it's delicious.
Moser: I was going to say, I've had that, I love it!
Flippen: I love it, too! And a lot of people go to HaiDiLao especially for it. I will say, HaiDiLao is expensive!
Moser: The stock or the menu?
Flippen: Actually, I would not say the stock is expensive. The menu itself is expensive. When you look at that per square foot, part of the reason why that is so high is not because their restaurants are really small. In fact, their average restaurant is something like 10,000 square feet. It's because they sell such expensive food. It's a real treat. You'll notice, if you have a HaiDiLao near you -- in the U.S., those are people only in New York or Los Angeles. They're not spread very wide here. They have a very long wait. It's very much a treat when you have the opportunity to go to HaiDiLao.
Moser: To your point there on the sales per square foot number, you weren't lying. This is a big disparity, when you look at some of the names here like Panera. These are as of 2017. Panera was $308. Texas Roadhouse, $652. Cracker Barrel, $517. Chipotle, $844. HaiDiLao, $1,267 in sales per square foot. So, yeah, maybe the stores are really big, but it does seem like you have to have the demand to keep that number up.
Flippen: Oh, yes! I will say that those comparisons maybe weren't the most fair comparisons, but I was hungry, and I was thinking, what do I want to eat? And those were the things that came to mind, in addition to HaiDiLao. That is to say, a lot of those companies -- Texas Roadhouse, Chipotle -- they really are best in class for restaurant sales per square foot. So, it's a fair comparison in that regard. HaiDiLao has done an excellent job in both growing their same-store sales, so, the amount of revenue that's attributable to existing stores for over a year, as well as building out new stores. Same-store sales increased nearly 5% year over year. The average spend per guest increased 4% year over year. So, there's lots of growth there. The vast majority of that is actually within tier-three cities and below. Their same-store sales grew 13% last quarter. These are the cities in China that are not your Shanghais, your Beijings, your Guangzhous. They're smaller cities. Although, small cities in China give American small cities a run for their money. It is to say that there's lots of opportunity there. It's a growing middle class in China that are more willing to spend up for experiences, and those experiences include things like free manicures while you wait.
Moser: That was going to be my next question. I was trying to figure out whether the manicure thing was a joke or whether it was actually real. You're saying, if you go to this restaurant, you could actually get a free manicure while you wait?
Flippen: Yes. I wish it was a joke. I think that's an odd thing to have included in your dining experience. I guess the lines get so long that people can pre-book manicures ahead of time, so while you wait, the manicurist will come, give you a manicure, as well as, they have a playground for kids, for instance.
Moser: Taking a page out of the old book of Ikea.
Flippen: Oh, exactly! That's probably a better comparison, it's the Ikea of restaurants, maybe. You go in, you send your kids off, and you get lost in a maze of food for a few hours. It all goes back to their CEO and co-founder, Zhang Yong. He actually founded the company in China. He grew up, I don't want to say poor, but not wealthy in China, and actually had lots of experience working in restaurants. He saw that the most successful restaurants were those that catered to the customer. So, he built this brand off of being the customer, wanting to improve that customer experience. The idea being, the moment you step in until the moment you step out, everything is built for you as the customer. This includes things like giving you bibs, and, if you're a woman with long hair, giving you a hair tie so your hair doesn't fall into the hot pot. Really, every aspect has been thought about here.
Moser: People think you might be joking about that. But I'll tell you, with two daughters at home, both with long hair, I can't tell you how many times we've had them put their hair up before dinner because we're having spaghetti with meatballs and you don't want a hair full of sauce. That's real, that exists.
OK, two questions. No. 1, you said right now, investors looking to get exposure to this company, they would have to actually buy it through the Hong Kong Stock Exchange. Correct?
Flippen: Yes, as of right now.
Moser: Is there any plan, do you know, in the near future, for this to become more accessible for American investors?
Flippen: I really hope so. I don't think there is any plan right now. But the shares have been on fire, and it's one of the few Chinese companies that has a really strong return on equity. I'm hoping that as the demand comes there, maybe that will change. But I do think it's worth, if you don't have international privileges set up on your brokerage account, a lot of companies now -- Fidelity included, which is what I use -- make it really easy to set it up, relatively low in terms of fees. So, I definitely say look into it if you're interested.
Moser: Manicure or pedicure?
Flippen: If you live in one of those companies that lets you go, go get the manicure. I admittedly wouldn't know the answer to that question because I bite my nails. So, I say pedicure then, since I have no fingernails.
Moser: I've never had a manicure so I can't speak to that. But my wife talked me into getting a pedicure one time. I have to say, I enjoyed it a lot more than I thought I would. God knows I'll probably be going back to get another one sooner or later. But I'm with you on the fingernails thing, man. I have to cut them before I start biting them.
OK, there you go. HaiDiLao. Thanks so much there!
Now, talking about the next story here, Amazon and Nike. Late last week, we saw the headline come through that Nike confirmed it's no longer going to be selling products on Amazon's site. This isn't a partnership that's existed all that long. It's really only been a couple of years where you can do that. It's been an interesting progression here as Amazon has continued to take up share in... I don't even want to call it e-commerce anymore because I feel like all commerce is becoming in this omnichannel. You need the total package in order to succeed, which is why we're probably seeing Amazon even investing in some physical stores here and there. But, in regard to Nike with Amazon, who's the bigger loser here? I don't know that it's so obvious at first glance.
Flippen: I'm not sure if there is a loser here. I'd say, this isn't a breakup. I think that makes it sound really bad. This is more just like a fling, where Nike maybe determined, "It's not really for me." I'll say, Amazon has done an amazing job in going after consumers. They aggregate consumer eyes better than any other platform out there. But here's the thing -- if you're Nike, you already have the brand name. You've already spent a lot of time and money in terms of marketing to aggregate those eyes yourself, and you have such a strong brand that you don't really need to pay Amazon, give Amazon their fees to have people seek and search out to buy your products. So, I'd say, they gave it a try. Nike maybe ultimately determined that it wasn't worth it for them. They did say they wanted to focus on building out their own distribution channels. It comes right after naming a new CEO, actually, who's going to take over in 2020. John Donahoe, formerly from eBay, is going to be coming over. So, that's also an interesting aspect at play there between eBay vs. Amazon. But I will say, I think both companies are still poised well after this.
Moser: It's a little bit of a "it's not you, it's me" thing, then, maybe. Nike just said, "Hey, we tried it, it's not working." I do understand this to a degree. Whenever I'm looking for Nike gear or Under Armour gear, I typically am going to their apps. No. 1, they've got all of the stuff that I've ordered there before. They typically have all the access to the latest stuff. Another thing that I'm finding and I've heard this from a number of people is that when you order things like Nike or Under Armour from Amazon, you're not ever quite positive where it's coming from. And, sometimes there's this chance, at least, that it could be pirated material, right? It could not authentic, not original Nike or Under Armour equipment. I can't imagine that they would be the only brands looking at this risk there. It certainly does speak to the bigger, more established brands wanting to invest in their own presence, control that consumer experience from start to finish it, which is why you see so much investment being made from Nike particularly -- they've done so much. The sneakers app alone, when you look at the numbers that their sneakers app is bringing in, it's actually astounding. I get a pair of tennis shoes, they last me a couple of years, and then maybe I buy another one. People like to buy tennis shoes, apparently, a lot. Nike's really exploiting that.
So, we've seen this evolution of the e-commerce environment, of retail, how it's becoming this omnichannel thing there. Now, there's this other little business off to the side, doing its own thing, and its financials don't look all that great right now, but it's signing up a lot of customers. That's Shopify. Shopify seems to be riding a little bit of the tailwinds created by Amazon early on, but I don't think its success is coming due to Amazon. It seems like Shopify is taking its own tack here in the retail world. How do you feel like Shopify benefits from a move like this? Do you feel like this adds a little bit more credibility to what Shopify is trying to do?
Flippen: Oh, totally! Shopify is such an interesting example. It benefits off of Amazon's mistakes, but Tobias Lütke, the CEO and co-founder of Shopify, has never once gone after Amazon's business. He's totally focused on just his merchants and their experiences using the platform. When you look at Amazon, the big catalyst for what's making people like Nike leave the platform and potentially start using a Shopify platform, their own distribution channel distributed over Shopify, is because Amazon has struggled so much with third-party retailers, both in terms of quality, like you mentioned with Nike, as well as with competing with their third-party retailers by launching their own private label brands. It's interesting to see a lot of people move from Amazon's platform. I shouldn't say a lot of people. Amazon is still very clearly dominant in this space. But a number of people are trying to get their customers to buy directly on their own sites. Not everybody has the brand name that Nike does, that would allow it to be successful in doing so. But if they are able to, that gives Shopify a huge tailwind. As consumers, what makes us use Amazon is ease of access, the ability to get your stuff within a couple of days. Shopify now has the ability to, virtually 100% across the U.S., provide their services, the products that you order, within two business days. That's Amazon-level delivery right there.
Moser: Yeah. To your point there, I think Amazon set the standard, and you're seeing other companies, I don't know, imitate it. But maybe to a degree they imitate it right. You have your innovators, your imitators, and your idiots. I think Shopify is probably one of those innovators/imitators. But if you're one of Amazon's third-party partners, and you're thinking, "Well, this is hunky dory, I've been able to grow my business by this amount thanks to Amazon and everything they've been able to offer," at some point, though, Amazon is clearly the one that holds the weight in that relationship. They're going to be able to command a little bit more. Your small businesses around the country, they're probably looking for maybe another alternative. Certainly, Shopify seems to provide that alternative. But the investments they're making in logistics and fulfillment, to your point, going beyond just the shopping experience, but really that A to Z, getting it from point A to point B in two days, one day, whatever they're going to promise you. Now we see, building all of that fulfillment out, the investments they're making, starting to become a little bit more obvious what Shopify's trying to do here. While we can rag on the stock price, maybe, for seeming expensive these days -- because, yeah, they are not profitable yet. Nope, they don't make a ton of cash. Yeah, they just keep on seeming to burn through it. They do have something to show for it. Certainly, the metrics that matter on the customer side all seem to be heading in the right direction. So, yeah, it does seem like more small businesses want to take control of that experience, and Shopify is one solution there.
Flippen: Yeah, Shopify has never looked cheap. To give you a good reason for why I think Shopify and Amazon can both succeed when it seems like they're competing against each other -- I went on Amazon earlier today, and I decided to look through their men and women's clothing, their apparel, what were the most popular products sold. You can sort by popularity. There were a lot of brand names there. A lot of those are, obviously, Nike, which they're going to be losing. Another example is Levi's. While Levi's hasn't announced any plans to leave Amazon's platform, they're some of the more popular products sold, and they have a brand name strong enough that could probably allow them to still get a lot of traffic directly to their own websites if they were to leave Amazon. That's great things for Shopify. Allow people to build their own brand, give them another option. But at the same time, I saw a lot of brands, like Hanes and Champion, which are never going to be able to leave Amazon's platform because those are so easily exchangeable for any other product. They need as many eyes as possible. It's great that third-party retailers are given the option. They have their Shopify direct-to-consumer channels that are higher-margin, more profitable for them, you don't compete with Amazon. But, at the same time, they're given the option to get on Amazon, aggregate those eyes, get the most number of clicks and purchases. It's almost a symbiotic relationship.
Moser: As a Shopify and Amazon shareholder, I feel like I'm leaving this discussion happy that I'm keeping shares in both companies. So, thank you!
OK, Emily, it's that time of year. The holiday season is upon us. That means a lot of traveling, it means a lot of eating. I'm OK with the eating part. Traveling, I'm tired of, but you have to do it.
Flippen: You can eat and travel at the same time. Makes it a little better.
Moser: Very good point. Fantastic! See? I like that! But, there's also a lot of gift giving. Now, gift giving I like more than gift receiving. I always enjoy being able to find that great gift and then seeing someone who gets it really appreciate it. It's always a lot of fun. But with that said, people like getting gifts, too. According to a Piper Jaffray survey of more than 1,000 U.S. consumers ages 18 to 65, the upper income teenage cohort -- I think we have to be careful here. Even though this is the upper income teenage cohort, we know how teenagers are, and that all trickles down to every teenager. Once teens see someone having something, everybody wants it. It should be no surprise that the top of the list of consumer brand for teens is Apple this year. It seems like it's that way every year. AirPods, certainly at the top of the list for a lot of people. Nike was the second most mentioned brand. Listen, they're taking control of their own brand, breaking up with Amazon. Maybe they saw this coming. Also, another brand that surprised me because I didn't know it held this much sway with teens, Louis Vuitton? Were you aware of this?
Flippen: No. I feel like I'm starting to get old. When I think about Louis Vuitton, I do not think about something that is maybe a top three desired for high income teenagers. Gosh, maybe their new marketing or something is starting to pay off here.
Moser: It's this internet age. Social media, the way these companies can market now. Stuff goes viral at the drop of a hat. And if you're feeling old, then maybe I need to go ahead and deliberate retirement. I think I'm twice as old as you are. OK, let's take this in the other direction. We know all of these brands that everybody likes. We can tell you with pretty high levels of certainty that these are going to be brands that do very well this holiday season. But what are some of the brands we feel like going into this holiday season really facing some headwinds? They need a hit? Something just ain't working for them and something needs to change? You got any ideas out there of brands or concepts that need a hit?
Flippen: Yeah. I remember when I was a kid, the best thing I could get for any present in the holiday season was games. I loved games. The go-to place for that was always GameStop. GameStop is an interesting one to watch as they slowly dwindle into nothing. Black Friday is always a great example of this. Coming up next week, it's going to be interesting to see if GameStop gets any of that excitement for Black Friday. Do they have to cut prices down to pull people away from the Targets, the Best Buys, the Walmarts of the world? So, that one's always... I don't want to say fun to watch. It's a little sad to watch.
I remember this time last year, a really interesting company was going public, and that was Yeti. Are you familiar with them? They made big coolers initially. Now they've become this brand. I remember doing my initial research on this and thinking, "What a disaster!" This company's products were worse than that available, their prices were outrageous, and they had nothing going except for that name, Yeti. And I knew I had made a mistake when I went back home for Christmas, and I went to my friend's house, and she had three Yeti mugs sitting on our countertop. She had been gifted three mugs. So, it'll be interesting to see how these brands that do really well during the gift-giving season, such as Yeti, do this time around. Admittedly, they're being compared to some harsh numbers year over year, because last year was so good for them.
Moser: Kind of a lifestyle brand.
Flippen: [laughs] I hate that term!
Moser: [laughs] I don't know how else to put it! When they first went public, I remember, we sat next to each other, and were able to talk a little bit about Yeti. You and I both had pretty much the same opinion there. It was hard to imagine why the market was receiving it so well. It's a brand that people are familiar with. They always struck me as... I don't know, I think we have a Yeti cup at home. Maybe it keeps stuff cool or hot, but the cup leaks. And I'm like, if I'm going to pay that much, the cup shouldn't leak, right? Are my expectations too high? I don't think so!
Flippen: With all these teenagers that are buying their Louis Vuitton products, it doesn't matter if the cup leaks. It has to have the Yeti on it.
Moser: [laughs] Well, I do remember that age very well. I do remember the value in a brand that matters. Sometimes it doesn't matter about the quality of the product. It just matters about the brand that's on it. Hey, if Yeti's able to capitalize on that, more power to them.
OK, let's jump into what has become a big favorite of mine here, this segment. This is something we kicked off, I don't know, a month and a half ago or so on the Financials show on Mondays. It really has snowballed thanks to all of our listeners out there. You just keep on chiming in. I've made you the promise, if you write it, we'll read it. It's the last stock you bought and why. You know we want to hear about the stocks you're buying. E-mail us at [email protected] or hit us up on Twitter @MFIndustryFocus. Let us know the last stock you bought and why.
We got an email from Josh. Josh says, "I first want to say that my strategy is a bit different than many. I don't buy one stock at a time, but rather typically place five to 15 orders at once using a fractional share purchase plan through Folio Investing. This means that I just bought four stocks in my most recent purchase." I'm going to whittle this down a little bit for the sake of time here. No. 1, he bought Facebook because it's cheap and social is no passing fad. No. 2, Comcast because he likes the utility-style subscription model. No. 3 and No. 4, he bought American Express and PayPal because in the world of finance, they're two of his favorites. No. 5, he bought iShares of a gold ETF, which is what he holds instead of cash. Josh, listen, thanks so much! We appreciate you chiming in.
Emily, before we go, I think you bought a stock recently, didn't you?
Flippen: I bought a lot of stocks recently, and they're all a little bit riskier than Josh's portfolio there.
Moser: What's one stock that you recently bought?
Flippen: One stock that I recently bought that I'm still a big fan of, even though I am down on it a bit, is Chewy. Chewy being the new pets.com -- no, not really. They're the largest pet e-commerce retailer here in the U.S. It's a really interesting company. We talk a lot about Amazon and how Amazon's really winning in the retail space. But, for instance, Wayfair and Etsy have succeeded as well. I think Chewy is up there with companies that are niche enough that they've carved out a strong market for themselves. You might have seen their boxes, actually, if you're not too familiar with the product, if you haven't used their services. They have great branded boxes that show you just how pervasive that company is. Virtually all of their revenue is coming from recurring purchases. People who have pets go on to Chewy to make recurring pet purchases like litter and food. They personalize the experience, which means they have exceptionally high retention rates.
Moser: You know what? Now you say that -- I've looked into this business a little bit, but now that you say the personalized experience, if I recall correctly, sometimes they even send paintings of your actual pet, I think I saw. Is that right?
Flippen: They've been known different paintings of pets. If you have the unfortunate experience of having a pet that passes away, they'll send flowers, oftentimes handwritten notes. Sometimes little gifts if they feel like they know your dog well enough to know what your dog may like. It's doing a great job of moving in on Amazon's network here. It's an interesting player also because they have a lot of their own labels. American Journey is a really popular dog food that is Chewy's own label. They have the ability to distribute it nationwide. Meanwhile, Amazon also has its own branded pet food. You probably don't even know the name of. I think it's called Wolf or Wag.
Moser: They don't really invest in that brand, doesn't seem like, very much.
Flippen: I would encourage anybody who has access to a computer or phone -- that's probably all of us -- google pet food or pet stuff. Everything you'll find is Chewy. Really. You'll be hard pressed to find an Amazon link. Chewy's done an amazing job of getting themselves entrenched in the market. If you're one of the many investors who are concerned about some sort of market downturn, the pet industry in general is a great one to be in. People tend to spend more on their pets in recessions. People love their pets. They consider them part of their family. The move toward pet humanization has me really sold on this company in particular.
Moser: Yeah. I think most, if not all of our listeners know I'm a big fan of that industry. I own some shares in Idexx Laboratories and Zoetis. They're more the medical side. You've convinced me that I need to take a closer look at Chewy. Real quick, you are a pet owner. You have at least one cat, right?
Flippen: I have exactly one cat.
Moser: Do you use Chewy?
Flippen: I do use Chewy, I get the litter delivered to me because I am too lazy to go to the store and get it myself.
Moser: Well I'm right there lazy with you. I've got three dogs and I don't remember the last time I went out to buy a big bag of dog food. I like just getting home and seeing it appear as it from nowhere. I've been using Amazon, but you're convincing me I have to at least give Chewy a look.
Flippen: At least price compare. For the most part, in my experience, they either match or are lower than Amazon's prices. Admittedly, you have to get above a certain amount to get free shipping, though. That to me is the biggest headache associated with Chewy.
Moser: That'll change. Emily Flippen, thanks so much for being here!
Flippen: Thanks for having me!
Moser: 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. Today's show was produced by Austin Morgan. For Emily Flippen, I'm Jason Moser. Thanks for listening! And we'll see you next week!
