In this episode of Motley Fool Money, Chris Hill and Motley Fool analysts Jason Moser and Ron Gross go through the latest headlines from Wall Street. They discuss the wave of store closures and bankruptcies taking place in the retail space; also, Warren Buffett makes his biggest acquisition in years. They also share some stocks to put on your watch list and much more.
Finally, Chris chats with David Henkes, senior principal at Technomic, to get some insight into the state of the restaurant industry during the pandemic and into the future.
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 July 10, 2020.
Chris Hill: In 2018, there were 5,700 store closings in America. This week, we got even more evidence that 2020 will be much worse. Bed Bath & Beyond (BBBY +0.00%) announced they'll be closing more than 20% of their namesake stores in the next two years. Ascena Retail, the parent company of Ann Taylor and other fashion brands, is likely to close 1,200 locations as it prepares to file for bankruptcy. This will only add to the already 8,700 store closings announced so far this year.
And, Ron Gross, I'll start with you. We keep seeing e-commerce sales rise, but in some cases, it's just not enough to offset the loss of those in-store purchases.
Ron Gross: No, if you're not filing bankruptcy, like JCPenney or Lucky, as we said, Brooks Brothers, J. Crew, Neiman Marcus, you're closing stores, and you're trying to stave off bankruptcy. And so your Macy's and your Nordstroms and your Children's Place and your Tuesday Morning, just a tremendous amount of closings in this industry.
I think we had too much retail in the first place, and sometimes it takes a shock to the system to recognize that there has been an excess. Sorry to say, obviously, because there are folks employed at all these places and a lot of investment dollars went into building up these establishments, but I just think, you know, certainly we're a consumer economy, but it got overextended -- I would say the same thing with restaurants -- it got overextended just a bit. Too much excess, shock to the system comes, it kind of thins things out a bit, and hopefully, the survivors can then resume growth and get back to maybe then expanding down the road if demand warrants it. Sometimes we build ahead of demand, and that can be a mistake.
Hill: Jason, what do you think?
Jason Moser: Yeah, on the one hand, I'm really actually curious to see the innovation that comes from all of this. I mean, we have seen, really, an amazing amount of closures in what seems like a very short period of time. And you feel like, even in retail, I mean, there's got to be some innovation or some new way of doing things that comes from this. Certainly seeing a lot of retailers, a lot of fashion retailers bringing more immersive technology into their worlds, bringing augmented reality into their apps, digital dressing rooms where you can [laughs] try clothes on virtually as opposed to having to go to the stores. So I mean, it'll be interesting to see how fashion retail shapes out that way.
But, you know, as bad as things are on the closure side there, and they're not good... Matt Frankel and I talk a lot about Simon Property Group on the Monday Industry Focus shows, and that's a really interesting story right there, because this is a real estate investment trust and they're the biggest mall operator in the country. And so, they basically -- all of their malls back open, and even in the face of these stores closing, you look at their longer-term strategy with these properties, it's actually to bring more uses into the properties, whether it's entertainment venues or office space or even apartments.
So you see, certainly, on one side, the real estate market is a bit tricky, the retail market is a bit tricky, but you look on the other side, and you see the companies that are innovating, thinking about it a little bit differently. Something like a Simon Property Group, for example, they could actually come out of this being even more productive with real estate that right now looks like it might not be all that attractive.
Gross: You know, before the pandemic, you know, for the last couple of years, companies have been moving to what we call this multichannel distribution strategy, which basically is in-store, online, what have you. And what I think the pandemic has done, it has served to accelerate that move significantly, because if you don't innovate in those regards, you die. So things like the buy online, pick up in the store, curbside pickup, all of these things have become so increasingly important that those folks that have been able to move to that more quickly than others are seeing this big bump in their online sales revenue and the revenue in general. Certainly, kind of, mitigating what could have been this incredible disaster.
Those folks who couldn't move, whether they don't have the investment or they're not innovative, are really just feeling the pinch in a double-whammy kind of way, having store closures as well as not being innovative.
Hill: Well, and, Ron, you look at a business like Bed Bath & Beyond, we were talking before the show started about CEO transitions, and I think you and I were both pretty excited, at the end of 2019, when Mark Tritton, who had a lot of success as an executive at Target, took over Bed Bath & Beyond. Cleaned house in the executive ranks. You know, part of their report this week -- and it was a brutal report -- but part of it was, the store closings -- I mean, he's trying to pull every lever he can, but in the midst of a pandemic, it makes the odds of success even tougher.
Gross: Yeah. I'm a big fan of Mark Tritton, and I will acknowledge that not every chief merchandise manager can make the transition to CEO, it's a different job, but I continue to have faith in what he can do. I think the pandemic has certainly -- [laughs] to say "muddied the waters" would be an understatement, to put this turnaround a bit into the longer tail, longer time horizon than we would have hoped. But as you say, he's doing the right things. He cleared out the executive suite, brought on new folks, he's closing 200 of the 950 Bed Bath stores, which was absolutely essential. The footprint was way too big, we've said it for a long time. He needs to remerchandise those stores; that's what he does best, so I can't wait to see what he does there.
This quarter, despite the fact that sales were down 49%, because the stores were closed, nothing much you can do about that, we did see sales from the digital platform increased by 82%. Actually, 100% sales growth in April and May. Online sales accounted for two-thirds of total sales. Again, not surprising [laughs] because the stores were closed. But what we talked about, those innovations, the buying online and picking up in stores and the curbside pickup services, really serving to help this business, and Tritton is doing what he did for Target now at Bed Bath. So let's wait and see, let's let the economy firm up a bit, retail firm up a little bit, and then let Tritton do his thing.
Hill: Jason, kind of a similar story with Levi's this week, in the sense that, you know, online sales look great, but that couldn't make up for the fact that the bulk of their stores were closed for more than a couple of months.
Moser: Yeah. I mean, it's a really difficult time to be a fashion retailer today. I mean, it's really difficult to be a fashion retailer in good times. And this has, obviously, been a tough stretch for everyone, Levi no exception. It's not had the greatest life [laughs] as a publicly traded company. I think the stock has been cut in half essentially. You know, it's one that tugs at my heartstrings a little bit, Chris. I mean, I still wear Levi's jeans and I don't what is -- am I just an old guy? Does Levi still have that, sort of, brand [laughs] cachet? I don't know. But clearly the business is suffering, revenue was down 62%, that translated to big losses on the earning side.
Now, you did mention direct-to-consumer and online. They do have a few different levers in their wholesale and direct-to-consumer e-commerce business. Direct-to-consumer is now more than 40% of their total business; that's up from under 30% just five years ago. And e-commerce has seen that same type of growth more than doubling over the last five years.
Management is doing what they can. They've certainly got the company in a good liquidity position, they're back to about 90% of the stores open. Last quarter, they were keeping the dividend; this quarter they went ahead and acknowledged that they're not going to pay a dividend for the third quarter. They'll reassess in the fourth.
And, you know, honestly, I was impressed to see the inventory number not out of control, given the drop in revenue, inventory only grew 10%. And that's something you really want to keep an eye on, because when those inventory levels get really bloated, that's when margins really start suffering.
So a really tough time, no doubt. I feel like maybe there's some light at the end of the tunnel with Levi, because of that brand, but they've got some work to do, no doubt.
Hill: So before we wrap up, Ron. When you look at Levi's down around 15% in just a few days, you look at Bed Bath & Beyond down more than 20% in the past week, there are people who look at that and think, OK, these are brands that I think are going to survive, I can buy it on the cheap. Do you jump in at this point, or do you think, you know what, there are still too many X factors, give it another quarter?
Gross: As a somewhat traditional value investor, those thoughts are, kind of, near-and-dear to my heart, buying a stock that looks cheap -- and maybe I have a disparate view than the market as a whole, and so it is tempting. And for selected opportunities, I think it's fine. I bought Bed Bath & Beyond in February before the pandemic hit on the fact that I thought Tritton could turn this around. I don't think it should be the majority of your portfolio, opportunities like that. I think most of one's portfolio should be really strong companies that you believe in, that continue to put up great numbers and great earnings and earnings growth. But I think there can be a portion, 5% of your portfolio, that you put toward value plays or turnaround plays, with the caveat that most things don't turn, but the ones that do, hopefully will generate a return in excess of the ones that didn't work out.
Hill: Berkshire Hathaway finally made an acquisition this week. Berkshire is buying the natural gas asset from Dominion Energy for $4 billion. Ron, you throw in the debt, the enterprise value is around $10 billion, biggest deal for Berkshire Hathaway since 2016; although it kind of doesn't feel that big.
Gross: You know, I'm a big Berkshire fan, a big Buffett fan, it's actually my largest holding, and I've been waiting for him to use that elephant gun that he likes to talk about. This doesn't feel like that. Now, $10 billion is still $10 billion, but he's got $137 billion to put to work. And I'm all for being conservative and I trust him, but as a shareholder, I do want to see more.
Having said that, I think this is a good acquisition. It will double Berkshire's market share in the natural gas movement to around 18% in the U.S. I think he probably got a pretty good deal, natural gas prices are historically low, partially as a result of the pandemic. They have bounced off their July lows, but when this deal was being negotiated, I would imagine that he got this on the cheap, since things aren't looking that strong, but they likely will rebound.
You know, biggest Berkshire acquisition in four years. So as we said, $10 billion. All right, let's get moving though, buyback some stock, perhaps, if you can't find anything else out there that you like, but sitting with that much cash is just a drag. And you see that in the fact that Berkshire stock is down 20% this year.
Hill: SiriusXM (LSXMB +0.00%) is nearing a deal to buy Stitcher, the podcast division currently owned by E.W. Scripps. SiriusXM will pay $300 million for Stitcher, which includes the Midroll ad network. And, Jason, this instantly gives SiriusXM business relationships with some of the biggest podcasts out there, Conan O'Brien Needs a Friend, WTF with Marc Maron, Freakonomics Radio.
Moser: Yeah. I mean, SiriusXM needs a friend. I mean, WTF with this acquisition, Chris? No, I mean, seriously, this is the same company that bought Pandora, and I don't mean that as a compliment. I've said all along, Sirius is playing defense. As streaming takes over, they've been slow to the draw in a lot of ways there. Spotify and Apple Music are just really two formidable services with a lot of [laughs] users.
Sirius, on its own, is less than compelling. They are trying to pivot and become more, right, podcasts are certainly part of the strategy there. But again, you kind of get back to the distribution thing, and they're not quite there. You know, look at the mobile presence that SiriusXM has, for example, it's just not good. And I used to have SiriusXM, I mean, that's one of the reasons why I canceled is because we just don't really use it anymore.
I think the real story here is [laughs] Scripps. I mean they're selling this thing for $300 million, they bought it for, like, $5 million or something. But, you know, overall Stitcher generated $72.5 million in revenue last year, it's not a company that doesn't make any money. But Sirius is a subscription business, so this isn't about advertising, it's about buying more users and trying to figure out some compelling subscriptions to come from all of it. So I don't think the answer is going to be so clear in the near term. I think it's going to take a little time for them to figure out the strategy, but again, I mean, they're playing defense, you expect to see them try to do this to keep up.
Hill: I'll just say, as a potential silver lining, people have asked me for years, "Hey, is Motley Fool Money on SiriusXM?" And we're on Stitcher, have been since the beginning, so maybe now I can finally start telling people, yes, we are.
More companies are innovating to help customers deal with the [laughs] global pandemic, and Kraft Heinz (KHC +2.25%) is one such company. Kraft Heinz has developed a series of kits to enable customers to make their own ice cream in the flavors of Kraft Heinz condiments. That's right, guys: Ketchup, barbecue sauce, mayonnaise, creamy salad dressing, now you can have these flavors in an ice cream kit. Ron Gross, are you in?
Gross: As Mr. Wonderful would say, "Stop the madness," and I will add immediately, this is disgusting. Now, as I've said on the show before, I'm not a condiment guy. Of all those things, the barbecue sauce is the only one that would interest me somewhat, but not in an ice cream, ever, and not for $17. I see it's only in the U.K. right now, I think, so around £15 for the kit, you know, that's about £14 pounds too much.
Hill: You know what, I'm going to just give a shout-out to anyone in the U.K. who's listening right now. If you try one of these, drop an email to [email protected], let us know how it goes. We're interested.
Jason, I feel like, gun to my head, I would try the barbecue sauce ice cream.
Moser: Well, that's the operative [laughs] phrase right there, "gun to your head." I'm with you, I'm with Ron, I don't see any reason in the world I would want to try this. I guess if I did, I would go barbecue. I mean, it's funny when you actually log on to the website here, a little bot comes up and says, "Hi, quick question before you go. If you didn't purchase today, what stopped you?" How about "These things look disgusting. That's what stopped me." I mean, do I even need to say it.?
Hill: Let's get to the stocks on our radar. Our man, Dan Boyd, who I know is also no fan of this new endeavor from Kraft Heinz. Jason Moser, you're up first, what are you looking at this week?
Moser: Yeah. Taking a look at Zoom Video Communications (ZM 1.98%), what we're broadcasting on right now, actually, ticker ZM. This is, obviously, a wonderful story. It has been a wonderful performer for Foolish investors ever since we've recommended it. It's the second-top performer in our Augmented Reality service. And I think it really has a long way to go still.
The news out this week -- you know, we've got SaaS, there's even BaaS, banking-as-a-service -- Zoom this week announced their efforts to get into the, wait for it, HaaS, market: hardware-as-a-service. And I'm not kidding either, they're actually coupling up with third-party providers to offer Zoom-integrated hardware that support their Zoom Rooms and Zoom Phone offerings. And I think, this actually is a pretty smart idea, because they're not really on the hook for the hardware, they're just partnering up. And I think it makes it a little bit easier for either businesses on the fence or businesses looking to expand their Zoom services to really, you know, get something that they know, like Zoom says, just works. It's a very customer-centric company. You have to keep your eye on those, they can be wonderful investments over time.
Hill: Dan Boyd, question about Zoom Video?
Dan Boyd: Jason, in the HBO show Silicon Valley, the idea of creating a hardware solution for a tech company was considered a joke. Is this going to be a joke for Zoom?
Moser: You know, I think perhaps five years ago, we might have thought it would be, but given where we are today and remote work, I think this actually stands a chance of doing pretty well.
Hill: Ron Gross, what are you looking at?
Gross: I'm going back to Rollins, Dan. ROL. Pest and termite control company, best known for its Orkin and Western brands. Steady performer. Increased revenue and earnings quarter over quarter for a decade plus, until COVID put a little bit of a halt to that. Serial acquirer, grows through acquisitions, 80% of sales are recurring. Commercial division took a hit because of the economy shutting down, but I think that will rebound. January made its 18th consecutive dividend increase of 12% or more, and they've taken a step back and cut the dividend for now.
Hill: Dan, question about Rollins?
Boyd: Not really a question, Chris, but more of a comment. When I find insects in my home, I just try to gently remove them and place them outside. I think that's the ethical thing to do.
Gross: Would you consider yourself a humanitarian?
Boyd: I'd consider myself an insect-arian, I guess.
Gross: Nice.
[...]
Hill: Earlier this week, I talked with David Henkes about the challenges facing restaurants and how the current pandemic might permanently change the ways in which we go out to eat. But I began by asking for his thoughts on the current state of things.
[...]
David Henkes: As a natural optimist, as I started to see restaurants reopen in May, into June, and it seemed that there was a lot of consumer pent-up demand, and numbers were coming back. And, listen, I mean, none of the sales numbers were great, with the exception of a couple, you know, delivery-focused concepts, you know, Wingstop, Papa John's, Domino's, those types of players. But I was starting to feel more optimistic, but I think as we've forecasted the industry -- and again, Technomic has been forecasting restaurants and broader food service industry since the early 70s -- we realized this is not a normal year. And so, we've been looking at scenarios.
And so, one of our scenarios for the industry was always that there would be a resurgence in some potential reclosers or new shutdowns; localized for sure. And so, what we, I think, are seeing play out here is more -- I don't want to say a worst-case scenario, but it's certainly one of the scenarios where we're not trending toward a best-case scenario for sure. And so, I think we're almost back to where we were maybe when we chatted in March or when I would have talked to you in April, that takeout, delivery remains critical for restaurants. That's going to now, in a lot of states and a lot of places, to continue to support the business for probably the next several weeks at least. And the dine-in experience, which, you know in most states had been limited to 25% or maybe 50% capacity, is probably on hold in a lot of places for the next month or so. And so restaurants are facing a continued uphill climb where all the fixed costs and all the labor and everything, as was a concern back when the first shutdown happened, are just exacerbated. And there's been some government support in the PPP, and some of the other things that we've seen.
But we're entering now a very dangerous phase, where a lot of restaurants that made it through the first three months are realizing that it's not working out. And so we think there's still a lot of heartache to come, a lot more challenges. And where we had hoped that things would be starting to brighten up is maybe not as bright as we thought it would be a month or two ago when we were looking at the industry.
Kind of a long-winded answer for you, but, you know, it's hard to get a national read on the industry, because there's so many -- I mean, you almost have to look at now -- and this is what we talked to a lot of our clients, but you have to look at it very regionally and almost on a state-by-state basis, because every state has different metrics and different opening rules, and some of them are closing. And then to your point, even in cities, within states, things are closing. And so it's hard to get a national read, but there's no question the industry is still going to be down probably 20% to 30% at least for the year when all of this is said and done.
Hill: Wow! Because the last time we talked, the range that you had given at that time was, sort of, best-case scenario, industry down about 11% in 2020. It sounds like we're obviously -- and you had said at the time, 27% decline is worst case, and it sounds like we're absolutely trending toward that worst-case scenario.
Henkes: Yeah. And, again, we're still, kind of, looking at scenarios, right? And it also depends on what type of restaurant you're talking about. Because quick-service restaurants, and if you look at, certainly, the publicly traded restaurant chains, which I know you track. I mean, some of them have been posting decent numbers, some of them are actually really great, some of them OK. And even some of the larger full-service chains have been able to pivot pretty strongly to delivery, third-party delivery or their own delivery, to curbside takeout or takeout more generally. And so there's certainly pockets of restaurants that are doing better than we anticipated, but the big challenge, and especially in sit-down restaurants, full-service restaurants, is so much of that business are small business owners, small business is one to six location operators.
You know, the big chains are generally speaking going to be fine, and so what's going to end up happening more broadly is, the business is going to be much more chain focused than it was last year or two years ago. And chains are going to have a bigger share. And it's really those independents where the continued challenges occur. And so sometimes the better news is masked by some of the publicly traded chain reports that, you know, give us some hope on what's going on. But those Main Street mom-and-pop operators are the ones that are going to continue to get hammered by this.
Hill: But even within some of the publicly traded restaurants -- and I'll just use Darden as an example, I mean, you look at their most recent result, they own Capital Grille, a high-end steakhouse, those results were so much worse than the results of Olive Garden and the other brands under the Darden umbrella. Whether it's chains like Capital Grille or mom-and-pop, is it safe to assume that higher-end restaurants that depend more on the in-restaurant sit-down experience, those are the ones to be the most worried about?
Henkes: 100%. There's no question. If you were, in 2019, a high-end, fine-dining or even polished-casual restaurant generating $60, $70 check averages, you didn't put a lot of thought into an off-premise strategy, you didn't really think about delivery, you didn't think about a takeout strategy. Maybe you did it as sort of an ancillary business just to drive some incremental revenue, but it wasn't a core part of your strategy. And what's happened since March is that those that hadn't had that beforehand have been severely disadvantaged. And it's very hard to replicate that in-store, in-restaurant experience for a higher-end restaurant in a takeout or delivery platform. And so there's no question that some of the casual-dining places, wing locations, obviously the pizza guys on the quick-service side, you know, those are all easy menu categories, if you will, that had already had some pretty strong off-premise business.
But you're absolutely right, the higher-end restaurants are most vulnerable. And you see them trying to pivot to this now. So I mean they're doing meal kits and boxes and selling things. You know, Alinea here in Chicago had a strong focus on off-premise over the last couple of years, I mean, nobody would have thought a year ago that Alinea, one of the Michelin-starred restaurants in Chicago, would have to do all of their business off premise. But they've shifted, and they're doing boxes and things that I think are $40 to $50 per person, which is still higher end and you get some great food with it, but it's still hard to replicate that experience. And so those are the ones, and especially the fine-dining, white-tablecloth independents, the true independents, those are the ones that probably -- you know, we're going to see some significant unit closures, business failures.
And again, within Darden or Brinker or any of the other ones, I mean you see within their more traditional casual dining, the parts of the business that perhaps had been struggling in years past, those are the ones that they had invested in some off-premise takeout or delivery capabilities previously, and they've been able to -- again, you know, not set the world on fire, but certainly at least maintain some levels of business that allow them to keep the lights on.
Hill: We've touched a little bit on delivery, in terms of delivery news, most recently Uber buying Postmates for $2.6 billion. What did you think of the deal for Uber, and does that tell us anything about the future of delivery?
Henkes: There's a couple things. One is, it's still very hard in today's environment for these third-party delivery companies to make money. Especially with Uber now. And when you think about Uber's, I don't know if you want to call their core business, but obviously the transportation side of Uber is getting killed right now. And so this move into Postmates and what it allows them to do -- and, I think, I was just reading something yesterday that they're now talking about this, it starts to get them not only new restaurant delivery, but Postmates is so much more than that. And they do last-mile delivery for a lot of different things, for retail, grocery delivery, pharmaceutical stuff. And so what this allows Uber and now with Postmates to do is to not only get into restaurant delivery, and hopefully get some synergies and lower cost and hopefully get to some higher level of profitability, but it now allows them, or at least gives them a greater platform to do delivery in a whole lot of other areas.
And I think that's part of the future of delivery, is that these restaurant-only platforms that are having trouble making it may need to look into other industries. And I think we're still going to continue to see continued transformation with the commission fees. And we see Grubhub -- especially, Grubhub has been, at least, charged with a lot of unfair business practices, rightly or wrongly. You know, players like DoorDash seem to have a little bit more flexibility. And I think what we're going to start to see is, a little bit more of a, sort of, à la carte system where they're going to need to offer a lot of different services at different price levels or different commission levels for restaurant operators, because certainly the government crackdown on fees and commissions, the ability to make money. I mean, it's all coming into this perfect storm where the bigger you are, at least, the more synergy, more [...] you can get, but it's still going to be really hard to make money in this environment, and I think we're going to see expansion into other areas, like I said.
Hill: Let's go into the future, 12, 18 months. Let's assume that America is past the pandemic, there's a vaccine, things are starting to get "back to normal." And part of getting back to normal is entrepreneurs looking at the restaurant business and investing in it. What do you think we're going to see in terms of permanent changes out of this? Is it smaller footprint for actual restaurants, is it more second kitchens within restaurants, more ghost kitchens outside of restaurants?
Henkes: Yeah, I think, one of the trends we had already been seeing is this move toward a smaller footprint. I mean if you look at, for example, a typical Cheesecake Factory. I mean, that type of location now is going to be very hard to support on a going-forward basis; these huge menus, huge square-footage locations. And so, already, I think, the movement was toward smaller footprints. And I think that's only going to accelerate.
And to your point, I think, as delivery and off-premise, more generally, continue to take share -- and it will continue to take share, even as people begin the dine in -- they've now realized they can get pretty high-quality restaurant meals at home. And so, delivery, we believe, which had already been growing double-digit even before the pandemic, is going to continue to eat into that on-premise share of consumption. And so, what that means then is that when you're building a restaurant or you're building your operation, you need to have a solution for that.
And so, ghost kitchens -- which, you know, really, we only started talking about ghost kitchens probably two years ago. I mean, this whole idea of a delivery-only kitchen. And there's a number of different ways it can work. If you're a restaurant, you can run your own virtual brand out of your own kitchen. There's third-party kitchens, like Kitchens United, that run them. DoorDash has tested delivery-only kitchens with some of the brands they work with. And so there's a lot of different ways that these can function or work within the industry, but there's no question that you're going to see a huge surge in some kind of delivery-only virtual kitchen.
You know, I was just reading this morning that Chuck E. Cheese had, for the last several months, been selling their pizza under the name Pasqually's Pizza on delivery apps. And I've heard some other chains that are doing something similar where they've developed their own virtual brand. There's no storefront for it, but if you're online you can buy, in this case a Chuck E. Cheese pizza under a different name. Is that a virtual kitchen, is that a delivery-only kitchen? It's certainly a virtual brand. But I think what it means is that the actual storefront, the actual location of a restaurant is less important than the location on the app or how much you've been able to drive interest in your brand either online or on a delivery app. And so it really changes the whole operation in terms of what the restaurant looks like and how it operates.
Hill: I applaud them for innovation, but I don't think changing the name is going to get me interested in Chuck E. Cheese pizza; that's just me.
Henkes: But if you don't know it, and you just eat pizza on a Saturday night, and you say, "Oh! Let me try this Pasqually's Pizza." And I think that's the thing. I mean, I think a lot of brands, in trying to expand their reach -- you know, if you're a casual-dining bar-and-grill and you want to get into the wing business, maybe you start -- or you want to focus on your wings -- maybe you start a virtual wing concept online and market it under a completely different brand. And so, it really opens up the opportunities for restaurants. Certainly, as researchers, then [...] challenges us to start thinking about, well, how do you actually define a brand? I mean, if Chuck E. Cheese is selling under Pasqually's, and Pasqually's suddenly is 10% of Chuck E. Cheese's sales, is that counted as a separate brand in our tracking of brands? Is it accounted for under Chuck E. Cheese revenue? And so, there's just some interesting things that we as industry trend watchers have to, sort of, identify and figure out how to track it.
But this whole move toward off-premise has some significant implications, and I think a lot of them aren't even going to be known, but there's no question that the investor money and just the interest level in operators opening or working with delivery-only virtual kitchens, whatever you want to call it, ghost kitchens, is going to remain extremely high for the next three to five years, and probably a significant investment opportunity for those that have the capital to do so.
Hill: One more thing, and then I'll let you go. Last time we talked, you said that one of the most impactful things that customers can do for their local restaurants is to buy alcohol when they're doing takeout orders. Is that still the case?
Henkes: It is. You know, beverage alcohol is such a high-margin item for restaurants in normal times. Now, what has happened, obviously, is, with the whole dine-in experience gone, that margin has disappeared with it. And so, what we've seen is a relaxation of local regulations allowing most restaurants and bars to sell off-premise, beer, wine, cocktails. It looks like a lot of cities are going to continue those, perhaps in some cases indefinitely.
And the challenge, though, is that, the experience, the price that you can charge for these is not the same as you're going to get in the restaurants. And so while the margin is still good, it's not as great as it would have otherwise been if you're in the location. I mean, a lot of places, now that sell beer have shifted to packaged beer, to cans, sometimes they're selling six-packs. And so, you can't sell that for the same price that you're selling a draft beer when you're sitting in the restaurants. And so, the margin structure changes somewhat on that.
And similarly, with cocktails or cocktail kits, I mean, it's an incremental revenue, for sure, but it's not the margin that it used to be. And so, certainly, we do a lot of work with the beverage/alcohol suppliers. And listen, when you look at the parts of the restaurant and food service business that are most significantly impacted, it's all the segments that serve alcohol, right; casual dining, fine dining, hotels, recreational venues. And so the beverage alcohol business, more broadly, is going to face some additional significant challenges that quick-service restaurants or others aren't going to, just because alcohol is sold in those segments that are most significantly impacted by the downturn. And so, to the extent you can buy a cocktail or glass of wine, a bottle of wine, a beer from an operator, [...] incrementally. And I would continue to recommend doing so, but it's certainly not as profitable as it is when you're sitting in the restaurant and you're paying $8 for a craft beer.
Hill: Well, I am going to do it anyway, just because you recommended it. [laughs] David Henkes, thanks for being here.
Henkes: Thanks, Chris, I appreciate it.
Hill: That's going to do it for this week's show. I'm Chris Hill. Thanks for listening, and we'll see you next week.
