Should You Take a Stake in the Business of Outdoor Grilling?

Weber (WEBR) is the preeminent decades-old outdoor grilling business that enthusiasts love. Traeger (COOK 3.38%) is the up-and-coming disruptor looking to convert every grill master into a wood pellet grill owner. Which of these newly public companies is setting itself apart from the competition? In this episode of Industry Focus: Consumer Goods, join Motley Fool analysts Asit Sharma and Emily Flippen as they discuss these questions and more in today's episode.

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This video was recorded on Sept. 7, 2021.

Emily Flippen: Hi, Fools. Welcome to Industry Focus. My name is Emily Flippen and I'll be joined by Asit Sharma today as we talk about the business of outdoor grilling. Now, if you're listening, today is hopefully Sept. 7th, but we're actually pre-recording today's episode. In fact, Asit and I did a very bad job of scheduling our out of office dates to be exactly opposite of one another. So we'll actually be pre-recording the episodes that are going out today, the 7th, the 14th, and the 21st. So we can call today's episode the first of what will be a pre-record Palooza, I suppose.

Asit Sharma: Emily, it's fun to be here but I want to lay one ground rule for this episode. Don't grill me on any of these data or facts.

Flippen: It's good for you that this episode is such an easy one to talk about because the business of grilling is so simple. I'm not sure if it needs all the complicated data and facts because when we talk about both of the businesses that we're going to talk about today, the fundamentals I think are pretty obvious. In fact, I would think both these businesses very clearly see each other as competitors. It's Weber and Traeger. Weber's ticker is WEBR and Traeger is COOK, they stole the COOK symbol here. They both have some interesting business models, but they both recently headed to public markets as well. So I figured, why not talk about them both and we can play them off one another.

Sharma: Yeah, it's interesting that they have IPOs very near to each other. Emily, I think we first saw some interest in this on Twitter. I think one of our viewers tweeted out that they wanted to see a head-to-head comparison as if we had the grill set up and we're doing a taste test. We could do a taste test as we go along. I've got a little bit of personal color on one of these two businesses. I'll leave that in as we go.

Flippen: When I saw that tweet which referred to Traeger as the Peloton (PTON 2.62%) of grilling, I got a chuckle from it. I also rolled my eyes because I was like, oh, man, all of these news sites, everything's the something of something, no business can just be its own self. But no, actually, when I went through Traeger's S-1, management specifically refers to themselves as wanting to become the Peloton of grilling, which is to say, they want their grills to have such widespread brand name recognition that they can be the premium product in a pretty fragmented market. So it's not a completely incorrect statement to say that's Traeger's mindset. I think Weber, on the other hand, many Americans especially, but people across the world will be really familiar with that brand already. They've been making outdoor grills for decades now. All different types, a name that, again, they have around 24% global market share in the grilling market having sold over 50 million grills. Very clear business model that I think will resonate with a lot of people.

Sharma: We will jump into Weber first. Interestingly enough, Emily, that 50 million grills sold, which they maintain with replacements, they called out their installed base, almost like a software company. So I think both of these companies are reaching for some credentials from other industries that have made so many businesses popular with investors as the IPO market and SPAC market exploded earlier this year, of course. It's been a more difficult experience as of late. They also mentioned their net promoter score of 62. For those of you who aren't familiar with an NPS score, it's simply a way of judging a company's desirability out there in the greater world of consumers. It takes scores by defenders of a company, I should say advocates and also detractors. A score of 70 and above is considered world-class. So to have a score of 62 is pretty decent. It's not world-class, but it's getting there.

Flippen: I will say there is a difference though between Weber and Traeger even though they both do break down those NPS numbers, and that's actually when it comes to the grills themselves. Weber, as I mentioned earlier, 50 million grills sold, all different types, Traeger much smaller. I think only around 2 million grills sold, which is around 4% of Weber's total sales, and they are solely focused right now on what's wood pellet grilling. A special type of grills that results in a more, I'd say, premium product. It's becoming increasingly popular, especially over the last year during the pandemic when people are looking to upgrade their outdoor eating equipment and Traeger is specifically trying to grow this market. Eventually we'll probably introduce other grilling products and we can talk more about that later, but what I thought was interesting was that in Weber, in their S-1, they specifically took shots at Traeger. While they didn't use the name in particular, they did mention that gas and charcoal grills continued to be preferred by consumers with 51% of their survey respondents saying that they're more likely to purchase gas grill and 26 saying charcoal grills relative to "only 3% for wood pellet grills." I love this because they went out of their way to mention, "Hey, wood pellets are still a very, very small part of the grilling market here."

Sharma: This shows you how savvy Weber's management is because, I think it was 2016, original patents for the wood pellet technology for the Traeger grills expired. Hence now in 2020, we have Weber with its own version of the wood pellet grill. They've got a version. So they're simultaneously slowly rolling theirs out by throwing some shade at a really fierce competitor who only focuses on this one product. Emily, I think you let me down here because for those of you who don't know, Emily is great with really bad puns. For those of you who really enjoy looking at the titles of our podcast each week, Emily usually works in a bad pun. I'm surprised you didn't pick up on the relationship between pellet and Peloton in Traeger's S-1, but we will find a way to work that in.

Flippen: I'm disappointed in myself as well. I do love a good pun here. I want to go back to the installed base that you mentioned because as we're thinking about Peloton, they also like to refer to their Bikes as an installed base because the idea is once you get a Bike into someone's house, then they pay for the subscription that results in recurring revenue. I don't think anyone thinks about grills and thinks to themselves, oh, that's a subscription business, that's recurring revenue. But there's aspects of it that I do think connect. The first one you mentioned is, I guess, the upgrade recycle phase for grills. Around 2 million grills every single year are upgraded. So there is an installed base that's already pretty saturated that is in the process of upgrading. Traeger says that wood pellet grills are upgraded nearly 44% faster than traditional grills. So the idea being that once someone has a grill, that's not their grill for life, they will eventually come back and make future purchases. But both Traeger and Weber are doing something that's like a Wi-Fi-enabled app. Traeger calls theirs WiFIRE and I believe Weber calls theirs their Smart Grilling Hub. But either way, they're apps that you can download on your phone that give you things like recipes, connect to your grill, let you know when your food is done, what the temperature is. That theoretically increases the engagement that people have with their grills. If you have the app on your phone, you're probably going to be grilling more often than somebody who doesn't.

Sharma: They both have these technological advancements. Weber thinks of its Smart Grilling Hub as being a disruptive technology. I think Traeger is a little more low key because Traeger itself is a younger brand and a somewhat more hip brand and I think their management team better understands that most appliances today for a certain set of consumer that has this hipster-ish element are going to want an app with that device. I know I'm very fond of coffee and I was looking for some new coffee equipment and found a three-in-one machine. Not that I want to buy this, Emily, but you can make pour-over coffee in it, you can do a version of a drip coffee and it's all app-enabled. Younger consumers want to utilize apps as they work. Well, both companies are hitting this market, and that's important. I think that when you go back to the idea of having an installed base, it's important to remember for investors that each sees opportunities in people having more than one grill. Now this sounds so strange to me because I've got a small wooden deck. I can't imagine having more than one grill. But Weber makes the point that if you like their product and you buy into their brand then eventually you may want to get their camping version. They've got a smaller portable version that you could take on a picnic. Similarly, I think Traeger also sees some extensions into other markets, although they've been so focused on this wood pellet market, that will take a little more time for them.

Flippen: I will say, when I went through their distribution and I guess growth strategy, I was surprised to see the differences between Weber and Traeger when it comes to direct-to-consumer sales. Weber, in my mind, is this legacy brand that I would imagine a lot of people are aware of, but I associate it with retailers, I suppose. Whereas Traeger, I actually haven't seen it in any stores which we'll get to, but I haven't seen it at any store. I figured, well, they have a really loyal following, a really high net promoter score. Surely they must be doing a lot of business online through their website. But it's actually the other way around. Nearly 20% of revenue for Weber comes from direct to consumer. These are people specifically going out seeking the Weber name compared to only around 7% for Traeger. Traeger does a lot of their sales through businesses like Home Depot (HD 0.86%), Ace, Wayfair (W 5.52%), Williams-Sonoma (WSM 1.73%). It obviously hasn't impacted their brand that much to date, but I was surprised to see, I guess more people going direct in the case of Weber as opposed to Traeger.

Sharma: Surprising statistics because again, Traeger being a younger and I said before maybe more hip brand, you would expect higher DTC sales, direct-to-consumer sales, that are generated by their really wide social footprint. I think they've got something like 1.4 million followers on various social media. How interesting that they've got basically the same distribution model as Weber. I was surprised at something you pointed out, Emily, Weber grills represent 52%, 39%, and 32% of grilling category sales for Ace Hardware, Home Depot, and Lowe's (LOW 1.49%) respectively. That is a massive amount of market share. They do talk about their penetration in the U.S. They seem to think, and I have to agree with them that the grilling market is bigger than it looks because we've got new technologies being introduced. Every time there's a new category, for example, wood pellets that extend the total addressable market. But at the same time, Weber is more of, I think you said it very nicely, a legacy brand. It's got a lot of brand power, but management has to keep spending to keep that brand fresh. I wonder about their eventual ability to grow at a fast rate, to have a compounded annual growth rate that's equal to what they've generated in the past, which we'll come to just a bit.

Flippen: I'm a bit embarrassed to say that I don't know much about the grilling industry and part of it is because I'm just not much of a griller, but I also think part of it is I live in a city and I rent an apartment and the idea of owning a grill has always felt, I guess, more like a burden than an opportunity. Earlier today before we started taping, I was looking through Williams-Sonoma which reported earnings over this prior week and I was surprised to see management calling out what a great market it is for homeowners. They see a lot of demand increasing as homeownership increases and as people leave cities, even in 2021 as a result of the pandemic, that's beneficial for them. I was thinking to myself as I was reading through it. Well, I was little surprised to see that neither Weber nor Traeger called this out specifically, but it's probably the same thing for Weber and Traeger as more people leave cities, as they buy bigger homes, move out to more spacious areas, grills are a lifestyle that naturally expands along with them. It makes me think maybe more positively about the market opportunity. But looking at the numbers that both of these businesses reported in their S-1s, I will say at least in the U.S, the grilling market seems very saturated.

Sharma: Yes. If you think about the housing industry, we've got a problem with supply. There's not enough supply. Even though that long-term trend is there, there are going to be more homeowners in the future. Basically, you've got a housing market itself that is legacy. What I mean by this, I used to own a grill. We are both anomalies, I think Emily, that neither of us own grills. I actually had, as I was saying before, I would give some color here, I had a Weber grill that was a hand-me-down from my parents. Weber grills are very high-quality for anyone who has ever owned them. They're not the kind of grills that rot out with rust after a few years. I must have hung on to that grill for 15 years after college. I did have to replace the integral work. But they're wonderful grills. At this point in my life, though, we don't have a grill. Why? Because a couple of years ago we went pescatarian, so we only eat fish in addition to vegetarian options. It's been a while since I grilled. I wonder too, there are other trends out in society that might also keep this as a saturated, not a very fast-growing market. If more people decide after COVID to flock to cities.

For every person who wants to own a home, there's someone who decides to go back and is an Emily, and doesn't own a grill, or they're like an Asit in that it's just not part of their lifestyle anymore. Although I should say, I had thought a couple of times about getting a grill, just to grill fish because I love that taste and it is pleasant for those of you who like to grill on a back deck or in backyard with friends over. It's a wonderful American tradition. How does that translate globally though? That's something else that we should talk about. I think the biggest sales for Weber are in just a few countries that are known for being very grill crazy. Australia's one, the U.S. is one, I think in Europe also they're very big. That's yet another, maybe a little bit of a short-term lid on this market.

Flippen: Yeah, for Weber, nearly 60% of sales come from North America alone. That is somewhat concerning because estimates, and I'm combining the estimates for both Weber and Traeger here, but they say it's probably somewhere around 55-60% penetration for grills -- 55-60% of all U.S. households already own a grill. Well that might translate to 75 million households, people love grilling. I can't help but think to myself, even those 2 million a year replacement grills can't be that much of an opportunity. Weber actually estimates its U.S. base addressable market right now as around $7 billion globally, around $15 billion. Well, both of these businesses, I think, have around $4 billion in terms of market capitalization right now. It's 4-5, I think in terms of market cap. It just doesn't feel like a super big opportunity, at least not one that you're reachieving every single year. For that reason, the market opportunity alone doesn't get me super excited. But again, I'm a bad person to ask, maybe I don't grill enough.

Sharma: Maybe we should extrapolate something from the fact that you don't grill, Emily, because you should be a target consumer. I'm thinking for Traeger, you're young. You have a pretty active lifestyle. You have a lot of friends. So there's something there, they need to hone their marketing to get to you so that you end up buying one. I will say for these two businesses though, the extensions into each other's territories could be interesting and sales of consumables could help them, which we'll also mention in just a moment here. But as business propositions, you could buy these companies, you could buy the stock in these companies. Again, we're trying to be on a shorter leash with these episodes. I will go ahead and give my opinion midstream. I think you could buy either of these companies if you really love the brand. They're pretty stable. I don't think either of these is going to accelerate to a rocket-type status. Could they grow a little bit in excess of the consumer discretionary market? Companies of their ilk maybe. I see that more with Traeger being the younger brand with the newer technology. But there is nothing here, ownership structures, too, which I promise we're going to hit all these things that I'm signaling we'll get to, might give someone pause. There's nothing here that's going to make these companies the drivers of a consumer good investor's portfolio over the next five to 10 years. But unlike some other companies, I do love the brand element here. I'm not dismissing them as quickly as I have some other companies that we've looked at over the past couple of years that have had similar economic characteristics, similar pulls in the marketplace. I do like the brand strength for both.

Flippen: Speaking of economic characteristics, the financial picture for both these businesses is interesting. To this point, I've really only talked about grills and that does make up the majority of both of these businesses' revenue. But in the case of Weber and Traeger, 26% and 22% of revenue respectfully actually comes from consumables and accessories. Weber sells things like cooking supplies, cookware, fuel. Traeger, they sell a lot of wood pellets for their grills. All of these grills need wood pellets to operate, obviously to cook food and Traeger has these branded wood pellets that they try to sell to people who buy Traeger grills and it means that there is some source of recurring revenue for both of these businesses. I think it's probably stronger in the case of Traeger, even though I know it's less in percentage of total revenue is because 96% of Traeger owners also purchased Traeger wood pellets and the retailers where Traeger does operate based on what I could find, they make it a priority to ensure that any place that is selling a Traeger wood pellet grill is also selling those same customers, the wood pellets. It's an interesting thing to think about as a source of recurring revenue for an otherwise stagnant market.

Sharma: True. Weber seeks to do something similar through Ace Hardware. They have a really great extension of their accessories on those shelves. Not as much though in major DIY houses like Home Depot and Lowe's, where there's much more competition for the consumables, third-party brands that are on the shelves so you don't have to buy a Weber replacement for your grill covering. I think for both these businesses, it's a margin builder. Most of the margin though comes from the sale of the grills. This is interesting, Emily. They have two different approaches. Weber itself is a manufacturer. They manufacture within the United States. They've decided to take control of that process pretty much since day one. They have a gross margin of about 40% which sounds right to me, as a manufacturer. Their net income margin hovers at slightly profitable. It's mid single-digit, 4% for the 2020 year, 7.7% for the last trailing six months.

When you look at Traeger, it's got a different business model. They basically outsource their manufacturing so they can get a higher profit per unit. But I think their cost of sales is a little higher because they are in aggressive-promotion mode, whereas Weber is in brand-maintenance mode. At the end of the day, Traeger's economics don't look a lot different. If you just look at the bottom line, both are slightly profitable in any given period. We see that Traeger, as you pointed out in our outline, is just coming into profitability. It's a younger brand, it's only recently profitable, but it looks like it's got that characteristic. It just brings up a question that I just wanted to ask your opinion on, Emily, these never-ending questions, should we produce or should we outsource? There does seem to be any clear winner across industries. They could help to be a manufacturer in some cases but you have this exact same business that's using the outsource model. The bottom line is very similar.

Flippen: This actually blew my mind, maybe just a little bit is that nuance with their process. Their production process was lost. You mentioned it to me, before we started taping this episode. I didn't dig into it because their margin profiles were so similar, I thought Traeger is obviously scaling up to what Weber has been producing for decades now. I was surprised to find that Weber was the one out of the two that did not own the manufacturing. Largely because Traeger makes a point about calling out the quality of its product. The argument is that you'll pay up for the experience of owning a Traeger because the product itself is worth the premium. We're talking about a premium in the order of five, six even in some cases $1,000 difference between Traeger and the next best product. The reason why that makes me scratch my head somewhat is because I'll say doing due diligence, aka wasting a lot of time watching review videos for grills, I know way too much about these grills now. But there is a lot of angst from buyers about the quality of Traeger products. I wonder if they maybe had some issues with manufacturing in the past. I didn't see anything in their S-1 but based on the number of people that were experiencing problems and there's always going to be some problems, grills are grills. I don't know, it was just something that took me a little bit by surprise.

Sharma: I think whenever you're trying to sell yourself as a lifestyle choice, that's something that you want to control the consistency and quality of the product. This is very much in the model of Yeti, Traeger position itself has that lifestyle brand for the younger consumer, the consumer that wants something that's a little bit higher-quality experience in management's eyes versus an electric or a gas or a charcoal grill. Now, this isn't to say that they won't explore those avenues in the future. But this is a good time to talk about what the future may look like in terms of product lines. I find it interesting that Weber, as this legacy brand as you call it, has a ton of patents on its grills. I think they've got 50-plus patents that cover the whole evolution of their grills. Traeger, I mentioned their original patent expired, really has not invested in its intellectual property, it's IP. They have no patents, they rely on trade secrets. This has something to do with the way the two companies evolved, Weber being a company that's developed over decades. Traeger has a more interesting ownership story, Emily, could you tell us a little bit about how they are structured and who's running the show there? Maybe this will answer my question on how come they don't have any patents. Maybe there's an answer here in what you're about to walk us through.

Flippen: It is a weird story with the founding of Traeger because Traeger Industries, which was the company prior to the Traeger that we know today, was founded back in the 1980s by a father and son duo, Joe, Brian, and Mark Traeger, but they sold off the business in 2006 to a venture capital firm but there are some legal battles, I think in 2014, they did sell it to the current owner. The CEO, Jeremy Andrus and their PE firm came and purchased the business in 2014. But I think along that way, there was some confusion about both the Traeger name and again, the process of manufacturing for the Traeger products that there were lawsuits between them. To this point, I think the lawsuits have been settled, but the ownership now is much more Traeger as a brand's name and their wood fire pellet grills as opposed to any patents that are passed along in the process.

Sharma: They seem like they're being run in a very sophisticated fashion by people who have experience with scaling companies. Not necessarily a passion project which is pouring money into R&D for the future. Not to say that they don't invest in research and development, they do, but it's not the same magnitude that we see on Weber's side historically. I guess, a quick takeaway is that you can go a long way on a brand and brand extensions, but at some point, you do have to invest in technology and then draw a circle around that technology, patent it, and keep extending. I'm wondering if this might be a little bit of an Achilles' heel going forward for Traeger.

Flippen: When I think about the risks of these businesses, it was funny to me. I was expecting there to be dramatic differences. But even though we're talking about a relatively new business, again, Traeger was founded, it's been a long founded company, but only recently became public. When you compare Weber and Traeger to each other, the same issues persisted in both that I found, which was these are businesses that hold a sizable amount of debt, they have a lot of concentration risk in the retailers that they sell to. They're both controlled businesses with PE firms and partners. The structure is not friendly for investors in either of these businesses, which is definitely something to know. They both compete in a really saturated, yet somewhat fragmented market that faces high levels of competition. I came across feeling like I have a hard time figuring out which is better than the other. I think I lean toward Weber just because they have a bigger product line. Traeger is so focused on one aspect, it's a $3 billion business. Wood pellet grills stop becoming popular, Traeger is in a much tougher spot than Weber is. But I don't find myself running out to buy shares of either of these businesses.

Sharma: Emily, I think you've identified more of the types of lids on long-term growth that I was referring to. These are fine businesses in the sense that the demand for grills is going to be around. They've already got very nice distribution and really the biggest names in their business. Ace Hardware, they're a national franchised company. They are basically a conglomeration of smaller businesses owned by different people but they've got a great footprint in the South and Middle America, a wonderful place to have your grills. Of course, Home Depot, Lowe's, those are the other places to go to if you want to market your grill on the sidewalk, which is essentially what Traeger is doing and so is Weber. I will say that Weber tends more to be inside the structures than Traeger, as of my own personal experience milling around these places. The bottom line though is you are not alone as public shareholders, you're in with founders. In the case of Weber, some original family owners still own a chunk. Then you've got, as you mentioned, VCs and private equity firms on the Traeger side. This is pointing to capital allocation that may not be in the best of shareholders' interest in the years to come. Again, stable markets, great products, decent unit economics, decent bottom lines. My point today is not to warn anyone off from buying these. If you love grills and you are a Weber person, why not? You get a few shares. You've given your money to the company. Anyway, those grills aren't cheap and neither are the accessories, same with Traeger, but I think we're at the same place here at the end of the day. These aren't companies that we're super excited to go out and purchase.

Flippen: Well, I hope Mac Greer is listening because Mac, our coworker, is a big fan of Weber grills and now he knows Asit approved, you can buy yourself some shares of Weber and probably be totally fine with that, Asit.

Sharma: Don't bet your stake though on the company. Put that on the grill, Mac.

Flippen: That's a great title. I think something with stake is probably going to be up there for today's titles.

Sharma: Emily, you have a lot of super titles that make me grow to live up to, so get to work.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, or just want to reach out to say, "Hey," you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I'm Emily Flippen, thanks for listening and Fool on.