Yahoo Finance

Ricky Mulvey: So we had a discussion on the show about a month ago. I was talking to Anthony Schiavone, specifically about apartments and multifamily REATS in the Sunbelt area where investors got a trend right, but the stock ended up being a loser, which was a lot of people are going to move to the Sunbelt area when you can work from home, things are a little bit sunnier there. What's ended up happening is there's been a little bit of a period of overbuilding. Remote work, the demand for remote work has evened out, I would say, and now you have a stock like Mid-America Apartments, which has gone down, not a total loser, but people who invested money at the peak have lost money. This is not a unique phenomenon, though. There are times where investors will get a trend absolutely right and completely dead on. But as my colleague Jim Gillies would say, the price you pay matters at a high level, when do investors get a trend absolutely right, but they see their stocks end up being total losers, even though they were right on one account.

Patrick Badolato: I want to add one thing to the price you pay matters, which is, I think the company, like the horse you're riding really matters, too, that the trend can exist, but if you're betting on a company that doesn't actually have a competitive, sustainable advantage, it might be one that has some years of performance and growth and everything else, but it just doesn't pan out. We talk about this extensively in class. It's honestly one of my favorite conversations, and I know we're going to get into this in more detail, but some of the examples we've used over the past couple of years, I'll just give two, and then we can add to this as needed. One of them is the meal kit trend, but I actually want to broaden it.

I would say the trend that happened was consumers demand for convenience when it comes to food, in addition to better producuration. Meal kits seem to perfectly fit that. I want more convenience and I want more producuration. A second trend that we've recently discussed in the last couple of years is the trend toward non animal based meat and just the idea of, hey, people have shifted their food preferences. Obviously, we still have massive amounts of individuals consuming animal based meat, but there have been more and a trend toward non animal based meat, plant based meats arising. Those are two trends we've talked about, and we can jump in and grab and discuss those companies as you want.

Ricky Mulvey: Before that, and Blue Apron is an interesting one. It makes me think of Kara Swisher has this line about how a lot of tech innovation is just assisted living for people in their 20s. Meal kit delivery falls into that. We'll get there in a sec. But one of the quotes you brought up when we were preparing for this was from Charlie Munger. He says, "Some people collect stamps. I collect insanities and absurdities, and then I avoid them. And it's amazing how well it works because I've gone by the examples of all these people that are more talented than I am. If I had set out to invent more quantum mechanics, I would have been also [inaudible] . I just set out to avoid the standard stupidities, and I've done a lot better than many people who mastered quantum mechanics. It's a way for mediocre people to get ahead, and it's not much of a secret, either. Just avoid all the standard stupidities. There are so many of them." Munger and Buffett have this wonderful ability to make incredibly difficult things sound simple and almost easy. I think this plays into what we're talking about, but what are the standard stupidities that Charlie Munger is referring to?

Patrick Badolato: Classic Charlie Munger is self deprecating. I don't know that it's a way for mediocre people, but still, what a great way to capture just such a core human idea. I think the main one or what I try to talk about in class is hype cycles, where you have just a variety of factors that are going to drive the growth rate of a company pretty high. One, it's new. Two, it's just building off a low base, so basically almost anybody can achieve a high growth rate or a compound annual growth. Three, would be, it is a trend or a fad. It's like, it is happening. Then we assume what? I believe this phrase is referred to as a straight line instinct. Like, we humans, if you give us two data points, we just keep extrapolating in a linear fashion.

It's like we can't help ourselves. We extrapolate trends when they don't exist. It's not that the growth didn't happen. It's just that just because that growth happened is not an indication. Like, be careful with growth rates, be careful with things starting out. Be careful with hype cycles and fads and trends. My advice would be like, always try to get at the essence not what was the growth rate, but what was the driver of that performance and whether or not the specific driver or drivers can continue in the future. The common stupidity to avoid is like trend extrapolation or getting overly excited about growth rates when the primary driver is either something that won't continue or just that it started low, and just mathematically, you're going to have a high growth rate.

Ricky Mulvey: Yes, growing 100% of your revenue, starting at $10 million is a lot easier than growing 100% of your revenue at $1 billion. That was certainly the case for Blue Apron, which was a meal kit delivery went public in 2017 for about a $2 billion valuation. It was delisted in November of 2023. I think it has a private owner now. Before going public, Blue Apron got some investors excited with exactly what you're talking about. It made about $80 million in 2014 to almost 800 million in revenue in 2016. Investors saw this explosive growth. They saw the trend. More and more people are going to get these meal kits delivered to their door.

When you look at the S1, you can see, promises of great unit economics, scale and growth and what's going to happen is we're going to spend a lot on marketing upfront, give people free meals to their door. They're going to realize how convenient it is and then become long term customers. That turned out to be right, the thing they also promised was a hard to replicate value chain because they worked with a lot of suppliers. That one I have some more doubts about, easy to be right in retrospects. But why didn't these promises, you think, pan out for Blue Aprons, IPO investors? What went wrong?

Patrick Badolato: Great question. I always try to distill things down to two main concepts. We've actually tried about this before. Like, the drivers of a company are their revenue, their expenses, and then any risks they face. I want to break it open in those two pieces. One, as we talked about low base, they could drive that revenue growth that you walked us through. They're able to do that because they're starting out. They were able to attract people. But you also nailed the other part there. That was heavy with promotions. That was heavy with marketing. I think just the tendency of many of the consumer demographics they were trying to get was, Hey, I'll try this. Our household did. We'll give it a shot. We'll try the meal kit, specifically when it was deeply discounted and there were so many promotions. The challenge, though to that, is not only, hey, it's going to get harder as it gets bigger, but I think the other huge challenge they faced, and I know they got some pushback across time on their conference calls on this was customer retention.

I think it's a company where I want to say, like, really no problem getting people to sign up. Certainly no problem when we were giving heavy discounts and promotions. But the challenge was, to what extent did they retain the customer the challenge they had there? The reasons that's hard to do is one, just there was increased competition at the time of others trying to do something similar. I don't know there was that degree of differentiation. But then, two, in many ways the individual who gets the meal kit, it's funny. I'd argue this is almost existential to what they do. But the individual who gets the meal kit, could always keep the recipe card and then think about, like, Hey, if I really like this meal, like, thanks so much, Blue Apron, and I appreciate you exposing me to this particular dish, but, like, I can keep this and make it myself. Is there incremental convenience of getting it all packaged once we've settled on the eight or nine meals that a particular household likes, or is it just more of a Hey, give me some variety, give me exposure. Then, unfortunately, it's like, did they educate their user to do it themselves in different ways. To me, that's a variety of challenges to revenue. If I can, I want to jump into the expenses part of it, too, which is, you read this story about the potential for unit economics and we'd all love to hear that. But I think at the end of the day, it's worth noting that they're still selling literal commodities. They're selling food, that's not branded, that's just ingredients to a meal.

As a result, I think the best way to understand their unit economics is to jump right over to the industry that's been doing that for centuries, decades, the grocery industry. The grocery industry has done fine. But with a reality that it's always low margin, and they've got to execute on scale. They've got to get huge. The established grocers, the Walmarts of the world do a phenomenal job at this, but they do so because of their scale. They have that same challenges with the supply chain, keep things fresh, everything else. But they're doing it at a scale, I think I don't know the math, but it's so many times over what Blue Aprons potential is even if everything went well. The second thing I would say there is that Blue Apron introduced major costs that their competition, the grocery stores don't have. Those are really two. One is customer acquisition costs, to get us in and then to keep us there. We go to the grocery store near us because it's near us. It's on our commute. It's near our house. They don't have to spend heavily on customer acquisition.

Then the second one is the last mile delivery. The last mile delivery of stuff that has to be kept fresh. Here in Austin, Texas, it's like, it's not going to work sitting in a truck that's 120 degrees. It's like, you got to keep that stuff fresh. That's expensive very time condition sensitive delivery. Those are two things that their competition, the grocery store just doesn't have, but a part of a challenge to the unit economics for the broad business of the meal kits of the Blue Apron.

Ricky Mulvey: A couple of things there. One is, I agree on the hard to replicate value chain that was promised in the S1 actually was already replicated. Grocery stores have hundreds of suppliers, and just because you have a bunch of suppliers, that doesn't mean it's necessarily impossible to replicate. Myself, I probably couldn't do it. But in a business, you probably can. You mentioned Walmart. They do have a difficult to replicate value chain because they built out their entire cold chain. If you need to keep things cold in Austin, Texas, or I'm out here in Colorado, where it's actually very difficult to transport ice cream because our altitude. When you're a mile in the air, things bubble up, and it's difficult to maintain that. You had a bag of chips in Denver, you know it blows up, and that can be difficult. Walmart's able to do that because they have their own cold chain, which is necessary for produce, frozen goods, all that kind of thing.

With the last mile delivery, I wonder if things would have been different if they didn't do it. If they just had stations where what the grocers figured out is that people want to go up to the grocery store. A lot of them actually don't want to shop for their produce. They want to be in and out and done. You could have had Blue Apron stations, maybe three or four in major metropolitan areas, where you go up, you load up your things, and then you can go home to make your meal kits.

Patrick Badolato: I agree, but I think I also almost want to push back a little more on the existential threat, which is really your first point. If I can synthesize these together, it's like, but isn't your grocery store already that station? This is an example where first mover was a disadvantage I never sat in a meeting, but I'm confident the grocery stores watched the meal kit thing unfold. Then we're like, so what day do we change that aisle of our store to put these in? Because it already is that. Now here in our HBs, the private grocery here that's all over Central Texas. Like, they all change at some point to have right at the front of the store meal kits, totally prepared meals the heat up ones. I would argue, in many ways, way more convenient than Blue Apron, because if your household wants to just pop a meal in the microwave and eat it, like, you can do that.

If you want the thing, you could walk out of the store eating, you can do that. If you want to get the meal kit. I've argued in class that the HBs are basically the platform. Like, they're more like Apple, where they're offering us whatever we need on one platform, true convenience. I agree with your point about reducing the last mile, but, like, isn't that still inconvenient if like, Oh, I have to go to this pop up kiosk for Blue Apron, and it's in a popular city like Austin, Texas, or Denver, Colorado. But it's like still I'm just getting that one thing there, where like, I could go to my grocery store, and I could get any of these things, and I can change each week just as suits me or my family's needs.

Ricky Mulvey: The other bear case I would offer is that when you're doing a meal kit, all of the portions are tightly controlled. For many people, you're not getting leftovers. Food is something we like to have a lot of control over. That's why Heinz Ketchup has the squeeze bottle is for a lot of kids, that's the first time they get to control their food is when they can squeeze exactly how much ketchup they like. I think that trend sticks with us as adults. With a meal kit, you kind of lose that. I think for a lot of people that tried it but didn't necessarily want to continue with meal kits forever, there's an element of I was full for a little bit, but it wasn't exactly what I wanted. I didn't get any leftovers, which I'm used to when I'm making dinner at home, making some hamburgers and pasta and vegetables, that kind of thing.

Patrick Badolato: Honestly, I've never thought about that angle. It makes sense. It's like, the ability to choose when you stop is a part of the control the consumer likes. They initially pitched it as, like, the reduction of food waste. The benefit of that was that, yeah, it's all packaged and they control it. But then the consumer doesn't have to worry about you're buying that thing of shallots you're using one stalk, and you're never touching it again. But I agree, there's layers of that story, too.

Ricky Mulvey: We'll see if we can bring this to something that's happening today, which is a commoditized product, a lot of marketing that gets into people that have to use that product, and then low switching costs. I'll bounce this off you. I wonder if there's a tie to these sports gambling companies, where you have huge incentives for people to join these platforms to bet on sports. Right now, there's a lot of excitement about them. Many of them still have a very difficult time making an operating profit because they have to spend so much money on advertising. But the key difference, I would say, and I don't know if it's powerful to get them over this hump, is that they are offering a incredibly dopamine inducing addictive product compared to the meal kit delivery here, even though some of the unit economic stories are the same.

Patrick Badolato: Yeah, that's a fascinating link, Ricky. I agree with your perspective there that the heavy promotions, the massive spend to bring in customers is very similar. But the difference is, yeah, I think in many ways, I'd argue the meal kit thing was like the opposite of an addiction, where at one point, you're like, if I'm cooking the food and doing all this, why am I paying extra and I have to do my own dishes anyway? Why don't I just go to a restaurant where your immediate gratification is almost going to drive you away from a Blue Apron at one point? But in gambling, I think that's fascinating. I'd add one layer to that, too. It would be that consumer data. My guess is that the data and the specifics that those companies can collect about what bets and when they're doing it. I wonder if that's another avenue where they can focus better on customer retention because the data they're collecting about the users, the customers could give them, how do we market? What do we do? What's the right time to offer them that next offer or whatever else? n some ways, that might be bad for society, but I think the business, the use of data and just the human psychology likely gives that company a better chance to a sustainable business model there, is the customer consistently gambles, never so much that they're going bankrupt or losing their job, but consistently is taking a small part of their paycheck and losing it. I believe their revenue is just when we lose. It's like they almost want the person to have, hey, every week, I'm going to gamble 20 bucks, but just 20 bucks, but I'll keep coming back. I think you're right.

The dopamine hit the consumer data, that stuff gives a little bit of an advantage. At the same time, if it's a crowded space, it seems like an industry that's going to struggle with true competition. But if it can consolidate, can they do things like reduce the promotions and reduce all that, reduce the marketing span? Will the final leaders in the space, the ones that make it out, will they be OK because the human condition is positive toward their model?

Ricky Mulvey: The key lessons, as we turn away from the Blue Apron story, I would say is be wary sometimes of the Lynchian approach. You may have seen a lot of advertisements for Blue Apron. Then you see a lot of sales growth, maybe you try the product and you like it. Then you have to ask deeper questions of what are the actual unit economics? Who are the competitors here? Does this business have a sustainable competitive advantage? Because oftentimes you can end up like the scooter business.

Patrick Badolato: The one thing I would say is with the competitors, I think we're all like, oh, it's Blue Apron and HelloFresh and Marley Spoon. Back to our earlier conversation, what I try to instill in the classroom is never think about competitors as just your literal peers. It's really who existing in the space, and this answer we all know now as grocery stores. But I think when I first covered this class in 2017, I came up with a phrase I thought did a good job, like, it's easier to add an app to infrastructure than infrastructure to an app. Think about your competition or who can replace you might not be up here. It might be the other, what's the entity that has the stuff, can do the stuff that we do, and can possibly do it with better scale and everything else? Because it wasn't really, hey, some other player in the space outdid them. It was the existing infrastructure was able to come in and say, we appreciate you doing all the product market fit and the R&D and all that, and we'll take over now. Thanks a lot.

They participate in the downside risk, they Blue Apron, of spending and all that and never got to participate in the upside in terms of benefiting from this secular trend. Back to your the introductory point here, when the trend is right, we still want convenience. But the company that wasn't the beneficiary of that specific trend.

Ricky Mulvey: Being a first mover is not always an advantage. There was a Netflix executive when asked who their competitors were, I think basically, it was TikTok, Sleep, and YouTube because at that point, the real competitors are things that take away from your time. Let's go to Beyond Meat. This is another example where this stock was on fire for a little bit. Revenue growth was looking good. It was even getting to an operating break even point, so investors could see revenue rising, the company's getting more efficient as it strikes deals with Walmart, fast food chains, including McDonald's and Burger King's. You're seeing the unit economics get better. You're seeing more widespread adoption, and yet the company has been a loser for many of its long term investors. Why is this one another case of right trend, but wrong stock?

Patrick Badolato: I want to flesh out a little bit you said, as an accounting professor, I can't help myself. I love the financial statements, but if you chart them up to 2019, there's two things that you mentioned, Ricky. One, which we commonly see, just the explosive revenue growth, and it's actually increasing at an increasing rate where I think it's over 170%, then 240% up to 2019. That's good. But in addition to that, you actually see improvement in both their gross and operating margin. It's your point. I'm just repeating it that, hey, this is a company that seems to be improving their unit economics. My first take there is that, well, the unit economics should improve because at the end of the day, what's the essence of the Beyond Meats of the world? Well, they're manufacturing and processing food. Their fundamentals should work like a manufacturer. In a managerial accounting lens, we would say that your cost allocations, if your units produced is small, you're going to have high cost per unit, and you're not going to look that good in your margins.

But as you grow your units produced, which they did, you expect the economies of scale to kick in, and then cost per unit goes down, gross margins get a lot better, and even operating margins can move, as you were saying, toward break even. They've got a situation where revenue growth and improvement in overall efficiency, which is pretty fascinating. It looks good, looks great. But it still gets back at, as we cover in class, what were the drivers of performance? I did the expense side there, but I want to talk a little bit about the revenue. One of those drivers was actually that they were expanding channels. They were adding the major supermarkets to the major restaurants, and as you do that, you get a big hit, and in some ways, it's the perspective I've offered there is, it's not really about the consumer's interest. The consumer alones interest in non animal-based meat. It does still come down to ultimately, who's your distributor? A question I've asked is, who's directly bought products from Beyond Meat or Impossible Foods? A bunch of people raise their hand saying they've tried it. I was like, are you the buyer of Kroger or whatever else, I usually interject with a question? The answer is, well, no, we've actually bought them through a third party distributor. They did expand their third party distribution.

I'm mentioning this because I think we have another example that actually fits the same challenge here. But it's worth us looking at reading in their financial filings that if you're growing through others and the others are the direct access to your customers, that's a risk that two things, really, is that could somebody else come in and undercut you and the distributor may not be as wed to your brand, or two, at some point, you're going to saturate those channels. You're going to add all the Kroger's and the Walmart's and the Albertsons and whatever else, the big grocers. Then you're not going to have that kind of amazing growth. You might have just more slower and steady growth. The challenge was actually there at the beginning that like, hey, is the revenue growth something that might be hard to sustain?

Ricky Mulvey: I'll push back on that because there's a lot of consumer products that rely on other people to distribute them. We'll talk Coca-Cola more later, but you could have made a similar case about Coca-Cola decades ago, which is that yeah, they have distribution plants, but you're really relying on convenience stores, grocery stores, and restaurants to distribute Coca-Cola. They've managed to do pretty well with that. Yes, you can have a similar formulation. You can get store brand Cola, but it doesn't hit quite the same as a fresh tasting Coca-Cola. Maybe that could have been true for Beyond Meat. Yes, you could have a store brand, but they did have a proprietary recipe that maybe vegetarians would love or people who want to eat less meat enjoy significantly more than the store brand product. I can also see it going the other way.

Patrick Badolato: I love your perspective. Really appreciate it, Ricky, but I want to push back, which is that I'm not sure that Beyond Meat is the Coca-Cola here. I'd argue, I think it was in 2023, but if I got my year wrong, I apologize. Is that I believe the largest manufacturer of plant-based meat is the private, massive animal-based meat manufacturer Cargill Foods. To me, the Cargills and the Tysons are like this, too, as a publicly traded one. They're more like the Cokes and the Pepsis here, where exactly to your point, they control the distribution channel. It's like if you're the one, if you're the big one, if you're sending a huge percent of your stuff to Kroger, but I think that is actually the existential threat to the Beyond Meats of the world.

My comment is not about the trend, what consumers want, but it's like, if that is this amazingly attractive, wouldn't it be the case that those who have the most to lose and the most to lose are the aisle right next to the plant-based ground beef, it's the animal-based ground beef cow, whatever. It's like, who's right next to them and turn that package over? I bet there's a Cargill or somebody like that with so much to lose. Aren't they going to want to fight back? Don't they have the ability to manufacture something similar? I don't mean immediately. They'll have to spend some money and time to get their food nutritionists and whatever, people to get the recipe right. But in the long run, isn't it the distribution? Coke is successful because of its distribution, but isn't going to push more toward a Cargill? I think it was 2023, and it might still be today. But I believe it is that Cargill is the largest manufacturer of plant-based meats. In some ways, I'd argue that's predictable only because they were the company who had the most to lose if the consumer is going to start putting in the plant-based meat in their cart and not the animal-based meat. Naturally, they're going to fight back, but they're going to use their scale and their distribution.

They have things similar to the Blue Apron story with the grocery stores. They already have those things ready to go to basically watch the Beyond Meats, the Impossible Foods do something. Then whenever it's big enough or big enough of a threat, say, thanks very much. We appreciate you did the R&D and the sales and marketing. But first move or disadvantage, we're going to take over now.

Ricky Mulvey: I'm going to take a step back for just a second because I don't want you to apologize ever for pushing back. Maybe I did as well. But I think it's something that's fundamentally important for anyone listening to this show, which is that if you're going to be an investor, you have to be willing to test out ideas with other people, with people who might know more than you or have a different perspective than you, and you have to be willing to hear it and not take it personally, even if they disagree with you vigorously. Shout out Bitcoin. But [laughs] I wanted to just take a second to do that because for someone listening who might be a newer investor, it's very easy to essentially find your tribe of people who really believe in the same stock as you, and you can almost find a community through that. I think that can be a good thing.

The Motley Fool was built on finding a community of people who are interested in investing, but I think it can be a damaging thing when it's built around owning one single company, and then you view yourself as being in that community and you don't want to hear outside bearish different voices than you. Anyway, that's my ran on that. I'm going to bring it back to Beyond Meat here because there was the point. We talked to basically 2019. Margins are getting better. You're operating break even, you're expanding your distribution partners. One of them at the time was McDonald's, which started to offer the McPlant burger. I know that struck you as odd. What was maybe the flag that the Beyond Meat Bulls should have seen or picked up on when that was going on?

Patrick Badolato: I don't know. Ricky, I don't want to disagree as we just said we could do. I disagree that I struck me as odd. But so we talked about this in class when the news came out. The specific reason for it was, I just thought it was such an amazing little microcosm of understanding all these issues. Basically, I just went on the website for McDonald's, got the McPlant thing, and just brought it into class and talked about it I was like, think of this like a footnote. Now, usually, when I say footnotes, I mean the actual financial statement footnotes. I was like, no, let's have this conversation with this as if it was a footnote. In that footnote, they do such an amazing job because you wouldn't know. First, the main thing is, it's called the McPlant, and I think that was intentional. The Impossible Burger is looks like it's a pairing of equals, Impossible Foods and Burger King. McDonald's gets the benefit of coming later. I just feel confident that they came later and said, look, we need to do what? We need to make sure that we secure the upside, so that it's McPlant, and we're acknowledging it's not a traditional thing we sell at McDonald's. But we didn't put anything about Beyond Meat in the title at all.

Now, they do mention in the footnote that's co-developed with Beyond Meat, so they're not violating anything legal. But then even when they talk about it, they're deemphasizing the patty and really emphasizing, like, just the way that it's cooked and what McDonald's is doing. Everything about that advertisement seems to be showcasing McDonald's and downplaying the role of Beyond Meat. When I've talked about it in class, I'm argued like, look, McDonald's knows how to market food, and you may disagree and not shop there or whatever else or buy. But like, man, this company's done such an amazing job for so many decades. I was just like, shouldn't we all just step back and think about if they're doing it this way, what does that tell the rest of us about the investment this is for Beyond Meat? Specifically, what was really interesting is when we talked about it, it seems really like McDonald set itself up back to our Blue Apron conversation, too, to participate fully in the upside. If things went well, I think McPlant was intentional so that what? They could finish the agreement and make sure everything's legally OK. But then what? Just do it themselves. If things went poorly, it's like, well, we did a partnership, and it didn't work out. It's interesting to think about upside. Who participates in the upside? If this was a massive phenomenon for their target market, I think they still participate fully in the upside and they get to reduce or at least mitigate some of the downside risk by co-developing.

Patrick Badolato: Don't spend all the time trying to figure out the exact ingredients, whatever else, but still give yourself the chance to be the one who bears the upside if the project was massively successful.

Ricky Mulvey: You put that in contrast a year ago when, and I pulled this up during our conversation, McDonald's announced a partnership with Krispy Kreme to distribute doughnuts. Whereas you had the footnote for Beyond Meat for the milk plant, when you look at the press release for McDonald's and Krispy Kreme, it is McDonald's, trademark, and Krispy Kreme, trademark, are partnering to bring you doughnuts, in part because people have that brand affinity for Krispy Kreme doughnuts, and it's also much more difficult to set up a doughnut manufacturing plant in all of your McDonald's locations, versus we can ship out these frozen patties that go on the same grill as the rest of your Big Macs.

Patrick Badolato: My thought there is like, McDonald's has been for decades. In some ways, I made the comments like, I'm not sure that the Impossible Foods and Beyond Meats were even first movers. Aren't they late movers into the world of processed food, where all of those fast food companies have been putting filler? I'm not a food scientist, but my guess is that filler, I bet anything it's plant based, and so, isn't it just recipe tweaks? Haven't fast food companies been creating highly plant-based, not 100% plant-based, patties and other pieces of meat, and then marketing them really well. In some ways, the comment I make is, are the Beyond Meats and the Impossible Foods really truly creating innovation, or aren't they just tweaking a recipe from fast food, and then can't fast food come in and tweak it back, and don't they maintain the upper hand the whole time?

Ricky Mulvey: I think it's easy to dunk on this story. It's always easy to be right in retrospect. One of the things we emphasize at the Fool is that rule breaker type investing can work for a lot of people. When you're doing that, you're going for a slugging percentage. You're looking for home runs, and that can mean you have nine stocks that are losers and one stock that's a big winner that makes up for your losses. It's a venture capitalist style approach to stock investing that works for many of our members and many people. I look back on this, and I think, yes, McDonald's, they have the upper hand, yes, they're the big distributor, and same with the Impossible Whopper at Burger King, but what if it did become popular? What if this did expand to all of the fast food locations, it became immensely popular? Wouldn't have that made Beyond Meat a winner and Impossible Foods a winner if it actually did take off like there was a chance to?

Patrick Badolato: We'll never know, but my guess, and I want to give some substance behind it, is no, because McDonald's did eight locations, then they rolled it out to 600, but then they closed it down. I don't remember the exact timeline. I think they gave it a legitimate shot, and whatever their criteria was, I don't know, but I don't think it was good enough because they pulled it. They don't have it anymore. My reason, though, I think it still wouldn't have been a situation where Beyond Meat fully participates in the upside because during that time, the last couple of years, when the secular trend is a movement away from just expanding what we define as meat. That's the secular trend. That happened, and in many ways, though, but if it was there and if it was amazing. Chipotle came out with their version with Chorizo. Chick-fil-A had a version of this.

I don't want to miss these, but it seemed like all of the major successful fast food companies were basically introducing their own. Now, the Burger King one was different, but after that, and McDonald's was co-developers, but it seemed like they were all just basically saying, "Hey, we can do a version of this too." We'll never know, but I would bet that I think if this was successful, and if for some reason, this milk plant plant resonated with McDonald's customers, the way that it was initially disclosed and marketed, in contrast to your excellent Krispy Kreme example, I think this would have been one where McDonald's would have just finished that contract, paid Beyond Meat what they need to, and then moved on fully participating in this as if it was a Big Mac, as if it was all the other stuff that they sell. Because we don't know who the provider of their ground beef and their chicken and everything. I think it just would have been, "Hey, we already have access to commodities and ingredients, and we already have food scientists, and we already do this stuff. We're just going to bring this in-house at some point."

Ricky Mulvey: I think the lesson for investors listening is you really need to think about sustainable competitive advantages, especially when there's a crowded marketplace. Also, anytime you see a partnership that you're excited about, you want to think about, is this a true partnership, who has the upper hand, and can the person or the company with the upper hand walk away whenever they want to?

Patrick Badolato: What's the true nature of that partnership?

Ricky Mulvey: Let's get to this Seth Klarman quote, because I think it's an interesting discussion to have in 2025 because he thought about this long before I did, which is this idea that people overrate investment trends. He was talking about the home shopping network, and home shopping becoming very popular for people to watch QVC and then buy things at home. He wrote, in margin of safety, "The value of a company selling a trendy product such as television shopping depends on the profitability of the products, the product life cycle, competitive barriers, and the ability of the company to replicate its current success. Investors are often overly optimistic about the sustainability of a trend, the ultimate degree of market penetration, and the size of profit margins. As a result, the stock market frequently attributes a Coca-Cola multiple to a cabbage patch concept. I think that is a good summary of what we've been talking about so far.

It's also, to me, Patrick, interesting to revisit right now because Klarman is describing a Coca-Cola multiple as something that is completely sustainable and durable. Coca-Cola will be here forever. In some ways, I think it will be. I think people will always drink soda. But right now, there are tremendous competitive pressures on Coca-Cola when you think about, I would say, a broad scale shift to healthier eating and drinking. Even Coca Cola itself is saying, "Hey, look at our new growth driver over here. It's not Coke Zero, it's not Diet Coke, it's this Fairlife protein milk, which I've been seeing all over the place, and it's crossed $1 billion of sales. At the same time, there's another competitive pressure, which I think the market is underrating, which is that a large subsidy is being removed potentially of Robert F Kennedy at Health and Human Services. One of the things that he has said is that he wants to take candy and soda off SNAP benefits. Basically, SNAP households spend about 10% of their food dollars on sugary drinks, including Coca-Cola. That was back in 2018. When I look back on this quote, I think Klarman is fundamentally right. It's interesting to see, too, as we update, even the companies that we take for granted as having sustainable, durable, competitive advantages might have different and intense competitive pressures in the future.

Patrick Badolato: I want to first defend Klarman a little bit, not that he probably needs it, but he was writing that about, '87, I think, written in '91. Does anything last forever? No, but, Coke still had a good run in front of it for decades. But I think your broader point is spot on that, the world is constantly changing, and the point of that was to express extreme durability, but even extreme durability decades later can change. But I also want to commend Coke here where their flagship products are nothing like they were in the past. The health trends, independent of the SNAP comment, everything else like, the trends have been away from Coke Classic. But I think to their credit is, and I'm not saying there's an easy way to do this where they perfected it, they focused. Their sustainable competitive advantage they initially had, I think would be brand loyalty to the Coke classic products, everything else.

But then as that's going down, they're shifting toward distribution, the network, and then that has been. It's a situation where the right acquisitions can keep the company afloat, doing fine, as long as they're willing to do what? In some ways, have the humility to say that it's not about our core flagship product, even though that drove us for decades and decades, it's about finding the next move that's outside of us, and obviously, not just doing acquisitions, but arguably, really trying to perfect which brands, which companies do we need to bring in-house? As our brand deteriorates, we can still do what? We can still operate this amazing distribution channel with convenience stores, and gas stations, and groceries and restaurants, and everything else, but constantly be willing to do what? To not get complacent, but to think about what changes are we needing? I think your point about potential change to the SNAP benefits is another layer to that. How do they deal with an external shock that could be bad for them?

What are the changes they can make with their product mix? Clearly, it can't be to continue to expect that the coke classic stuff is going to resonate. But they've done a bunch of those acquisitions, could some of them be failures? Possibly, but at the same time, it's a step of, it's not us, it's how do we diversify to better utilize what we have, the distribution network, and better meet changing consumer preferences?

Ricky Mulvey: Let's apply this metaphor to current companies right now, because Coke's forward earnings multiple is 24, which is a little bit under the market. But you can find some companies that are pretty close to that. Two of them, I think, are interesting. One is NVIDIA, which for as much as the stock has been on a run long term over the past 3-5 years, its forward earnings multiple is about 26. That's Coca-Cola Land. For many investors, you might think, wow, that seems cheap. The second one, and I'll let you pick which one you want to do, is Celsius, the energy drink manufacturer. I've talked about it on the show. I unfortunately own stock in Celsius, I don't own stock in NVIDIA. Probably should have swapped those. That's now at a 28 forward earnings multiple. There's a case for either of these that they could deserve a multiple much higher or much lower than Coca-Cola. That's your menu. Do you want an energy drink or do you want a chip designer?

Patrick Badolato: NVIDIA is awesome, but I think we should keep the conversation consistent and go with Celsius, and elaborate in that direction because I think it's just a more natural extension of all the stuff we've been chatting about. NVIDIA is awesome in different ways, but outside of all that.

Ricky Mulvey: Is it a cabbage patch product? You would have some folks, myself saying the bull case, no, this is a large scale shift to healthier for you energy drinks. This is one that now has bought up Alani Nu. This will be a good acquisition because you have some of the most popular sugar free energy drinks for people who are interested in fitness, working out, and it's a completely different subset of customers than your Red Bulls and your Monster Energy drinks. When we get into energy drink land, it's all marketing. I would personally say no. I think Celsius has potential to grow even more. They're making savvy acquisitions, and maybe it deserves something higher than a Coca-Cola multiple.

Patrick Badolato: I think it's worth getting into layers here. One of them is that the involvement of Pepsi is massively important to Celsius. They signed an agreement 2022, where Pepsi is effectively the main distributor, and also, as a result of this, really the main consumer. They make up a large percent of the revenue, Pepsi does. That obviously helped them boost sales massively when it went to effect, not when it was signed. I'm sorry. But then what? In last year, revenue has been roughly flat. One of the factors they faced toward the end of last year, which you guys have talked about in the Motley Fool, is that Pepsi's inventory issues and Pepsi's inventory backlog was this goes back to our conversation about, there's the channel that controls your direct access to customers, and a constraint.

I don't think this in any way says, therefore, Celsius is a bad business model, but just a risk and a constraint to their growth is they are still dependent on what happens at Pepsi in order to continue to achieve that growth. You have a major extremely powerful customer, Pepsi, who's not going to crush you or send you to bankrupt or whatever else, they have mutually aligned incentives, but I would say, but actually may just be a headwind, a little bit of a pressure on why and how Celsius may not be able to continue to grow at any explosive rate. Again, not to crush them, destroy them or anything like that, but just as a meaningful constraint to be aware of is that, like I would say, what would I recommend if you're thinking about investing in Celsius? Just go get their latest filing, Control F, the word Pepsi. Why does it appear so much? It's in there. Read the agreement, think about what that means.

Ricky Mulvey: I'll also add reasons. I could be completely wrong on it. One is that many other energy drink makers have brought in sugar-free energy drinks. That space is becoming increasingly competitive. Celsius is also trying to, maybe it made an expensive acquisition with Alani Nu. We don't know. Time will tell. Then the other thing with it is there may be some brand confusion. Right now, Celsius is trying to pivot into hydration powders labeled as Celsius, but those don't have caffeine, and that struck me as something that might be a little tricky to some of its consumers if you're selling a Celsius hydration powder, but it doesn't give you the kick-start jolt that the can of energy drink does, despite it looking a little bit similar. Those are the few of my concerns. I could be totally wrong. If I'm totally wrong, it won't totally wreck my retirement, but it's something that I have some confidence that things could go right.

Patrick Badolato: I actually want to push back a little on the comment I was making before with the success case.

Ricky Mulvey: Are you pushing back on yourself or you're pushing back on me?

Patrick Badolato: I'm pushing back on myself.

Ricky Mulvey: This is the ultimate Meta, is you're pushing back on yourself on a podcast. Let's go.

Patrick Badolato: That's right. There's a classic case we cover in our classes with YETI, where they face the big challenge where the third party distributors, basically, the Cabela's and the DICK's Sporting Goods and all had bought enough. It's obviously a non-perishable product, truly, in this case. They just cut back on their spending in 2017, and YETI saw a year-over-year decline in revenue. But then what did they do? They went and expanded their direct consumer channel, were able to survive that. Their growth rate's not going to be in the 40s in percent anymore, but they survive that and were able to keep the thing going and moving forward. I think that Pepsi is a constraint, but I don't think in any way, it's damning, because again, I think the benefit to Celsius is actually the Pepsi contract because you want one of those big players to be like, we're on your team. Even if we're on your team means that, we do control and call the shots, but we want you, I think that the best reason is that, but it's still in Pepsi's interest for Celsius to continue to grow, to develop, to do things. Hey, Pepsi is on our team is a positive thing.

Timing is impossible to figure out, but Pepsi has a vested interest in Celsius continuing to grow. In some ways, I'd argue that's a part of the portfolio diversification of Pepsi. They haven't literally acquired them, it's different structure, but it's the other side of this that, the contract with Pepsi caused some negative effects in 2024. But ultimately, is it long run advantageous to have a player with that distribution pool effectively rooting for your success?

Ricky Mulvey: Unlike the consumer products we mentioned earlier, Celsius does make a profit, and that's a good thing. For Celsius, even if you're a sugar-free drink, not bad to have a sugar daddy. Patrick Badolato, appreciate you being here. Thank you for your time and insight.

Patrick Badolato: Thank you, Ricky. Appreciate it.

Mary Long: 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. All personal finance content follows Motley Fool editorial standards that are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. For The Motley Fool Money team, I'm Mary Long. Thanks for listening. We'll see you on Monday

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Mary Long has no position in any of the stocks mentioned. Ricky Mulvey has positions in Celsius, Kroger, and Meta Platforms and has the following options: long May 2025 $67.50 puts on Coca-Cola. The Motley Fool has positions in and recommends Beyond Meat, Celsius, Meta Platforms, Mid-America Apartment Communities, and Walmart. The Motley Fool recommends Kroger and Yeti. The Motley Fool has a disclosure policy.

What We Can Learn From Companies That Brought Great Ideas to Life was originally published by The Motley Fool