Brunching Beyond Boundaries: First Watch's Strategic Blend of Growth, Innovation, and Community Connection
At the Barclay's conference, the FWRG discussion explored the strategic and operational aspects of the company. The company's approach to expansion and customer engagement is multifaceted, focusing on balancing growth in existing, emerging, and new markets and maintaining a solid value proposition despite economic pressures. First Watch's growth strategy includes a 10% annual unit growth rate (50 stores), supported by a broad geographic presence and strong relationships with commercial developers.
A significant aspect of their current strategy involves the introduction of alcohol in their restaurants. About 90% of their locations offer alcohol, with limitations in some due to lease restrictions, proximity to schools, or license costs. The alcohol beverage mix is around 6% to 7%. While there's potential for growth, First Watch does not aim to become a liquor destination, maintaining its identity as a breakfast and brunch spot. On the other hand, the company compares this to their fresh juice program, which started small but now accounts for a significant portion of their beverage sales.
Some interesting commentary around the company's transition to a public company post-IPO in 2021 brought new challenges, particularly in time management and maintaining focus on core business principles. The company emphasizes the importance of its restaurant teams staying focused on service quality, regardless of ownership status. They have managed the additional responsibilities of periodic reporting and engaging with a broader range of stakeholders while ensuring their development team and culinary staff uphold the company's standards.
Another topic was the impact of COVID-19 on business dynamics. Changes in commuter patterns have affected their business, with an uptick in alcohol sales on Fridays indicating a shift in customer behavior. Despite these changes, the weekend business remains robust, underlining the importance of their neighborhood locations.
Regarding ownership, First Watch's equity sponsor still holds about 55% of the company, down from over 70% earlier in the year. This change has increased liquidity, and the equity sponsor is a supportive partner (and seller), contributing positively to the company's overall growth and investor relations.
Key Highlights with Added Points:
- Alcohol Offering: About 90% of First Watch locations offer alcohol, contributing 6% to 7% to the beverage mix.
- Growth Strategy: Continues to focus on balanced growth in various markets.
- Market Positioning: Maintains identity as a breakfast and brunch spot, not aiming to become a primary liquor destination.
- Beverage Program Success: Compares the alcohol program's potential to the success of its fresh juice program.
- Focus on Service Quality: Emphasizes the importance of restaurant teams focusing on service, irrespective of ownership status.
- Neighborhood Business: Weekend business remains strong, highlighting the importance of neighborhood locations.
Company commentary about traffic trends:
- Weekend Dominance: The company emphasizes that weekends are jam-packed for First Watch, likening them to "Super Bowl" events every week - the weekend rush remains a significant aspect of their business.
- Impact of Remote Work and Commuting Changes: Management on how the change in commuting patterns, with more people working remotely, might have affected business. While specific details on traffic trends related to this aren't mentioned, it's implied that there has been some impact.
- Temporary Relocation Impact: Florida might have seen increased traffic due to people temporarily relocating there. This was attributed to the pandemic, where individuals chose to spend extended periods in Florida, possibly due to its climate, outdoor lifestyle, or other factors.
- Seasonality Return: The mention of a "return to seasonality" implies that Florida, like other locations, is experiencing more pronounced seasonal variations in customer visits post-COVID. Is that implying that traffic could be more robust this winter?
- Weekend Business: Weekends remain a robust time for business, consistent across First Watch locations, including those in Florida. This suggests that despite any pandemic-related changes, the weekend dining trend continues to be strong.
Balancing Act: How US Foods Masters Market Share and Margin Growth
Dirk J. Locascio, Executive Vice President & CFO of US Foods Holding Corp., discussed various aspects of the company's strategy and market conditions at the Barclays Conference. Upfront, he acknowledged the difficulty in predicting inflation and deflation trends, especially given the volatility in protein prices. Locascio noted that grocery items have remained relatively stable with modest inflation levels and expects this trend to continue. He also mentioned that while US Foods is prepared to manage various market conditions, predicting specific commodity price movements, particularly in proteins, remains challenging. Regarding cash usage and leverage, Locascio indicated that US Foods has reached its leverage target and will now focus less on debt paydown. The company plans to continue investing in the business, maintaining CapEx at around 1.3% of sales, including leases. With leverage under control, US Foods is looking at opportunistic M&A and leaning more towards share repurchases, having already executed half of its $500 million authorization. Regarding M&A strategy, Locascio expects future acquisitions to be similar to recent ones, focusing on increasing local density and geographic footprint rather than large-scale transactions. This approach includes acquiring well-run businesses that complement US Foods' operations. Regarding margins, Locascio emphasized the company's focus on balancing profitable volume growth with margin expansion. He highlighted the company's success in increasing margins over the years and sees further potential for margin growth. The company aims to maximize EBITDA dollars rather than solely focusing on margin percentages. Finally, Locascio reflected on the company's recent leadership and board changes, including appointing a new CEO and new board members. He expressed satisfaction with how these changes have played out, emphasizing the increased focus on execution and the unified direction of the team and board. He concluded by expressing optimism about the future of US Foods and its potential for shareholder value creation.
Key Highlights with Additional Points:
- Resilience and Adaptability: US Foods has shown resilience in past economic downturns, with minimal impact on business volumes. Locascio emphasized the resilience of US Foods' business model, particularly in the face of economic challenges like inflation-induced recessions. He noted that even during significant economic downturns, such as the Great Recession, the company experienced only a modest decline in volume and maintained strong earnings. This resilience is attributed to the company's US-only focus and diverse customer base.
- Focus on Control: Emphasis on internal initiatives and control over external macroeconomic factors. Locascio acknowledged the difficulty in predicting inflation and deflation trends, especially given the volatility in protein prices. He mentioned that while grocery items have shown modest inflation, protein prices are more unpredictable. This unpredictability makes forecasting a stable, low-single-digit inflationary environment for 2024 challenging.
- Balanced Strategy: Aim for a balance between profitable share gain and margin expansion. Locascio emphasized the importance of balancing profitable volume growth with margin expansion. This approach suggests that US Foods is not solely focused on increasing its market share at any cost. Instead, the company aims to grow its volume in a way that contributes positively to its profit margins. This strategy focuses on sustainable growth rather than just expanding market share.
- Customer Focus: Locascio highlighted the company's growth in serving independent customers, healthcare, and hospitality sectors. He pointed out that a significant portion of the company's growth has come from acquiring new customers in these segments while also focusing on increasing penetration with existing customers. The company's strategy includes focusing on products like produce, which have been the fastest-growing category in independents. Concentration on independent, healthcare, and hospitality sectors for growth.
- Operational Efficiency: Distribution and warehouse operations improve, leading to better cost management and productivity.
- Long-Term Goals: the approach outlined by Locascio indicates a long-term view where US Foods is not just chasing immediate market share increases but is also keenly focused on how these gains translate into sustainable profitability. This strategy involves making calculated decisions on where to compete and how to win, ensuring that growth aligns with the company's overall financial health and long-term objectives—targeting $1.7 billion EBITDA in 2024 as part of a long-range plan.
- Execution Emphasis: The importance of practical execution in strategy and operational initiatives.
- Misunderstandings Addressed: Clarifying the company's resilience and diverse customer base, often misunderstood by investors.
- Market Consolidation and Organic Growth: Potential for increased market share through consolidation and focusing on organic growth in key sectors.
- Inflation and Disinflation Management: Demonstrating the company's ability to manage through varying economic conditions effectively.
Three positive takeaways from the presentation:
Market Conditions and Inflation Management: A significant theme is the challenge of predicting and managing inflation and deflation, especially in volatile commodity markets like proteins. Locascio acknowledges the difficulty in forecasting these trends and emphasizes the company's preparedness to handle various market scenarios. He notes that while grocery items have shown modest inflation, predicting movements in protein prices remains complex. This theme underscores the importance of agility and adaptability in the face of unpredictable market forces.
Strategic Focus on Mergers and Acquisitions (M&A) and Cash Usage: The company's approach to M&A and managing its cash resources is another critical theme. Locascio discusses reaching the company's leverage target and the shift in focus towards opportunistic M&A and share repurchases. He prefers acquisitions that increase local density and geographic footprint rather than large-scale transactions. This strategic approach carefully balances growth through acquisitions and prudent financial management.
Commitment to Margin Expansion and Profitable Growth: US Foods' commitment to balancing profitable volume growth with margin expansion is the third central theme. Locascio highlights the company's success in increasing margins over recent years and sees further potential for growth. The focus is on maximizing EBITDA dollars, indicating a strategic approach that seeks to optimize revenue growth and profitability. This theme reflects the company's broader goal of sustainable, long-term value creation for shareholders.
That said, we still see the negative elements of the cycle outweighing the positives.
The Challenge of Predicting Inflation and Deflation
Mr. Locascio acknowledges the inherent difficulties in forecasting market trends in the ever-changing landscape of the food service distribution industry. His candid admission about the challenges in accurately predicting inflation and deflation trends underscores a significant uncertainty faced by the industry. This unpredictability, particularly in the volatile protein market, poses a constant challenge for companies trying to strategize for the future.
The Competitive Struggle for Market Share Growth
Locascio highlights the intense competition in the food service distribution sector, where even the most significant players, like US Foods, command only about 40% of the market share. This fragmented market scenario illustrates companies' uphill battle in expanding their market presence. Gaining additional market share in such a competitive environment requires effort, strategic innovation, and adaptability.
The Complex Road to Margin Expansion
Expanding margins in the food service distribution industry is a complex and nuanced endeavor, as pointed out by Locascio. Despite US Foods experiencing some growth in margins, the journey is fraught with challenges. Fluctuating commodity prices and the balancing act between profitable volume growth and margin expansion make this a particularly intricate goal. This complexity indicates that achieving significant margin growth is a strategic challenge that can be difficult to achieve in this environment.
Electrify Your Doorstep: DoorDash Sparks Up a Partnership with Best Buy for Lightning-Fast Electronics Delivery
DoorDash has announced a new partnership with Best Buy to offer on-demand delivery from all Best Buy locations across the nation. This service, accessible through DoorDash's app or website, enables consumers to receive a wide range of electronics, including TVs, computers, and gaming accessories, delivered to their doorstep in under an hour. This collaboration marks Best Buy's debut on the DoorDash marketplace and aligns with DoorDash's strategy to diversify beyond restaurant deliveries. The timing is perfect for the holiday season, allowing consumers to purchase electronics and gifts at in-store prices conveniently. Additionally, DoorDash is celebrating this partnership with special discounts for the holiday season and including Best Buy products in its DashPass program, which offers free delivery on eligible orders.
Key Highlights:
- Partnership Launch: DoorDash partners with Best Buy for on-demand electronics delivery nationwide.
- Product Range: Wide selection, including TVs, computers, gaming gear, and more.
- Convenience: Products are delivered in under an hour via the DoorDash app or website.
- First of Its Kind: Best Buy is the first national electronics retailer on DoorDash.
- Holiday Shopping: Ideal for purchasing electronics and gifts during the holiday season.
- Special Discounts: Promotional offers like $15 off on orders over $55, and additional benefits for DashPass members.
- DashPass Benefits: Best Buy products are included in DoorDash's DashPass for free delivery on eligible orders.
