In this episode of Industry Focus: Consumer Goods, Fools Emily Flippen and Dan Kline look over some of the biggest developments in this market over the last few months. First, McDonald's (MCD +0.71%) is rolling out a chicken breakfast sandwich -- why now, why nationally, and what does this do for McD's?
Then, a discussion about the recent rash of retail and restaurant closures: Find out why the narrative that e-commerce killed the mall is lacking, and what investors should focus on instead. And finally, Emily and Dan look at some statements made at the World Economic Forum about business goals that aren't just increased profits.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Jan. 28, 2020.
Emily Flippen: It's Tuesday, January 28th, and I'm your host, Emily Flippen. We have a lot of consumer-goods industry news to cover over the past week. And joining me today to talk about them is Dan Kline. Dan, thanks for joining!
Dan Kline: Thanks for having me!
Flippen: There's a lot to cover, and we're going to get to some interesting bankruptcies, and some changes that we're seeing in the way that companies maybe manage their assets. But first, we have to start with the big story, or at least what I perceive to be the big story, and that's...McDonald's is rolling out a chicken breakfast biscuit across the nation.
Kline: Well, I'm doing this episode dressed as Grimace, so I'm in a big purple suit as far as anybody knows. No.
So, there is a chicken sandwich war going on. And McDonald's is firing sort of the latest salvo. And this is a little bit odd to me, though I do live in the South, where the chicken biscuit -- like, if you go to Bojangles, you can get a chicken biscuit for breakfast, and fried chicken as a breakfast food is considered normal. As someone who's from the Northeast, that is a bit of a culture shock for me. And what McDonald's is doing is nationwide, they're going to roll out a chicken breakfast biscuit and a chicken breakfast McGriddle. And this is all about having an answer for Chick-fil-A, and really giving consumers sort of more options, saying, "Hey, you know what? If you come to McDonald's at 10:30 in the morning, you have this option now, so you don't have to go to Chick-fil-A just to get a chicken breakfast sandwich."
Flippen: For what it's worth, I don't think anybody was being forced to go to Chick-fil-A for their breakfast sandwiches. But I do think it's a move in the right direction. McDonald's franchisees themselves have been long pushing for a competitive chicken sandwich. But I guess the question I have for you, Dan, is: Do you see this as being, I guess, a fad? Because I remember three years ago, I was covering Cracker Barrel [Old Country Store], which has not been the best company, up and down a little bit, largely trading flat. But, Cracker Barrel at the time was rolling out this new initiative they called Holler & Dash, which was a fried-chicken-and-biscuit fast-casual chain. And really, I feel like they were ahead of the curve there, but it really hasn't moved the needle for them at all. So, is this a fad? Is it going away, or is it staying?
Kline: Well, here's the thing. A chicken breakfast sandwich, or a chicken anytime sandwich, is a tool in your arsenal. And one of the things McDonald's has going for it is -- if you're with, say, a group of friends, or a family of five, or people who work together, whatever it is -- Chick-fil-A is very specific. It's largely a chicken company. They have more of a diverse breakfast menu, they have bacon, they have sausage; but at lunchtime, if I want a burger and you want a chicken sandwich, McDonald's is a better option than going to Chick-fil-A. And I think that's sort of where this is fitting in. This isn't Popeye's, which is a chicken company that damn well better have a good chicken sandwich or people are going to go to Chick-fil-A. McDonald's still needs a better all-day chicken option, and that's something that I think franchises will get at some point. But I'm not sure you want to build a business and be completely narrow and just focus on just one part of the fad, because it makes it too easy for people to decide, "Yeah, hey, I really want a chicken sandwich, but so-and-so wants a Bacon, Egg & Cheese, and I guess we'll just go to McDonald's." The Cracker Barrel thing only had the one -- you want as big a menu as possible that can be well-executed.
Flippen: This, we talked a little bit earlier. I feel like the breakfast wars themselves could be an entire episode of Industry Focus: Consumer Goods. We also see IHOP coming out with a very soft launch for 2020 of their own kind of fast-casual breakfast-food chain. So, Dan, I'm going to put it onto you -- there's a gun to your head, and you have to get breakfast tomorrow morning. Where are you going? What are you getting?
Kline: If I have to get, are we going to say a fast-food breakfast?
Flippen: Fast-food or fast-casual.
Kline: Fast food, it's definitely a Burger King sandwich. Their hash browns aren't as good. Their Croissan'wich looks nothing like what the pictures of it look. It's not like a big fluffy croissant; it's a big, sad thing. But it's, by taste, probably my favorite breakfast sandwich. McDonald's actually executes the most things really well. It's an enjoyable pancake. You could get a biscuit or McMuffin or a McGriddle, and they're all pretty good. I mean, if I could fly, I'd go to a New York deli and get a hard-roll sandwich, but that is not something that's a concept here in the rest of the world. Honestly, a lot of these chains do breakfast well. Chick-fil-A does breakfast well. I think Wendy's has struggled with breakfast. But for the most part, it's not hard to get an inexpensive, pretty good breakfast sandwich.
Flippen: I think that was a hot take. I saw Austin kind of having a visible reaction there.
Austin Morgan: I didn't even know Burger King had breakfast, honestly.
Kline: Oh, come on, you've never had a Croissan'wich?
Flippen: Nonetheless a Croissan'wich.
Morgan: No. But I think if I had to pick, I'd do the Taco Bell Breakfast Steak Crunchwrap. Can't top it.
Flippen: I'm going to side with Austin on this one.
Kline: [laughs] Yeah, I have found the ingredient quality at Taco Bell a little bit lacking. Though, I will give a shout out to the Cinnabon sausage wrapped in a pancake that's probably like 8,000 calories for the order. It's not actually a pancake; it's more of a pastry. Those are really, really good, too. So, I think we have a plan. We're going to do a breakfast crawl the next time I'm in town.
Flippen: Yeah, I don't think I realized the breakfast universe was as vast as it was, but maybe this is a great thing for investors and consumers alike.
But, moving on to some retail news. We have a lot of updates coming out of some of the major retailers here in the U.S. over the past week about store closings. Namely -- and I apologize, I'm going to butcher the name of this retail outlet -- Pa-pyrus?
Kline: Papyrus.
Flippen: Papyrus, there we go. Closing all their stores nationwide. I feel like that's a great example of the fact that I couldn't even pronounce the name of their store, and I'm probably right there in their target demographic.
Kline: There's a lot of stores that are closing locations. Macy's, J.C. Penney, Bed Bath & Beyond, GameStop, Express, Pier 1 Imports. And there's sort of a false narrative around those stores that it's changing consumer habits, people are buying online, they're not going to the mall. And with most of those stores, I would argue that's not really true, that mall traffic is down from all-time highs but still very high; and that if a store has an omnichannel model, like a Best Buy, there's still a place for brick-and-mortar retail.
Papyrus might be the one store that you could really argue has become unnecessary. They sell sort of expensive stationery, and cards and things that you might buy incrementally if you're walking by the mall. But the price tags are high enough that it feels like you might want to just jump on Amazon on your phone to see if something else is cheaper. So this is a store that was almost unique to malls. Like, it made sense in the setting of a mall-based universe. It now makes much less sense. But, the overall narrative is that good retailers who give consumers what they want, where they want, meaning omnichannel -- so, easy pickup options; look at it in the store, buy it for delivery; buy it online, pick it up in the store; easy returns; all of that -- those retailers can thrive, and they're not the ones that are closing stores and going out of business.
Flippen: I love that, because I feel like that's a line that's been underappreciated by the media, for the most part, who's been reporting on these store closings. And yeah, that's because these companies, to an extent, have made their own bed from a lack of action in the past. It is probably fair to say that even the stores that have been effective in relaying an omnichannel approach will have a smaller footprint than they may have had, five, 10 years ago. What does that mean for REITs [real estate investment trusts] that look at these retail locations?
Kline: Well, some of it is use of space. Like, you might not have a smaller Kohl's. You might have less of the Kohl's location dedicated to you coming in and shopping; more of the back end might go to fulfillment. But you probably will see an overall shrinkage of retail space. The B and C malls in many markets are going to close. And the good malls are diversifying. They're adding hotels, they're adding entertainment options, they're adding co-working spaces. So, the smartest REIT investments are the ones that own the A-tier malls, or are invested heavily in those, because there's still a reason to go shopping. There's also a whole wave of internet-first retailers that are opening stores. There are going to be more store openings this year than there were closures, most likely.
But what's opening is, you lose a JCPenney and you're getting a Casper mattress [store] and an UNTUCKit. Well, those two stores have a small footprint comparatively. So, it makes sense for the mall to say, "OK, we have these two stores people want to visit. Let's put in a gym next to it. Let's put in a modern food court." So, really look at the quality of the mall. If you go to the mall and the food court has a couple of local restaurants you've never heard of, and more than 50% of the mall is dedicated to stores that sell cellphone cases and speakers, those malls aren't doing well. You want to look at the mall that has the really interesting mix of stuff, maybe has a couple of cosmetical places -- that's been a growing category in malls. Go to the mall and get your fat zapped off, get your Botox injection. There's about three or four of those in the mall near me.
Flippen: Well, Florida, there you go.
Kline: Yeah. Look for the mall that built the modern movie theater, and has an ice skating rink. Not all of these things have worked. We might find that people don't want to deal with mall parking to go to their co-working space. On the other hand, I was a member of a co-working space for about a year in an outdoor mall, and it was nice. There were a lot of lunch options. There were stores. I could go to the movies at three in the afternoon, it was two doors down. So, look at the diversity, but really look at the health of any individual property, because there will be less physical space devoted to retail, at least, going forward.
Flippen: Well, in a story that's similar, another company declaring bankruptcy, Bar Louie. It might not be a retail outlet, but it does have that huge footprint we're talking about.
Kline: Bar Louie is sort of an upscale take on a TGI Fridays. Like, it's a bar bistro. And I really want to like it. We had one when we lived in Connecticut. We had one for a few months here in West Palm Beach. And there's another one down the road in Boynton Beach, which is about 15 minutes away. And I've eaten at all three of those. The menu is good; the execution wasn't. And, again, this is only my experience going five or six times across three restaurants, but in general, they were understaffed, the TVs weren't tuned to local sports, they didn't know how to change the channel. And, again, you're going to hear stories: "It's competition, it's delivery." And those things matter, but execution is very important.
So, if you're thinking about investing in a restaurant, one of the smart things to do is just go eat at that restaurant. Order delivery from that restaurant. See what your experience is like. See what happens if they get something wrong, how they make it up to you, how they handle it. Are the customer service people trained well? Order something and tell them you have an allergy that you don't have to see if they're prepared to deal with that. I generally don't eat gluten, and you'd be amazed how many places don't realize that flour has gluten, or is gluten, really, or that rice pilaf has pasta in it, and that's gluten. So, you really want to put things through the test. And, again, it's anecdotal, but if a chain isn't doing a good job training some locations, there's a pretty good chance it's not doing a good job training all its locations.
Flippen: I love the fact that you gave it five or six chances, because that's four to five more than I would have given it under the same scenario.
Kline: So, there's a story behind that. I have a 15-year-old, and those of you that have teenagers know, you are sometimes driven by what they like. And he enjoyed, they had a tater tots appetizer and had bacon and cheese. And it took him a long time to eat, so it was a way for me to get to watch some football, or things I wanted to on TV, that would take him longer than if I just got him chicken fingers somewhere. It does have a good menu. Hopefully, under new ownership, coming out of Chapter 11 with a smaller lineup of stores, hopefully they'll be able to focus on training and making sure it's a good experience.
Last night, I ate at another national publicly traded chain, a very crowded one. This has not generally been my experience there, so I won't name them. But it was half-empty, but there was a huge line because they didn't have enough people working. And maybe that was a one-time thing due to illness; maybe that store can't find enough employees because it's in a very high-trafficked area. But they created a bad experience for every customer that was there. And when those things happen and they're not well-explained, or there's a big line -- I've been to restaurants where there's a big line, and they come out with water or food or different things to keep you happy, or they find ways to make it work. That's very important when you're looking at investing in something. How do they treat their customers? And how do they handle things when they're not going well?
Flippen: That's a really good point, because we talk about the decline of retail -- I really don't like that saying. But over the past holiday season, it seemed like a lot of stuff wasn't selling. But experiences are, and people are paying up for good experiences. And it kind of goes back to what you're saying about the fact that some of these retailers, it was a self-imposed death, because they weren't changing with the times. The same could be true for these nationally traded restaurant chains that are potentially not making it a good experience to eat at their restaurants.
Kline: Yeah. And experience is about more than, like, "Hey, I bought a snowboarding trip." It's also a part of any shopping outing. So, if I go -- I hate to pick on this store, but JCPenney is closing lots of locations. And so many articles blame the internet. But the reality is, I wear one shirt from JCPenney. It's a black polo in their house brand. It's $9.99. It's effectively disposable. I buy, like, a dozen of them every six months. And you could go to that store, and they may not have a stock black polo in their house line -- which probably has something to do with ordering quantities and how they make them. They have to sell out half the teal before they can order a new black. I don't care. If I went to the trouble of driving to the mall rather than ordering the similar-but-I-don't-like-it-quite-as-much Amazon Basics version of the same shirt, or going to Kohl's and buying the lasts-longer version of the same shirt that costs twice as much -- if I have a bad experience, I have a lot of choices.
I could stand in JCPenney and order from other places. And even they might say, "Well, we don't have it in stock, but you can get it on our website." But I'm here. I want it. I don't want to have to deal with getting the package. That's something that you have to be relentlessly focused on. Good customer experience, driving, sort of, even when you're out of something -- OK, you don't have the sneakers in my size. I can order them online, but they'll be 20% cheaper because I made the effort of coming to the store and doing it. That's actually not how it works, but that's how it should work.
Flippen: Well, the last story I have for you today, Dan, is one that is a little bit of a shift, but I think it's really important for consumers to be aware of. It's a story coming out of the World Economic Forum. Maurice Levy, the chair of Publicis Groupe, has kind of made national news by saying that profit is no longer the sole focus for businesses; instead, these businesses should be focused on being a good citizen, which will in turn support investors.
Kline: I want that to be true. Obviously, that's something we believe in strongly as a company. That's important to many of us and how we make investments. The reality is that profit remains the most important thing; but doing the right thing is something that a lot of consumers are concerned about, so as long as you can do it cost-effectively, people are going to gravitate toward those companies as investments.
The example I'll give is Starbucks. Starbucks has been at the forefront of getting rid of straws, changing its packaging, being a bit conscious about how it uses water. It's made some pledges recently about how it's going to be handling that going forward. And that can be used to justify its somewhat higher prices. So, yeah, this isn't Scrooge anymore, yelling at people and making them work on Christmas Day. But profits first, but the other factors do matter, because consumers are driving that.
Flippen: Yeah, to be frank, I did roll my eyes a little bit when I saw this article, mostly because Publicis Groupe itself is a multinational advertising and public relations company. And it seems like a special level of irony when you have a big, multinational PR company coming out and saying, "Yeah, we should all be focused on helping the world," when in reality, I think the way that a lot of companies view helping the world is actually by helping their brand image by doing things that, yeah, leave a good taste in consumers' mouths versus a bad one.
Kline: And I think that's OK. As consumers, we should make decisions. "OK, am I going to go to the department-store chain that pays a $15 minimum wage? Or am I going to go to the one that pays people $8?" You can make those choices. There's a lot of information about companies, what they pay, their impact on the planet, how they treat employees, that you can use to factor into your decision.
Now, look, sometimes are you going to go to Taco Bell, which perhaps doesn't pay the highest wages, because Taco Bell is delicious? Yeah, you might. On the other hand, are you often going to go to the companies that have come out and -- Starbucks will pay for your college. Are they doing that to be benevolent? No, they're doing that because it ties a worker to them for a period of time, which saves them money. It's good for both sides. I don't trust a business that's doing things just to be good. I prefer when there's something in it for the business. And right now, keeping workers is very difficult. So, we're seeing more and more companies offer to pay for college, or reimbursement for student loans, and better wages. So, you have a right to ask for this as a consumer. You also, as an employee, can pick and choose where to go based on what companies are doing.
Flippen: I actually laughed a little bit when you used Taco Bell as your example, because I think it was just a few weeks ago that Taco Bell announced that they were going to start raising manager salaries to $100,000 a year, to presumably improve their retention -- the same thing you were already mentioning. So, yeah, this is going to be more of a thing.
Kline: Let's talk about -- I don't want to say that's a gimmick. I mean, they were already paying managers in the $80,000 range. But they are competing against Chipotle, where general managers can make six figures, and the level above that can make well into the six figures. So, is this Taco Bell being benevolent? No, it's them losing a bunch of managers to other retailers. Wawa has been expanding near me in South Florida, and they hire away a lot of Starbucks managers. So, at some point, Starbucks will probably have to pay its managers more so they don't go to Wawa, or offer the same perks, or whatever it is. It's all a competitive environment. And I think that's great.
And as a worker, you should be looking at your options. I have a friend who switched from being a Starbucks low-level manager to being at first just a clerk at Wawa, making more money. And now, she's in a management program, where she will eventually make significant money, six figures. It will take her years, but there's a lot of training and a lot of upward mobility. And as a worker, you have to manage your career like that. And that sometimes does mean moving on.
Flippen: Well, Dan, thank you so much for joining us today. I think if anything, we've all learned that we should be trying to be fast-food managers and eating lots of chicken sandwiches.
Kline: Wow, this was a diverse episode.
Flippen: A real motley collection of topics and stocks. But, listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out, 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 Austin Morgan for his work behind the glass today. For Dan Kline, I'm Emily Flippen, thanks for listening and Fool on!
