Should Starbucks Buy Luckin Coffee? Should Alibaba? HeyTea? (Tech Strategy – Podcast 30)

In this class, I talk about what can be done with Luckin Coffee post-scandal. Should another company or investor buy it?

You can listen here or at iTunes, Google Podcasts and Himalaya.

Who should buy Luckin Coffee?

  1. Starbucks
  2. 711 or other convenience store
  3. HeyTea
  4. Alibaba or other ecommcerce company
  5. Financial investors

I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

——transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today’s class, who should buy Luckin Coffee? Starbucks, should they buy them? Alibaba, JD, Meituan, Haiti. I mean, the Luckin Coffee situation is pretty clear now and a lot of people are turning their attention elsewhere. I think this is kind of the time to turn your attention back to this company, you know. Companies in trouble, company with a lot of uncertainty. This is where the opportunities often are. So is the luck in situation really an opportunity? And this is the sort of time to jump into it. So that’s what we’re gonna take apart and try and figure out what, if anything, people are gonna do with this. Now the learning goals for today are really three, which we haven’t talked about before. So this is gonna kind of be three new topics. First one is just gonna be new retail. which is something that’s obviously huge in China, increasingly in Asia. Talk about new retail as an idea and as it applies to food and beverage, F&B, which Luckin is. And that’s kind of an interesting question that hasn’t really been discussed that much. Usually when people talk about new retail, it’s like supermarkets or fashion. Everyone kind of knows what that is. Walmart, Carrefour. What does new retail mean for selling coffee? I mean, that was kind of the Luckin idea. So we’ll talk about that. That’s idea number one. Concept number two. We’ll talk about company quality, that how do you assess a company in terms of its performance longer term? Before you can do anything with a company, you kinda gotta have an idea of what you’re dealing with. I mean, is this a penthouse on Central Park? Is this a dumpy apartment out in the alleys of the Bronx? I mean, those are New York analogies, but I mean, ultimately, you have to make a distinction. This is a great company, this is a terrible company. This is a mediocre company at best. and you gotta kinda place it in that bucket and then you know if it’s worth the time and the money and whatever to focus your attention on this. So that’ll be one is how do you assess company quality. And then the third one, which is we’ll talk about value added deals. And we’re really talking about Prince Al Waleed, who I have not talked about, but who I worked for for a long, long time. And he’s sort of the biggest investor out of the Middle East, certainly the most famous, very good. amazingly good investor and he is in the I mean his his strategy which nobody knows which is amazing because he’s been a Billionaire for 30 years and nobody really knows how he does it as he’s a value-added deal guy. That’s what he does So we’ll talk about you know This is kind of the situation actually that would get his attention a company struggling on its knees that nobody wants to touch That’s an all-well lead. He’d run toward this situation probably not this one, but Generally that’s his approach. And we’ll talk about that. So those are the three goals for today. New retail applying to FNB, company quality, and then Alwaleed and value added deals. A little bit of housekeeping. I’m pushing you more and more to do homework during the week. As I kind of teed up last week, I’m gonna start putting out credentials and certifications for each level so that people can actually start to put the stuff on their resume. You know, I finished level two, level three, level four, and this is what that means. And as part of that, I’ve started to say, look, start doing homework. Every week, take whatever level you’re at. This is for subscribers. If you’re a subscriber, you know there’s early, easy first steps, level two, level three, level four, level five is basically done. That’ll go up this week. Within each one of those levels, there’s usually four to five key ideas and companies to understand. and I’ve sort of laid those out and then I tie you to various podcasts and articles you can read to get smarter about each one. I want you to choose one idea within your level and go find a company that’s sort of symbolic or that you can apply that to. So if we’re talking about network effects, which is one of the ideas, okay, go look for a company that you think has a network effect, take a crack at it and write a couple paragraphs about I think this company, Shopee, has a network effect in e-commerce. And here’s how I think it works. I think the more shops that come on, the more it’s valuable to consumers, the more consumers it’s more valuable to shops. I think it goes up linearly. I think it keeps going up. The more shops you have, the more customers are happy. Things like that. Take it apart and try and actually apply it. And then every week do this once. Write it down, write it down, write it down. In my experience, if you don’t write something down, you don’t really know it. So write three to four paragraphs about one of these concepts applied to a company that you’re interested in. That’s sort of the homework for the week. Hopefully you’ve been doing this every week. And I will start to make the homework more formal soon. And then that will tee into the idea of we’re going to do certifications and credentials and things you can put on your CV. But that’s the direction we’re moving. So… Start, you know, keep going, keep going. Okay. Let’s get into the company. But last thing, if you haven’t subscribed… Absolutely, please do it. There’s a ton more content behind the paywall now. It’s growing every week and lots of more sort of structure to the course. So please sign up. There’s a 30 day free trial. We’re getting that we had kind of a boom in signups in the last week, which I don’t totally know why that happened, but I looked in, I was like, holy cow, what happened? Which is cool. It would be cooler if I knew why, but I don’t know why. So I was like, all right, great. Anyways, let’s get into the topic. Now we’ve talked a bit about luck and coffee over this course, and I’m gonna just sort of refer you back to those. The three podcasts where we talked about this was Podcast 3, Podcast 6, and Podcast 24. The links are in the show notes, so if you’re watching this on your phone, it’ll be down in the notes. If you’re looking at a webpage, it’ll be there as well. I still feel bad about podcast three because I was just getting going and the audio quality isn’t very good and I think I packed too much thinking into those. So the first five, I thought I had some good questions to take apart, but I didn’t think I executed terribly well. But it was my first podcast. But that was about what should Starbucks have done about Luckin, which was sort of the mid-2018 time period of Luckin when they just started. It was six months in. They were a big deal. should Starbucks have responded strategically, which I think is a really important question. And we looked into this, so you can listen to that one if you wanna go more into this. I thought podcast six was a bit better, which was, can luck in mobile, DD, we work ever make money? And that was basically a podcast about… Look, just because you have a great competitive situation, just because you have a platform business model, you have network effects, you dominate your market, those are all competitive dynamics. It doesn’t mean you’re profitable. You can dominate competitively a business with tiny or no profits. That comes down to unit economics, which are to some degree determined by the ecosystem more than the company. You know, and that’s a question particularly for WeWork and Uber. which are struggling with profitability. DD has announced they are now profitable, which is pretty cool, but we don’t know what that means. But they’ve been pretty straight shooters over at DD. It’s easy to be a straight shooter when you dominate the market and don’t have any competitors really. Okay, and then the other one was the basic fraud situation, which came out a couple of weeks ago. And that was number 24 of the podcast, which was just a little bit about Luckin. It turns out they were baking their numbers in 2019. Not a huge surprise, but anyways, you can go back and listen to those. But I want to sort of talk about where we are today. I sort of tuned out of Luckin. I thought Luckin was really cool in 2018, which is their first year of operations. They came out of left field challenging Starbucks, which was long overdue. and they had an innovative business model, which was cool. I mean, we’re gonna use digital first, we’re gonna get rid of the stores and we’re gonna do things on an app and then do pickup. Which really gets rid of your real estate costs, which is a huge part of the cost structure. It makes it more convenient, and you maybe are building a better consumer relationship virtue of the smartphone instead of waiting for people to walk in. I thought all that was very innovative, I thought that was cool. I thought they had a very aggressive management, which I liked, and they were using capital very, very aggressively. This was not Starbucks opening store after store for 20 years slowly and then building on profitability. No, no, they were going to, we’re going to build it fast. And venture capital is good at that. And there was a big upside. And the big upside was if we get Chinese consumers to drink more coffee because they drink very little coffee. That’s a huge potential win. And venture capital’s good for that kind of thing. Like if you see a big, huge opportunity, dump a lot of cash on it, and one of two things will happen, you will either win really big, or you will fail very fast. It was a swing for the fences approach, as opposed to a more corporate approach, which is what you usually see in FNB, which is open slowly, use your capital. No, they swung for the fence, win big, get Chinese consumers to drink. 20 cups per capita instead of five. You know, Hong Kong, it’s 250 cups per capita per year. You know, Italy’s like 700, because they’re crazy. But mainland China was like five or 10. I mean, so if you could move that at all, you’re going to have a big opportunity, and you could support 20, 30,000 of these outlets. And they were only opening to 2,000. So big idea, dump the capital, very aggressive management. And they weren’t just talk, this management team, they actually could open these outlets very, very quickly. So they could execute. I thought that was very interesting. And it all came down to, okay, did it work? Did Chinese consumers show up? Did they start drinking more coffee? And my little pet theory at the end of 2018, the end of year one of operations was no. I would hang out at the Luckin in Beijing and I wouldn’t see very many people. and I would check out lots of them and I didn’t see very many people. So I was pretty suspect and I pretty much tuned out. And then 2019 happened and then it turns out they were baking their numbers and they did a desperate race to IPO, which is basically a get out of Dodge strategy. If your choice is between closing your business because it didn’t work and everyone takes a huge write-off, including management of their time and sometimes capital, or pushing an IPO and then shifting the problem to public investors. It’s not an uncommon thing to do. Well, that’s what they did. And then it turns along the way, they, I mean, it looks like they baked their numbers. And then somewhere on November, the lockup period for the founders of their shares expired. And I figured the truth would come out pretty shortly after that. The short sellers started circling in January, and then the fraud thing came out a couple months later. Okay. I basically stopped paying attention in 2019 because I didn’t think there was anything to learn. I mean, my thing is always like not to cover the news, which I don’t really care about. It’s what can we learn as executives? What can we learn as people who run companies or maybe invest in companies? Well, there wasn’t that much to learn. Okay, now I think there’s something to learn. Now the story is getting interesting again, because everyone likes to talk about startups. The truth is most businesses fail. Most businesses have trouble at some point. Even the successful ones have period of like, hey, we did great, Baidu did great for 10 years. And they’ve really struggled the last five years. So dealing with the struggle, dealing with failure is an incredibly important skillset because everybody deals with it. There is no successful person who hasn’t failed many times. So this is a scenario, okay, we know what Luckin is now. What would you do if you were running this company and their management just got booted out, well, except for the chair. except for the lead guy, but COO and the people we know are all gone now. What would you do if you were management? I mean, what would you do? It’s kind of a mess. You know, you’re not the unicorn darling rock star anymore. Life is a lot harder now. You know, this is more like being the trauma surgeon. You know, you’re sitting in the ER and someone comes in with a bullet to the chest. If you can solve that scenario, if you’re the person that can walk into that situation and know what to do, that’s an incredibly powerful skill set. It is a lot more powerful than, hey, we’re a fund and we have money. Turnaround management is a very useful skill to have. If you can turn around companies, people will call you all the time. You don’t even have to do anything. You just sit in your office and they go, oh, no, Bob or Susie, she’s really good at turning around companies. You can just sit there and people will call. Yeah, we’ve got a company and we invested in and we don’t know what’s going on. And the CEO, we fired him or her. And, you know, we heard you’re good at this. Could you come talk to us? You will get that phone call all the time. It’s a great skill set. It’s like being a surgeon. Surgeons don’t have to market. Surgeons just sit in their office and they wait for people to show up. So what would you do if you were the executive or if you were one of the investors, because that’s who’s left now. It’s, it’s the management that’s left and it’s the big investor who this is sitting on their plate. What do you do? That’s a great business question. And this is kind of, and this is really kind of what I do nine to five. And when I went from being a management consultant out of New York City, it was because this Saudi prince, who I didn’t really know about, I just knew he was the world’s fourth richest person, he had hired the firm because he had a company that had gone through this exact scenario. The company had gone bust, this was a healthcare hospital sort of group. You know, obviously the management disappears, the smaller investors disappear because they don’t want any part of this. They’ve just written it off and they’re moving on in life. But when you’re the lead investor, the lead developer, it’s your problem. And it ended up on his desk and he didn’t know, so he called the consulting firm, said, come in and look at it. They called me, I was based in New York, but I was working in a project in St. Louis at the time. And I remember sitting in this, you know, this was a company called Express Scripts, which is a… PBM out of St. Louis, very impressive company. And they had called me and said, hey, we got this project in the Middle East. You know, we know you know healthcare, because I was a healthcare guy. They didn’t have healthcare people out of the Middle East team, because it’s kind of a specialty. You know, would you come take a look at this and, you know, figure out what to do with this hospital, because they don’t know what to do. The bankers are involved because there was a lot of debt that was borrowed, the bank was involved. The senior management was kind of involved. They had put a plan on the table, the senior management, who had gotten them into this scenario. So when the person that drives the car into the ditch comes and tells you, here’s the turnaround plan, please write a big check, your highness, well, you’re probably already angry at that person anyway. So they didn’t know what to do with him. So they said, look, come on out. I said, like, I don’t, you know, one, I’m going to quit because I don’t like being a management consultant very much. And they knew that. And they basically said, look, don’t quit yet. come out to Saudi Arabia, spend a couple weeks looking at this company. We’ll take you out to Beirut, which is fun. I’d never been to Beirut, I had to look up on the map where it was. And then we’ll give you two weeks of vacation in Paris on the way home, then quit. Which was a pretty good pitch. Like I was like, yeah, all right, that sounds like a little adventure. I’m out the door anyway, sorry, fine, fine, fine. And I flew out there and I’ll talk more about what happened next. And that’s how I started doing this stuff. And I teach… I teach a class on all of this, on private equity, on value added deal making, and this is my other hat in life which I haven’t talked about. But it’s really fun. Okay, let’s talk about luck in specifically first. Now I think we look at this and we say, alright, concept number one for today is what is new retail in F&B, food and beverage? Now new retail, the Jack Ma phrase, incredibly boring idea like as a term. Think of a better name than just sticking the word new in front of it. I mean, that’s just really lazy vocabulary right there. But the idea is, look, e-commerce can only go so far online. It works fine for bookstores because you don’t really need to go see the books in the store. Doesn’t add a lot to the experience, but so much of retail is about the experience. It’s about walking down the street, going into the store. looking at the sofa, sitting on it, bringing your family when you all decide to buy furniture for your new house and picking it out together. Seeing the luxury experience and all of that. Then there’s an experiential aspect to it and there’s also a logistics aspect which is like, look we got to ship stuff. How do we do that? And you can ship books and people wait a week, but if you’re going to sell people produce and their daily trips to the supermarket to cook dinner, they’re not going to wait. You have to do it immediately. So there’s an on-demand delivery aspect, there’s a logistics aspect, there’s an experiential aspect, and it was pretty clear in a lot of sectors that this was all gonna come together, that the online assets were gonna merge with the physical assets in the real world into one experience, and it was all gonna be data-driven. And from the consumer’s experience, it would all be one thing. You’d walk into the supermarket, you’d look at the fresh fruit, you’d decide what you’re gonna buy for dinner tonight. to cook or whatever. You would go and say, oh I like this menu, what should I have? Well okay, I’m going to make this dish. The menu pops up on your smartphone, let us recommend this menu to you. Oh, I like that menu, okay I’ll cook that. Oh, by the way, we know your son has an allergy to nutmeg, so you shouldn’t order ingredient number five, you should order this ingredient because they know everything about you because it’s data driven. They recommend an alternate menu, that item’s on aisle six, you walk over and pick that up. Would you like us to cook the fish for you and then you can take it home? Yes please. There’s a service aspect. They cook the fish. Okay while it’s being cooked would you like to have your hair done? Because you have 20 minute wait. Okay fine. Alright the meal will be done in 20 minutes and then it will… Would you like to take it home or would you like it to be delivered within 15 to 20 minutes? And oh by the way we could also deliver some wine and stream a movie for you because we’re Alibaba and we offer everything. Now it’s clear that going to the local supermarket was going to be a much richer experience. And it turns out it’s true. If you go to the fresh hippo stores in China, they’re amazing. They’re absolutely amazing. It makes going to the regular supermarket ridiculous. So this data-driven experience, which is both the physical assets plus the online assets all merged together, is going to be very powerful in certain sectors like supermarkets, luxury, fashion. And in other areas like buying a cup of coffee, yeah, maybe it’s not gonna be that big a deal. Maybe the physical assets aren’t that big a deal. Well, Luckin was the first real attempt at applying new retail to. food and beverage. I think one sector that’s really cool that I’ve been looking at, for those of you who follow the writing, is I’ve been looking a lot at department stores as a really cool frontier of new retail, which is why I went out to the JD E-space in Chongqing a couple months ago, which I wrote up. It’s why I’ve been talking about Intime. I don’t know if it’s called Intime or Intima, but anyways, the department store chain owned by Alibaba, where they’re doing a lot of interesting stuff in new retail. That’s another area I think is cool, but okay. We have Luckin Coffee was a stab at food and beverage. And really what they offered was two things. They offered on-demand delivery. Either on-demand delivery or order and pickup, which is the idea of I’m in my office, in the CBD, I’m upstairs, we’re all working, I open up the app, I order a latte, bing, it’s… In 15 minutes, there’s a little counter right downstairs in the lobby of my office building, and it’s sitting there, and it tells me when it comes up on the counter. I walk down, I pick it up, and I go back to work. Order and pick up. That was most of their business model. They also did some order and delivery, but it’s hard to make money delivering a cup of coffee if you’re not offering subsidies to get usage, which I did a lot of order and. and delivery of Luckin coffee over last year because it was clear they were desperate. So they kept offering free promotions and every time they offer a free promotion, I’d get a free cup of coffee. So I was doing that or at least subsidized delivery. But no, their business model was clearly order on your phone, pick it up in a very convenient little counter located within five minutes of wherever you are, which is going to be at your office or your home. That’s kind of interesting because with that you get rid of the retail space. You don’t have to have all those Starbucks stores everywhere. That was cool. The other thing I thought was cool was shifting the consumer interaction from, let’s walk into a Starbucks or let’s walk into a 7-Eleven, pick something off the shelf. You can buy lattes in both of those locations. And it’s a very shallow interaction between the company and the customer. Starbucks doesn’t know who you are. I’ve been going to Starbucks for 10 years. They have no idea who I am. except for my credit card information maybe. There’s no app I’m using. There’s no two-way communication happening on the app. They don’t know when I’m walking down the street nearby. They don’t know anything about me the way Alibaba does. Alibaba knows everything I buy. They know what movies I watch. They know what I like to buy. They know where I live. They know where I sleep. They know what taxi rides I take. Starbucks doesn’t know anything about me. Okay, so there’s this idea of shifting from a very shallow one-directional relationship with the consumer. here’s an ad, here’s a coupon, to a dynamic two-way communication because everything is now running through an app. And I thought Luckin was doing a great job on that. Their app was pretty cool, especially because Starbucks app in 2018 was awful. They had like the worst app. They didn’t do delivery. You know, they really were weak on the digital and delivery side. And when you look at FNB in China, McDonald’s, Yum China, which is KFC, Pizza Hut. Shabu Shabu, which is the hot pot restaurant, which I absolutely love whenever I get back to China The first thing I do is I go and I get the hot pot restaurant All of those companies if you pull their 10 K’s the phrase Digital and delivery is all over them. That’s what they’re doing. They’re building the digital relationship That is two-way and they’re doing delivery but pickup is better so Starbucks wasn’t doing any of that so That was kind of how Luckin came in from you know left field and really pushed on-demand delivery and pickup and the digital relationship and shifting that as a business model. And then they got rid of the cost structure, which was pretty innovative. Okay. Of those things… What is new retail gonna look like with FNB five years from now? I think that is the key question here. What is the goal line? What is the, you know, where is this leading? Now, Starbucks has since partnered up with Alibaba, which was a good move. They did that six months after Luckin launched. They said it had nothing to do with that, which I totally don’t believe, because They’d been talking about this deal for a year and suddenly it got done and and Alibaba doesn’t take a year to do a deal It takes him like four days to do a deal So I think it had to do with that and then six months after that Starbucks carved out their digital business into a separate business unit. There was an organizational change shortly after Where they created Starbucks China digital with a new digital head and that business is separate It’s not just a functional support to their regular business They’re building a digital business. That was a good move. That was a good organizational move. Whoever did that, good job. I mean, that’s a really clever, this is really good. If you work at a more traditional business, this was a really good approach. Step one, you joint venture with a famous digital company like Alibaba and start to learn, start to train people. That was very good. Step two, launch your own wholly owned digital business. That’s a good approach. Okay, so here’s the question. So what does new retail for F&B look like? Walmart’s trying to figure it out. Starbucks is trying to figure it out. Haiti is trying to figure it out. A lot of bubble tea places are trying to figure it out. And you have sort of two models and I think Luckin was right in the middle. One model is the Starbucks model, which is Starbucks is selling you Experience, right? This is experiential retail plus a product. You go in, you sit down with your friends, you have a cup of coffee, you chat. It’s a nice location. It’s beautiful, especially in China. The Starbucks in China are absolutely beautiful. The only place they’re better than China is Thailand. The Starbucks in Thailand are absolutely beautiful. You go to a Starbucks in New York City, dude, those places are a dump. I’m sorry, I used to live above one. It was a dump. Actually, I lived above two of them. And I changed the, they didn’t like this, because I lived upstairs above the Starbucks. I changed my wifi signal, because you know it has a little name, instead of saying Jeff’s wifi. Because you can see it when you’re sitting in Starbucks and you scan for wifi, it’ll pop up. Oh, Jeff’s wifi, must be some guy upstairs. I changed my wifi name to Starbucks needs to clean the bathroom, because it was absolutely disgusting. So whenever you sat down in Starbucks and tried to log in wifi, up popped Starbucks needs to clean the bathroom, which they didn’t like. But they didn’t know it was me. So, okay, that’s experiential retail. That’s a lot more like the JD eSpace. That’s a lot more like going to the supermarket. That’s a lot more like the department store where the experience within the physical retail space is very important. That’s Starbucks, that’s what they’re doing. They’re adding a better app, they’re offering delivery, but they’re still about getting nice, beautiful locations that are convenient, that are high traffic, high visibility, and then building out a nice user experience. And they do it well. Their stores are great and they’re unbelievably good at getting real estate. So digital is a small part of the equation for them. Although their membership program is pretty impressive. The other extreme would be, not other extreme, but let’s say another model would be 7-Eleven. How duh? These convenience stores that are on every block, they sell coffee. You go in there and they sell coffee. And… They are not pitching an experience. You don’t go to 7-Eleven to have a nice experience. You go there for convenience. That’s why they’re called convenience stores. I mean, that’s literally in the name of the store. You go there because you know it’s close by, you know you’ll get a decent product, you know it’s fine for quality, it’s right down the street, price is low, and they sell bottled water and Red Bull and coffee and morning bakery, and they sell lattes, freshly brewed coffee. They have that behind the counter now. Okay, that’s another pitch. Experience doesn’t matter, but for a company like that to go digital, I don’t understand why 7-Eleven doesn’t have a great app. I don’t understand this. Why don’t they have an app such that when I get up in the morning, I can click brew my cup of coffee, and then I walk down the street to the 7-Eleven and it’s sitting there on the counter waiting for me. I don’t know why they haven’t done this. In between those two, and why do they don’t do delivery? They’re already close by, or pick up, order and pick up. They have this network of locations. And then in between those two models is Luckin. Luckin is, you know, the funny thing is when you read the Luckin IPO documents, they have an enormous amount of discussion about their business model and digital. About, you know, we are offering convenience, standardized quality, and low price. That was their pitch. Which is basically the same thing 7-Eleven offers. Convenience, standardized quality, low price. And they have very little to say about selling coffee, which is funny. Like most of their IPO document is about the business model and digital. And there’s almost no discussion about coffee, how you sell coffee. HeyTea, which is a tea company, they are all about the experience and the products. They talk overwhelmingly about products. We’re good at making new products that people love. That’s their skillset, getting locations and products that people love. Luckin never talked about it. It was like the product was almost secondary to the business model. But in between these two business models for a new retail you have this idea of, okay we’re not going to have physical locations like the convenience store but we are going to offer the same thing which is the app, the on-demand delivery and or pickup, and the standardized quality. So they’re right in between those two business models which is interesting. So let me push this back to you now. Let’s do this as a case now. Who should buy Lucky & Coffee? If you take apart this question with the idea of, look, this is about building new retail for F&B and what that’s gonna look like in five years, this could be part of that play. So, what’s it gonna look like? What is F&B gonna look like? It’s gonna have a customer relationship via an app, which is a two-way relationship, that’s important. It may have an experiential component. and it may have an order and pickup and a delivery on demand component, sort of a logistics component, a retail experience, and then the digital experience, which is pretty much exactly like the supermarket. The supermarket example I gave you is there’s a app you do everything through, there’s a retail experience in person, and then there’s a delivery logistics experience. Make a call, what do you think the future is gonna look like? Is it gonna be like 7-Eleven? Is it gonna be like Starbucks? Is it gonna be a mix? And based on that, who should buy them? And I will give you five choices for who should buy them. Number one, Starbucks should buy them, right? Starbucks has the physical locations, it has the retail component, but it’s weak on digital, it’s weak on delivery, on demand. So this gets them both, bam. That’s option number one. Option number two, 7-Eleven. 7-Eleven is not so much about the experience, it’s overwhelmingly about the convenience, but 7-Eleven doesn’t have delivery, it doesn’t have a good app, which Luckin does have. So 7-Eleven should buy them and integrate the app in with their network of convenience stores. That’s option number two, which is a different idea for what new retail would look like for FNB. Number three, Haiti. I like Haiti. For those of you who don’t know how to tea, I’ll put the link in below. I’ve written some articles about them. I’ve visited their stores. They make cheese tea, baked goods. They’re basically a Starbucks business model that was applied to tea. And their products are great. They have lines out the door. Every time I go, you gotta wait because their biggest problem is the queues because everyone waits and people don’t like to wait. But they make these great teas, beverages. You know, if Starbucks is really good at getting locations and doing coffee, Haiti is really coming up with new products that Chinese consumers love. OK, so they have a product. And that was kind of the thing Luckin Coffee didn’t have. They had the business model, but they never had a product that people loved very much and they never got the demand. OK, Haiti has that. So maybe we take a company like Haiti. which has the product and then we pair it with the Luckin business model. Haiti doesn’t have an amazing app, it’s okay. So maybe that’s the model. Maybe the only thing Luckin really missed was they didn’t have the right product. That’s option number three, Haiti should buy them. Option number four, Alibaba. Alibaba is all in, and you could say JD as well, I don’t mean to leave out JD, you know, similar idea. They could integrate this into their… We do new retail for everything. They bought a department store. They’ve partnered with Starbucks. They’re buying supermarkets and building them. So maybe they want their own F&B footprint. So an Alibaba or a JD or a Matawan, possibly. An e-commerce player should buy them. That’s option number four. And option number five is a financial investor. Maybe. you know, maybe we don’t need a partner, maybe it’s just a matter of money and management. That’s what was missing. Financial investor like a guy like my old boss would come in and he would just inject capital and management, and that’s it. So that’s option number one, two, three, four, oops, sorry, that’s five. So those are your options. If don’t, you know, look at the show notes, I’ve listed them there so you, if you can look there if you’ve forgotten, but take a minute and you know. If they called you and said, what should we do with this company? We’re an investor or we’re the current management, what should we do? You’re gonna come back and pitch them option one, I think you should do this. And let’s say two options, option two should be this, what would you pitch? And then based on that, you would set up meetings, maybe with Alibaba, maybe with Haiti, and you’d start to talk about it. What would be your recommendation? So that’s your question for today. Pause the recording. Take three, four, five minutes and make the call and make the call based on what you think the future of new retail is going to be. Okay, pause now and then come back. All right, how did you do? Did you do it? If you didn’t, stop the recording. You’ll get 10 times more out of this if you just take three to five minutes and give it a shot. All right, let’s sort of shift to this second idea for today, which is company quality. Now, you kind of got to know what you’re dealing with before you start. It’s like 80% of everything is. Look, what kind of business am I going to be involved in? Am I going to be in an operating system software business, which Bill Gates decided at 19, and he was a billionaire two years later. You know, you got to place your bets on the right area. You know, some businesses are just difficult. They’re a ton of work, there’s a ton of competition, and you never make any money. That’s just how a lot of businesses. Other businesses, you know, they’re amazing. You make a ton of money. You don’t have to work that hard. And the irony is like the better the business, the more money you make and the less work it takes because you have fewer competitors. No, Jack Ma had one brilliant idea as a young guy, which was 2000, 2001. I’m going to do e-commerce in China. That was an amazing idea. Everything felt. It wasn’t amazing. It was just, it was accurate. That enabled everything else. If you had said, I’m going to do hospitals in China in 2000, you would still be struggling to get anywhere because, you know, it’s very difficult business to make anything happen. So picking your spot incredibly important. And that means making a call on how good of a company or industry is this? Because you’re going to live within that. You know, dentists don’t make tens of millions of dollars. My brother’s a dentist. My father, when he was working, was a dentist. You’re going to live within that. So the question is, how good of a business is F&B in China? And that’s really, you got to have that call. You got to know, don’t spend your time and effort and money and capital and all that building a mediocre or difficult business. You know, know what the finish line is and that you’re going to end up with something really valuable that you like. And that’s great. So how good is this? How good is this as a company? You know, luck in specifically, but then just overall F&B in China. Do you want to be in this business? And for those of you who’ve taken my sort of private equity class, you know, this is always question number one and two for me is, I give my students nine questions to answer, decide whether to do a deal, do an investment. And number one and two are always about assessing company quality. And one of the reasons I talk about Buffett so much is because he is the best person on the planet at identifying the best companies. That’s what he does, because he only buys the best companies. His company, Berkshire Hathaway, is like the Louvre of great businesses. It’s like the best painting of every era. That’s the Louvre Museum in Paris. That’s what Berkshire Hathaway is. It is a collection of the greatest businesses on the planet. So how good is his business? Other people like Carl Icahn, who is another guy I follow closely, he’s very good at buying mediocre businesses and bad businesses and making money with them. which is a good strategy because it turns out there’s a lot more bad businesses than great businesses. Okay, how good of a business is this? Now, I always put this into basically four buckets. And my buckets, for those of you who are in my class, I say this all the time, good, great, bad, and too hard. I just force myself to make a decision. Is this company good, great, bad, or too hard? And I have checklists I go through and ways of doing that. But I generally, good and great, the defining characteristic of a good or great business is does it have a competitive barrier? Are you competing with a thousand companies or are you competing with three companies? This doesn’t mean globally, this could just be in a local small town. Hey, we’re the only hospital in this village in the mountains. That’s a good business in my book there’s not enough people in that small village to support two hospitals. So if you’re the only hospital in town, that’s pretty good. Now I would call that good and not great because the economics of hospitals don’t go up forever. It doesn’t scale easily. So it’s not gonna double or triple or quadruple in value year after year because you can’t keep adding beds to the hospital, there’s not enough people. But it is gonna be a very stable business. If you have the only hospital in a mountain town. you’re gonna have nice profits, nice profitability, but you’re not gonna go up in revenue like crazy because that’s just the way hospitals are. I would say the same thing about if you own a hotel on Waikiki, if you own a hotel on the beach in Sanya, if you own an apartment building on Central Park, on Hyde Park, you’re not competing with… a hundred hotels and a hundred apartments, you’re competing with probably 10 because you’re on the park. And that’s what people want. It makes you unique. There’s no ability to add more apartments on the park because the spaces are all gone. You have limited your competition fundamentally. And the only real estate deals I know Buffett has done is I think he bought a hotel on Washington Square in New York. That limits your competition fundamentally. and that makes you a good or great business. I think this is good because you can’t double, the only way you can double your revenue is by building more and you can’t do that. So I would say that’s good, but it’s not great. A company like Coca-Cola, I would put in the great category because it’s one of two to three main colas in the world for a hundred years for various reasons. So it’s got a competitive barrier. and it scales very nicely. The economics are nice. You can keep selling more Coke to people in Africa and Indonesia and South, you know, it keeps going up nicely. Hotels don’t do that. So that’s for me, you know, good versus great. I always look for a competitive barrier and I put it in those buckets. If I don’t see a competitive barrier, I put it in the bad category. Now, bad doesn’t mean it’s awful. It just means it’s unpredictable. I don’t know what’s gonna happen. If I’m a restaurant on a side street in China, I’m competing with, now how many restaurants am I? I’m not competing with, if I’m in Shanghai on a side street selling jiaozi, I’m competing with what? Couple hundred restaurants? I’m not competing with restaurants in Beijing, so that part’s nice, but I am competing with a lot of local restaurants in the area that are offering new stuff, new menus. doing promotions, refurbishing their place. It’s hard to, and I don’t have any barrier against them and new restaurants can open every week. There’s nothing stopping people from jumping in and renting the space next to me. So it just means there’s a degree of unpredictability. I could do well, but when I wanna look how I’m gonna be doing in two to three years, I could go up, I could go down. I don’t know. It’s a lot like running a marathon. Some days you win, some days you lose. The difference between that and a good and a great business is I may go up, I may hold steady, but if I have a good or great business, I know I’m not going down. That’s how I break it down in my mind. A bad business is unpredictable. So then it really turns out to be a lot about management. Some management is better than the others. Most restaurants are bad businesses in this sense. Bad is probably not the right word. I should use the word unpredictable. If you have a great management team, which KFC did, in China under Samsung for 20 years. He built, actually it was about 20 years, he built, he took four KFCs in China in 1988 and turned them into more or less 7,000 KFCs in Pizza Hut over 20 years. Mostly because, well, people like chicken in China and he was a very good manager and had a very good management team. Sometimes it’s about the horse. That’s, that’s good and great businesses. Sometimes it’s about the jockey. That’s restaurants. Now ideally you want a great horse with a great jockey. And if you can’t have that, you want an okay horse and a great jockey. But if you have a bad horse and you put a good jockey on it, you’re still probably gonna lose. That’s how I break it down. Okay, so let’s say good, great, bad. And then the fourth category I use is too hard. And this is a Buffett term. If you look at pictures of him at his office, you’ll see on his desk, there’s a little wooden plaque that says, too hard. There’s no value in trying to solve really hard questions versus easy questions. You don’t make any more money. Go for easy questions that you can figure out as opposed to difficult ones. I don’t do biotech. I do a lot of healthcare. I love healthcare. I think I’m pretty good at it. I don’t do pharmaceutical drug development because it’s too hard. I can’t figure it out. One, it’s too hard. I don’t think I can figure it out. Two, it’s too hard. I just think it’s hard for anyone. It’s actually just really hard to develop a new pharmaceutical that works. Elon Musk sits with one foot in the too hard category. A guy like Bill Gates never did too hard. He did software. Software is under your control. You know if you can code the app. You know, you’re writing software. It’s under your control. Mark Zuckerberg, he avoided too hard. There’s nothing hard. That’s why a college student can do that stuff. Elon Musk, he puts one category in the, one foot in the too hard category. He’s trying to do stuff that is actually technically difficult. Building rockets has an engineering aspect that is difficult, it’s hard. You better be really smart and you’ll still probably fail most of the time because it turns out it’s hard to invent new engineering products in this life. And it’s even harder to invent new chemistry and new biology products and new medical products. Most business people avoid the too hard category. If I think it’s too hard for me or just too hard in general or too unpredictable, forget it, it’s not worth it. So that’s my buckets, good, great, bad, too hard. Now, where does a rest, where does an F and B for selling coffee fit? Is it too hard? Too unpredictable? Well, it’s not like we’re inventing rocket ships here. We’re making coffee or we’re making juice and we’re merging Luckin with Haiti and we’ve got a popular product. I can look at how much juice Haiti sells today. I have proven demand there and I have a clear business model built over by Luckin. If I put those together. That doesn’t strike me as something I can’t figure out. I can probably figure that out. Okay, so maybe that’s not too hard. Maybe getting people to drink more coffee in China is actually too hard. That there’s no easy way to get people to drink more coffee. Luckin just spent a gazillion dollars in free coffee, giving it away, trying to get Chinese to drink more coffee and it didn’t work. That seems important. So maybe getting Chinese to drink more coffee is too hard of a business problem. And the only way to address that is to do what Starbucks, which is doing, which is just the long, hard slog, where for decades, they’re just gonna slowly grind away and get one new drinker after another, but you’re not gonna have explosive growth. Haiti has lines out the door. Luckin doesn’t have lines out the door. So maybe that’s too hard. So if we look at Hey T, let’s say if we look at Luckin Coffee and we combine it with Starbucks, that was option number one. Is that a good business, a great business, a bad business, i.e. unpredictable, could go up 20% next year, could drop by 50% next year? When I think about bad businesses, I ask myself, could this business drop by 30% in the next two years? Coca-Cola, that’s never gonna happen. It could happen, could it happen with people buying coffee? I don’t know. Too hard, can’t figure it out. Which one of those buckets is Starbucks plus Luckin? Same question for 7-Eleven. If 7-Eleven buys Luckin, and we start to do the new retail convenience based, not experiential based, is that good, great, bad, too hard? Alibaba? Or just a financial buyer? put in some management capital. Okay, so that’s one way to think about it. I’m gonna have you take another swipe at this. But let me talk a little bit about value added deals. This is the third concept for today. This is the last concept for today. So if you’re getting tired, hang in there. This is concept number three. Now I wrote a whole book. It was my first book. After I worked for Avalid for about eight years in various forms, I left, I quit, and I went back to the US and I… I wrote a book called What Would Ben Graham Do Now? And it was sort of about the Awa lead investment strategy. It was not a well-written book. I think it’s probably hard to find now, which is good because I don’t really think it was very well written. I don’t usually recommend it, but I think the thinking was good. I’m going to rewrite the whole thing and do it better because I didn’t know what I was doing. It was a little wordy and pretentious. But the idea was… What a guy like Al Waleed. Okay, so I went out to Saudi Arabia. I flew out from New York. I had to get my visa. So we went to Lebanon because back then this was early 2000s. Back then to get a visa into Saudi Arabia, you went to the embassy in Lebanon in Beirut. And a lot of the, this was Booz Allen and Hamilton, which was sort of back then when I did this, there were sort of three management consulting firms. There was McKinsey, BCG and Booz Allen. Booz Allen is sort of cratered since and disappeared. But the team was based in Beirut because half the team was Lebanese and living in Beirut was awesome. So I flew in there, had to get my visa, so hung out in Beirut for a week and hung out with the Lebanese staff at the Booz Allen office in Ashrafieh, for those of you who know for Beirut. It was amazing. It was such a fun town. It was sort of post-Civil War, so there was bullet holes in buildings and it was crazy, but you know, just great fun. You know, this is like Lebanese are just, this is a stereotype, but it’s true. Lebanese are just awesome. There’s so much fun. They had taken the bomb shelters that they had used during the civil war and turned them into nightclubs. So you’d go out to a nightclub that was based in a bomb shelter. You could go to the beach, you could go skiing in the mountains. It was just, I mean, I had so much fun. The food was amazing. You could go up into the hills. You know, George Clooney married a Lebanese woman, Amal Clooney. She was from the Shouf, which is… an interesting part of Lebanon that’s just outside of Beirut. Just amazing. You get your visa and then you fly into Saudi Arabia. Saudi Arabia is not a lot of fun. It’s fun for business, but it’s not a lot of fun for living because there was a lot of segregation in men and women. There’s no movie theaters back then. It’s all dudes mostly because women were not really allowed to work that much back then. It’s changed somewhat since. So we would fly into Saudi Arabia. There was this hospital which was basically bankrupt. And actually I said this and then Al Waleed owned it because the management that had built and developed the thing and opened it didn’t, you know, didn’t do that good of a job. They loaded it up with debt, which guaranteed that it was going to go bust because hospitals take two to three years to get to operating breakeven. And they had loaded this thing up with debt. So it was almost guaranteed to go bust. So I had looked at it and sort of taken it apart as part of the team. And then I’d gone in to meet Al Waleed for the first time. And I basically said the same thing. This thing is bankrupt. He didn’t like that. kind of yelled at me a little bit and said, it’s not bankrupt, it’s broke. It was actually pretty funny. He’s like, if I decide, this is what he said, he says, if I decide not to put in any money, then it’s bankrupt. He says, right now it’s broke. They’re going to him and saying, please put in money. We need more money or we’re gonna close our doors. And they were burning about one to $2 million per month, which means every month, every 30 days, someone had to go down to Al Waleed’s office and say, your highness, I need another million dollars. That does not make you popular. Nobody likes that meeting. So I’d gone in and I’d sort of presented to him as part of the team. And I basically said, look, you got a couple options here. You’ve built a beautiful hospital. The facility’s amazing. You have a medical staff that is overwhelmingly foreign, flown in from other parts of the world, like Germany and UK. They all doesn’t make any sense. You need local doctors, local nurses. Hospitals are a local business. You basically have a facility, but you don’t have a medical group. And in the US, that’s what hospitals are. They’re actually two different businesses put together. One business is a facilities management group. One business is a medical group. And sometimes they join up and sometimes they’re separate and they contract. They said, your best play here, I’m paraphrasing a lot, was go find a local medical group in Riyadh, which has a well-established group of doctors and nurses, a patient base, merge up with them. We slap that group into your high quality facility. You can be… a very high quality top of the market hospital medical group within one day. You’ll still lose money for a year or two, but you’ll end up with something good at the end of the day. That’s option number one. Option number two is we can just call up the insurance companies, take a bunch of insurance contracts, fill this thing up with insurance patients who are bad at, you know, insurance companies don’t pay. You’ll be a middle of the road, middle of the pack hospital with low rates. One of a 25. but you’ll lose your brand. That’s another option. Three, keep going. Four, close it. Something like that. And he went for option number one. We merged it up with a local medical group and now it’s a very, very good hospital. If I was sick in Riyadh, it’s the only place I would go today. Okay. What that is and what Alwaleed does when he buys a company like Citibank, he was the, you know, he basically bought 10% of Citibank when he was 32, 33 years old, became the largest owner of an American. business, the bank. He bought Euro Disney, same period. He bought the Four Seasons. He bought Lyft, Twitter. His standard strategy is what I call surgical value add, which he goes in, he doesn’t look for the great companies, because great companies don’t have any problems. He doesn’t even look for good companies. He looks for potentially good companies and potentially great companies, companies that are in trouble, companies that nobody wants to touch. but are one move away from being a good or great company. So in this case, this was a surgical value add. You take the hospital, you put in capital, you put in management, and you put in the medical group, and in one move, you’ve ended up with a good business, bam. You go into Citibank, which is on its knees financially in the United States in 1991, you inject capital, and one day later, the balance sheet looks better. and you’ve ended up with a great company, which is what Citibank is, four C’s and same things. He looks for those companies that are one step away, maybe two steps away, one move away from being good or great so that when he’s done as fast as possible, he can step out, move on to other things, and he ends up with a great company in his pocket. But you gotta go after the companies nobody wants. You gotta go to the companies where you can add a ton of value, which is not just money, it’s management. could be political connections, could be a capability, like a medical group, it’s value added deal making. And that’s what he does. So what kind of value can you add? Let’s say you can get into Luckin and you can go and make the owners an offer today and they’re gonna take it at a low price because they don’t know what to do with this thing. I mean, this is your moment to move. Okay, what’s your value add? Well, I think there’s four to five different types of value add. One type of value add is just money, capital. Capital can be valuable when a company is on its knees, like the Citibank situation. All you had to do then was add capital and you were done. Is that enough? Does that get you to a good or great company? Probably not, because lucking has a strategy problem. Another thing you can add is management. OK, we’re going to come in and we’re going to be capital, plus we’re the experts at turnaround. That’s a good skill set. What I ended up doing for Alwaleed for several years in various projects was to be the turnaround guy. That’s literally what I was, was he would say, okay, you think you’re so smart, take over, you be CEO, which is literally what he told me. And he said, go sit outside in the boardroom. I went and sat in the boardroom. He brought the CEO of the hospital in, sat him down and basically fired him. That guy went out the side door. I came back in the side door and he says, okay, you’re CEO, good luck. That’s management. Management can be powerful. He invested in Apple computer a couple months before Steve Jobs came back and took over. That was a good move. So management can be a surgical value add. Another one you can do is political connections, which sounds swarmy, but it’s not. If you’re gonna try and buy a bank in Saudi Arabia, if you’re gonna try and buy a bank in China, it is gonna have a lot to do with your political connections because those are sensitive industries. We could say the same thing about oil, energy, security, things like that. You can bring in government contracts, things like that. There’s a political aspect to a lot of business. which people seem to want to ignore, even though it’s very common in lots of businesses all over the world, healthcare in the United States is incredibly political. So that can be a value add. You can add capabilities. So these are sort of your four buckets, capital, management, political, value add, or capabilities. And a capability can be something like, the capability we need for this hospital is a medical group. The capability we need is a popular product. We have an operating system which is lucky and coffee, but we don’t have a product that people love. Hey Tea has a product that people love. That’s the value add maybe we need. We slap that into the business model, bam, we’re done. Surgical value add. So obviously I think in the Hey Tea situation, we have a capability problem. We need a value there. We need to bring something to the table there in a surgical fashion. So let’s wrap this up because I’ve been talking at you a lot. What would be a surgical value add deal that we could do with Luckin Coffee? Is bringing capital necessary? Yes, we’d have to have a partner with capital. Is it enough? No, because clearly there’s a business problem here in terms of strategy. So capital is gonna be necessary but not enough. Is it a management problem? That we just need, look, the idea is fine, the product’s fine, it just needs money and management. We just need to run this thing better. The horse is fine. We need a better jockey. Is that enough? Number three, political. Is this an issue where, look, we’re selling automobiles, we’re selling jet engines, we need more political connections, we need to be able to sell. If you’re going to do real estate somewhere like Shanghai, Beijing, New York city, Abu Dhabi, Dubai, a lot of that is political. I mean, Donald Trump was a very good. One of the reasons Donald Trump became Donald Trump out of New York real estate was he was pulling. derelict projects out of the government and revitalizing him in the late 70s. That’s what he was doing. He was good at the political side of the business. If you’re going to do real estate in Shanghai and build something in downtown, you’re going to deal with the government. They care what’s built there. So political can be a part of this. Is that the thing in FNB? No, not really. There’s not a lot of politics in food and beverage. Alright, so then we get to capability deals. I think this is a where we have to think about it. What is the capability that’s gonna put together the scenario such that when we’re done with one or two moves, we end up with a good or great company? Or maybe just a bad company, maybe F&B can’t be good or great. You know, a lot of restaurants, that’s what it is. And now I’ll jump to the end. I think it’s very hard to build a restaurant or an F&B business with a competitive advantage. I think that’s very, very difficult. I think you’re mostly in the bad category that… You’re just in an unpredictable business and you need top tier management that can execute like crazy every month of every year forever. That’s fine, most businesses are like that. Do you wanna be in that business? I don’t know. Okay, so what would be the capability that would make all the difference? Is it a brand? A brand is a capability. Is it a hot popular product? is it maybe it’s the other side, maybe what Starbucks needs, maybe what 7-Eleven needs is they need a capability to bring into their own business that they’re missing, like a good app, like on-demand delivery, like pickup. Well, Luckin has those things. You could slap those things. Maybe it’s not about fixing Luckin. Maybe it’s about taking what Luckin has and slapping it into 7-Eleven and slapping it into Starbucks and slap, maybe that’s a better play. So that’s the last idea for today, which is this idea of surgical value add that gets you into a deal at a good price because you’re looking at something that other people are afraid to engage with. If you go and try and buy Starbucks, you’re not going to get in because they don’t need you. Well, Luckin, its management and its owners, they have a problem and you want to come in and solve their problem. Okay, so let’s do this case again. Same thing. Who should buy Luckin coffee? Option number one, and I want you to think about what kind of business this is in terms of new retail. Is this gonna be a good, great, bad, or too hard business when you’re done with it? And what do you need to get there? And you wanna get there as surgically as possible. Do you wanna get there with management, capital, political connections, or capabilities? Okay, so option number one, Starbucks should buy Luckin Coffee, which would basically mean we’d fold Luckin into Starbucks and it would become part of their digital business and they would get the app. They would get all those locations, the footprint, the on-demand delivery, all of that. Fine. Option number two, 7-Eleven. We would fold Luckin into 7-Eleven. It would compliment their chain of stores all over the country. It would be convenience, not an experiential business like Starbucks, more of a convenient, low price, get it fast. And 7-Eleven doesn’t have a nap, as far as I know. Haiti. Okay, Haiti has a popular product that people love. but they don’t have a digital presence. They don’t have a big footprint. They only have, I think, 200 stores right now. So maybe we merge those two together, popular product plus digital business model. Number four, Alibaba, e-commerce, JD. This just becomes another part of their big suite of, you know, they have department stores, they have supermarkets, they’re building lots of little stores, convenience stores, and now they have F&B stores. It’s just part of the suite of Alibaba. or JD. Number five, a financial buyer that doesn’t have capabilities. We come in, we inject capital and management, and that’s it. Those are your five options. Which one would you do, and what would be the business you would end up with when you’re done? So take a minute, press pause, and give it a shot. And we’re back. Okay. So how did you do? It’s a good question, this one. Everyone likes to talk about the famous companies. Everyone likes to talk about the great companies. Everybody likes to talk about zero to one. You know, this idea we’re gonna be a startup, an entrepreneur, and you know, that’s a very small sliver of business. Most of business is mediocre. companies, screwed up companies, dying companies, struggling companies. You know, it’s not the year zero to one that matters. It’s that third phase of business after the growth phase when the venture capitalists have all moved on. There’s so much that’s where most people live in business. You’re far better off in life, in my opinion. learning to be the person that knows how to go into the situation that’s screwed up, where the business is in trouble, where things aren’t working like the plans were supposed to do, and knowing what to do. You know, you want to be the trauma surgeon. You want to be the ER doctor of business, because that’s so common, and it’s a valuable skill set. And it moves you away, if you’re an investor, from being just a source of capital. Capital is capital. But if you’re the person that can fix broken businesses, that’s a really good skill set. So I think this space is important and we all face it, everybody who’s successful, you are gonna have a disaster on your hands at some point. And you gotta learn what to do when everything goes wrong. So what would you do if you were sitting there and looking and you were on the management team or you were representing the owners or you were a consultant or an advisor, they had called to come in and look at it. Maybe the investors had called you, maybe the bank had called you because they were now involved because it had defaulted on its debt. So I’ll give you my take. For me, it’s always about know where the ending is. Is this gonna be a good, great, bad, or too hard business that I wanna be involved in? Investor, management, as part of a career. And generally speaking, I’ve been involved in opening a couple restaurants. They weren’t mine, but I was sort of helping someone. Restaurants are a very, very hard business. Very hard, endless competition, changing consumers, not a lot of loyalty. It’s a very, very hard business with no barriers to entry. That’s difficult. It’s especially true in China because how many restaurants are there in China? There are millions of them. You know, it’s crazy competitive. Everyone can open any, it’s a tough business to be in. And the companies that are successful like KFC, Starbucks, McDonald’s, they spent 20 years fighting their way there. I mean, it was a 20 year fight to get there. So I don’t really want to be in the F&B space generally, but I’m open to exceptions. I don’t want to be in the coffee business in China of F&B because it’s clear that Chinese consumers are not thrilled with it. Luckin spent hundreds of millions of dollars trying to convince Chinese to drink more coffee and it didn’t work. If it didn’t work for them, it ain’t going to work for me. So with that said, my inclination on this is to look at Luckin as a source of parts. Are there any parts here I want that I can slap into another business? Okay, I would take option four, the Alibaba option, I’d take that off the table. I don’t think Alibaba needs, I don’t think JD needs this. I think they can open, they have customers, they have data, they have apps, they have locations. There’s nothing here that they need. They have all of this or they could build it very quickly. So think option number four, no. Option number five, inject capital in management and try and fix the business as is, no. I think it’s too hard. And even if I succeed, which I think would be very difficult, I don’t wanna end up as an F&B business in coffee anyways, because I don’t think it’s very good business. So that one’s off the table. Okay, what about Starbucks or… 7-Eleven. I don’t think Starbucks needs this thing. I think they have an app now, maybe a year or two ago, this would have been a good deal for Starbucks. I think there was a window of time when Luckin had a lot of digital tools they had built and Starbucks didn’t, that you could say, okay, let’s take the digital abilities of Luckin and put them into Starbucks and combine it with the real estate footprint. Okay, that window of time has passed. Starbucks now has its own digital division. They’ve got a partnership with Alibaba. They don’t need anything here. So I think that one’s off the table. 7-Eleven is interesting. I think that one would be worth a phone call and a meeting to sit down with 7-Eleven and say, look, you’ve got this great footprint of convenience-based retail operations. Luckin basically was doing the same thing. They were convenience-focused, not experiential. They’ve got the app. They’ve got this order. system where you can pick up. Let’s combine that with your retail, you know, your real estate footprint at 7-Eleven. I think that’s interesting and worth a meeting and I think you can get this company cheap. I would do that meeting. So option two I think was interesting. The other option would be, okay, do I want to be, and I think that would be interesting. I actually like the convenience store business. I think the convenience store business is a nice business to be in. I would like to be in that business. So good, great, bad, and too hard. Convenience stores, good business. I’d be interested in there. This might get you in. The only scenario where I would think about being in the F&B business is Haiti. Now I sat down with, I went out to visit some Haiti. There’s a nice young woman who works in their media group, Media Relations, who called me and we sort of connected a bit and I went out and visited their operations. And you know, the store was packed. There was line out the door. I tried all the teas. I tried some of their alcoholic beverages and they were great. And the product was great. And we actually talked a little bit about career because she had been working in the digital space and had gone over to an F&B. And we talked about that. And my take, which was just my opinion, was, look, I would generally not tell people to go into an F&B business as a, maybe not as a career, it’s just a hard business. The odds of winning are lower than other businesses. But in this case, it actually worked out beautifully because you ended up in a company that looks like it’s got a hot product. Chinese consumers love it, it’s proven. And as we’re walking around the shopping mall, this is in sort of Western Beijing, I said, you notice that like, there must be 30 restaurants that we can see here and all of this was afternoon on like a Monday. All of them are empty. And all of them have staff standing at the door waiting for people to come in, hoping people come in. And then there’s one store with a line out the door, which is you. I said, that’s unusual, you did amazingly well, but you could have been the other ones. So, God bless, you’ve done beautifully, you’ve got a great product, and when the company talks about, now the company’s gotten a lot bigger, hey T, this was back when they had like 100 outlets, now they’ve got two or 300, and people are paying attention to them. And when you talk about the company, you hear exactly what I would wanna hear. I’m hearing exactly what I would want, is you’re talking about how do we make good products that thrill the customer. How do we give them a great day? How do we come up with something new that is thrilling and fun and cheese tea and fruit teas? And that’s what I wanna hear from an FNB management. I don’t wanna hear about your business model and your great app. I wanna hear about how you’ve come up with this amazing product everyone loves. You have to be product focused and that’s what they’re doing. And I thought that was great. So I said, in that case, I think there’s an interesting, I would do the meeting with HeyTea and luck in. I think HeyTea has the hot product. Haiti is very popular. They don’t have a digital footprint. They have a store footprint like Starbucks. Let’s compliment that with a good app and order online and pick up close to where people live and work for a small set of their products. That could be an interesting extension of their current business. Let’s take your current business, which is a Starbucks business model, let’s extend it with this sort of more innovative business model and make you a bit bigger. I like that idea. And that’s probably the only F&B business model that would get my attention. So I would do those two meetings. I’d set up a meeting with 7-Eleven, I’d set up a meeting with Haiti, and see where we go. And that’s it for today. That’s my take, you know? The key ideas, just to recap, key ideas to take away from today are what is new retail gonna look like in F&B? New retail’s a big idea, very important. We know what supermarkets gonna look like. We kind of know department stores now, we’re getting there. Fashion is interesting. So new retail is an important idea. Second idea to take away from today is think about company quality. Good, great, bad, and too hard. You do end up living within the economics of a business regardless of how hard you work and how smart you are. So kind of know that when you start out and is it worth your time and effort and all of that. A third concept for today is what we’ll call the Al Waleed and Surgical Value Add deals. Can you come into something that other people are avoiding, be very surgical in what you’re adding, which could be capital management, political connections or capabilities, and end up with something that’s attractive? And that’s kind of the Al Waleed investment idea. And those are your three ideas. And I’m gonna put all of this under learning goal number 21, which is I’m calling value added deals. and new retail. And that’s really what’s going on in new retail is people are putting together capabilities and new combinations to add value to the consumer experience and such. And that is it for today’s case. I hope that’s helpful. I think it’s a fascinating question. I think it’s worth your time to think about. And I’ll leave you with one. I came across a funny story the other day I thought I’d share with you. For those of you who missed it, Zoom is kind of the company at the moment, right? Zoom is taking off. Their numbers are going through the roof because we’re all using video conferencing. Like my mom yesterday, she’s like, oh, I like Zoom. The fact that my mom likes Zoom, I mean, they went from obscure and unknown to everybody knows them in a couple months, which is amazing. There was an awesome Zoom story out of Brazil the other day where the president of Brazil, Bolsonaro, I think that’s how you say his name, was doing a Zoom. meeting with 20, 25 people. I assume it’s cabinet people and there was a lot of senior business people, industry leaders, all that on the call. And at some point, one of the business guys clicked out of the call because I guess he was done with his segment and didn’t really do it correctly and didn’t turn off his camera and didn’t actually leave the call. He stood up, walked back where his shower was, took off his clothes and started taking a shower naked. still being completely visible to everybody on the Zoom call, including the president of Brazil. I guess he brought it up. He’s like, you know, there’s a naked guy in the lower right of the screen and you couldn’t get his attention, I guess, because he was showering. And yeah, so in terms of the worst Zoom call ever, showering naked in front of the president of your country. That’s gotta, it’ll never be topped. You know, it’s, when this guy passes away one day in the distant future and they write his, you know, his obituary, this is gonna be the first line of his obituary, showered naked in front of the president of Brazil. So, anyways, it’s pretty awesome. I think if you do something that embarrassing in life, you just kinda gotta own it. Like, there’s no way to, like, You shouldn’t like try and hide. You shouldn’t like scurry away. You should just, I don’t know, just start dancing or something. Just own it completely, because there’s no other thing, you know, there’s no other option. So I mentally made a note, like if I ever humiliate myself on a Zoom call, I’m just gonna own it. I’m gonna put on some music and start dancing or something, but yeah. It was just the best story. Go look on it. It’s hilarious. You can search for it. Just do… Bolsonaro Brazil Zoom and it’ll pop up. It was awesome. Anyways, thought I’d leave you with that. I’m teaching here in Thailand, which is fantastic. I’ve got about 110 students, it turns out, of MBAs, executives that are, we’re all doing it on Zoom. It’s the first time I’ve really taught like this. We’re all doing digital. And we had our first class. couple days ago and we’re going to do this for the next couple weeks and it’s fantastic. I’m really enjoying it so that’s been sort of my week. But that’s it for me. So everybody have a great week. Hopefully things are coming to an end with the the virus thing or maybe not an end but just opening up which is really a relief. But everyone stay safe and I will talk to you next week.

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