Issue #25: Wingstop Prepares For Liftoff

For a while now, I have been trying to figure out what is the best use of the startup section in this newsletter. I have toyed with several different ideas, but none have felt fully right. However, I was steadfast in wanting that section to be a part of the weekly newsletter, so I kept thinking about how to improve it. Last week, I put out a poll on the preferences of that section. Thank you for all the feedback and responses! Ultimately, a conversation with a reader about the future of retail got me thinking. That section should be dedicated to highlighting an emerging, growing, retailer. Excited to kick it off this week with Cocoon. Make sure to scroll down for the full breakdown!

Americans eat a lot of chicken wings. Last Super Bowl, it was estimated that 1.45 Billion chicken wings were eaten while watching the game. Given the prevalence of wings in American society, you would think wings have been around forever. In actuality, they were created at a bar in Buffalo, NY in 1964 and only really took off in popularity in the 1990s. This was when sports bars grew in prevalence and fast-food restaurants started to include these products on their menus. Since then, the popularity of wings has skyrocketed. Despite the current prominence, there is still an opportunity to grow in the space. One company capitalizing on that growth, which happened to release earnings recently, is Wingstop.

Wingstop, the QSR wing chain with 1930s aviation vibes, was founded in Texas in 1993 and quickly added franchises in 1997. Since that first location, it has rapidly expanded to 2,120 units in the United States and 338 internationally. In the United States, 2,064 are franchised and 56 are company-owned. What does Wing Stop do right? In addition to retail, they have a large focus on mobile/digital orders, associate themselves with sports very closely via TV advertising, have a very high-margin product, and focus on quality. What stands out is that while chicken wings are a very occasion-focused product, Wingstop is able to make that work in all dayparts. They are not stopping here either. For some context, in the US, KFC has ~3,900 stores, Popeyes has ~3,700 stores, and Chick-Fil-A has 3,059 stores. Clearly, there is an opportunity to add another 500-1,000 stores in the United States alone for Wingstop.

With all this growth, ups and downs are bound to happen. Recently, the Q3 earnings were announced and people were taking a negative view. Most of this was due to Wingstop posting $25.7 million in net income, below the $28.2 million analysts had expected, as part of rising chicken wing prices driving increasing costs. In terms of how negative retail is right now, I think this is not the worst thing. Here are some of the highlights I took as positives for the quarter:

• Sales are up 39.4% overall to $1.2B with same-store sales increasing 20.9%

• Digital sales are 69% of sales

• More stores will be opened this year than expected

• Net income is up compared to the past quarters

• Average Unit Value is up ~20%

Overall, definitely some work for Wing Stop to do to control costs, but I am very excited to follow along with how they perform.

LA County Allows Home Restaurants

In 2019, California passed a law allowing home restaurants where certified chefs trained in food safety could manufacture and sell hot food produced in their homes. Oftentimes, this food would be consumed in that house too. From the moment I saw this law, I was very excited about the prospects for the food industry, and the startups that support it. In 2021, I wrote a market map examining the trends in the space and startups to watch. Looking back, unfortunately, most of the see startups are no longer in the business or have pivoted the operating model significantly. Ultimately, I could write a whole newsletter issue about why these businesses struggled and had to pivot. I have grown as an investor since then too, but to me, it just comes down to a small market size for these products. However, when I saw LA County was legalizing these establishments, one of the few of California’s 58 counties that allow these enterprises, I was very excited because I think this will have a huge impact on the food and CPG ecosystem. As this article details, it is very challenging to run these types of businesses, especially profitably. Still, I envision the eventual nationwide roll out of these types of businesses having a huge impact on the restaurants and CPG. Not to be a hot take, but I do believe the way AI has made it so easy to test and ship software, a similar impact could happen in restaurants in CPG once this is available nationwide. Why? Any new business needs to test and iterate quickly and cheaply. In restaurants and CPG, that just isn’t really possible right now. A multi-unit restaurant chain will come out of these initiatives, if not multiple. Now that the almost 10 million residents of access to this program, it will be interesting to see how it does. Telling too, for if this starts to get rolled out across other states.

Parent Company With Almost 2,000 Retail Locations Declares Bankruptcy

Franchise Group, which owns Vitamin Shoppe, a vitamin store with 780 locations, American Freight, a discount furniture store with 330 locations, and Pet Supplies Plus, a pet store with 700 locations, declared bankruptcy this week. The bankruptcy comes after racking up nearly $2B in debt and a failed sale of assets due to a criminal investigation into alleged securities fraud. As part of the bankruptcy, American Freight is going to be shut down, but the other two will continue to operate. Going forward, it is not clear yet what the strategy will be. Vitamin Shoppe recently announced a partnership with D2C site, iHerb, to feature their products on the iHerb platform. On that front, maybe Vitamin Shoppe uses the brand notoriety to focus on being a CPG brand. Regardless, hopefully, the strategy can be improved, so that ~2,000 more storefronts do not sit empty.

Starbucks Proposes New Layout

Starbucks has hired a new CEO, Brian Niccol, formerly the CEO of Chipotle who is trying to bring back the community to improve the brand of the company. As illustrated in the diagram above, the flow of the store will also change, with added comfortable seating. In an effort to feel more community-oriented, the baristass will handwrite names on cups among other initiatives. Additionally, like many non-chain coffee establishments, there will be a self-service toppings bar. These sacrifices in operational efficiency are made to improve the brand. Overall, I think this is the right decision but the balance will be key. Retailers are in a constant battle to balance operational efficiency and fostering brand community. Niccol’s wants to move quickly, so it will be interesting to see how much of this can be done by just re-jiggering the existing layout versus new construction. I think these changes will help improve customer satisfaction, but it will be interesting to follow how quickly it gets rolled out and the customer response.

Allbirds Poor Earnings

Allbirds was part of the D2C wave of companies that raised a lot of money, went public, and struggled. Recently, I covered the partnership with Uber Eats in Issue #21, which I thought could be a strong incremental revenue stream. However, it is still too early, and clearly not ever going to be enough additional revenue to turn around the company. Overall, revenue is down, stores are rightly being closed, and margin is down. To me, a lot of this comes down to that it is really hard to build a lasting brand and that Allbirds has fallen behind. A lot of branding is inorganically creating organic positive momentum, which Allbirds had early on as it was coming up. I think Allbirds needs to get back to the basics of its marketing and branding, and focus on growing the top of the funnel, while also exploring strategic partnerships with large retailers. For instance, Vuori, the athleisure brand, just raised $825 million from General Atlantic and Stripes, partly based on their strong marketing.

On another note, for a more financial breakdown, I recommend reading Drew Fallon, the CEO of CPG finance platform Iris Finance, where he broke the earnings down and does not like the Uber Eats partnership.

• Summary: Cocoon is a third space for families with young kids where kids can play, take classes, and learn, as well as a space for parents to do work and hang out.

• My Take: Especially in large cities, space is at a premium. Factor in cold winters and short days that limit outdoor time, finding space for kids to play can be difficult. Due to these factors, just like how co-working has taken off, I think co-playing is a large opportunity too.

• Founder(s): Megan Lucas-Chong, Karl Chong, and Tony Yu

• Number of Locations: 2 in NYC (UWS and Tribeca)

• Social Media Following: Instagram (1.7k)

Additional Links:

1. A deep dive into one brand’s quest to get into Costco and then the effort to fulfill that PO when it came (read more here)

2. Sweetgreen earnings continue to progress positively (read more here)

3. As a brand, if you provide a fridge to a retailer, you need to make sure it is being used for your brand (read more here)

4. Nation Retail Federation (NRF) expects this year’s holiday spending to grow compared to last year (read more here)

5. Couche-Tard, the owner of 16,700 convenience stores across the world including Circle K, is looking to buy 7/11 as it tries to offer more fresh items (read more here)

6. Krispy Kreme Doughnuts will be available in 2000 McDonalds by EOY (read more here)

7. Popeyes struggled in Q3 because it did not have value-focused promotions to draw in customers (read more here)

8. E.l.f. Beauty will now be available in some Dollar General stores (read more here)

9. Wayfair announces its COO is stepping down and going forward it will combine the leadership of Ops and Supply chain into one role (read more here)

10. StockX’s co-founder and COO is taking over as CEO as the company struggles (read more here)

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