What Chick-fil-A Can Teach Cannabis
Slow & Steady Compounding is the Key
The Chick-fil-A quick-service restaurant chain made almost $19B in 2022 systemwide sales, with median sales per store increasing to almost $9mm per year - up 8% year-over-year (Restaurant Business Online - h/t). Some more striking facts about Chick-fil-A’s performance:
A typical Chick-fil-A generates sales that are 2x an average McDonalds, 4x an average Wendy’s, and 5x an average Burger King.
Chick-fil-A’s lowest-volume restaurant generated $2.2mm in sales - i.e., the lowest volume Chick-fil-A is an average-volume Wendy’s.
Store growth in 2022 was just 100 new locations to bring the entire system to a total of 2,800 - under 4% annual store growth.
So, Chick-fil-A generates more sales with less than half the stores of Taco Bell, Burger King, or Wendy’s, with each store likely being much more profitable than any competitor.
Chick-fil-A may seem like it burst into the limelight, but its actual growth has been relatively quiet and consistent - a sales CAGR of roughly 14-15% per year since 2006:
(Source: Technomic & Chick-Fil-A franchise disclosures via Restaurant Business Online)
How does this relate at all to cannabis? Imagine a 2006-era Chick-fil-A as a cannabis company today, implementing the consistent, steady growth which allowed it to become an eventual juggernaut. Now imagine the many likely objections from analysts, investors, market commentators, etc. “Not enough growth,” “Where’s the blue sky?,” and the like. A Chick-fil-A cannabis story today would be profoundly unsexy even as it was steadily compounding into terrific results.
No one argues that Chick-fil-A has some kind of chicken technology which cannot be cracked by other concepts. No one argues that their menu isn’t available for all to see or that they have some kind of way of sourcing and preparing chicken patties that is far superior to that of its competitors. These would be laughed off as ridiculous claims. Somewhat analogous to limited licenses (effectively geographic monopolies), McDonald’s unquestionably has had one of the best real estate ground games in America for decades and Chick-fil-A had to directly contend with better-financed competitors which had often had first pick of the litter when it came to the best quick-service restaurant locations.
Many individual components of the Chick-fil-A system are easily discernible, but it’s the operation's magic of bringing them together in a cohesive, consistent way to deliver customer value (delighting and creating rituals for customers) that is the “secret sauce” which apparently other larger, better-financed operators cannot replicate even as it has borne fruit in front of their eyes for over a decade. Why should we assume, as many industry observers seem to, this same thing isn’t happening in cannabis right now?
So, while people raise their eyebrows when we at Bengal claim that the current largest companies in US cannabis do not have an everlasting franchise to stay the largest, we think these folks are forgetting the simple power of slow and steady compounding. In 2006, you likely couldn’t find many that would say that in 2022 Chick-fil-A would be trouncing more established competitors like Wendy’s and Burger King in an incredibly competitive industry with next to no proprietary protections - just like in 2022 you can’t seem to find many that will say that you don’t necessarily need to the most limited licenses (government-protected) and plum markets to create value.
Of the Bengal Catalyst Fund’s current holdings, this relates most to Grown Rogue and Body and Mind (BAM). On the growing side, Grown Rogue has been steadily investing into its operations competency while delivering profitable growth. We believe that it is currently in that starting stage of generating compounding returns, which to us is the formative element of capturing the longer-term blue sky that this growth sector should afford. BAM is similar in that it has all the pieces to be a compounder as well, albeit more on the retail side at this point, and we at Bengal are actively rolling up our sleeves to help optimize and allow the company to focus and refine the best parts of itself (we look forward in the near future to BaM’s first Illinois store opening).
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Disclosure: The humble writer of this post has a preference generally for McDonald's chicken products over Chick-fil-A and of Wendy’s spicy chicken sandwich over Chick-fil-A’s equivalent. Hopefully this does not erode the credibility of this post. However, he has done his best to not let his biases affect his analysis.
Other Interesting Links
Former colleague of Bengal partners Josh Rosen and Jerry Derevyanny, Kris Krane, wrote a four year followup piece on the cannabis industry and its development that we think is worth reading: Is The Cannabis Industry Playing Risk Yet? Or Still Monopoly?
Debt that mature sin 2024 still generally needs to start to get addressed long before that, so we don’t necessarily agree with the headline of this article that debt cliff concerns are “overblown,” but the article does provide a good overview of just how much debt the industry has taken on - and not even counting sale leasebacks: Cannabis MSOS 2023 Debt Cliff Concerns Overblown—Most Debt Matures In 2024 & Beyond