Latest / The Dutch Investors / #59 | Cake Box Deep Dive w/ Paul Zbikowski | Sweet economics

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#59 | Cake Box Deep Dive w/ Paul Zbikowski | Sweet economics · The Dutch Investors

• 0:13
  SPEAKER_01: So uh how you doing?
• 0:14
  SPEAKER_00: Where are you from, Paul?
• 0:15
  SPEAKER_00: Um I'm originally half Irish.
• 0:18
  SPEAKER_00: I was born in Ireland originally.
• 0:19
  SPEAKER_00: Um also half Polish, as you can see from my surname.
• 0:22
  SPEAKER_00: Uh yeah, it's cool.
• 0:24
  SPEAKER_00: Um I'm currently in Warsaw area.
• 0:26
  SPEAKER_00: Um my family house right right here.
• 0:29
  SPEAKER_00: And uh spent a lot of time in UK.
• 0:32
  SPEAKER_00: That's where I studied, that's where I lived in Southampton, and I probably might be back here in London area, so I have most of my friends and whatever.
• 0:40
  SPEAKER_01: So you live in the UK or in Poland?
• 0:42
  SPEAKER_00: I I I used to currently temporarily I'm in Poland because for personal circumstances, but uh I lived in UK for a couple of years before coming here.
• 0:52
  SPEAKER_00: I moved around Europe quite a bit.
• 0:54
  SPEAKER_00: So uh I spent quite a lot of time in in Belgium as well, in Antwerp.
• 1:00
  SPEAKER_00: So uh I can I can you know survive with some minimal Dutch.
• 1:05
  SPEAKER_00: Maybe not uh maybe a bit different accent, the Flemish, you know, it's a bit different, but yeah.
• 1:10
  SPEAKER_00: So I I moved I moved around.
• 1:12
  SPEAKER_00: I some I was born in Ireland, I grew up there, then I went to international school in Poland, went back to Ireland for COVID, then I went to uni in UK, and my partner used to be Flemish.
• 1:26
  SPEAKER_00: So I used to basically uh commute between Belgium and UK quite a bit for a couple of years, um using you know Eurostar and all that.
• 1:35
  SPEAKER_00: Um so yeah, that's my background, very convoluted.
• 1:39
  SPEAKER_00: Um you've been around, you've seen uh lots of Euros.
• 1:41
  SPEAKER_00: Yeah, I mean, yeah, for better or worse, I guess.
• 1:45
  SPEAKER_01: Yeah.
• 1:47
  SPEAKER_01: For sure.
• 1:48
  SPEAKER_01: Alright.
• 1:49
  SPEAKER_01: Well, um, it's great to have you here, man.
• 1:52
  SPEAKER_01: I've been looking into Cakebox, I've heard uh the name a couple times before, and I found it pretty fascinating because it's so quite simple, it's a microcap, and but when you look at like the returns on capital and some of the numbers, it's it's pretty ridiculous for such a niche product.
• 2:10
  SPEAKER_01: So, how about we uh we we get into the company?
• 2:14
  SPEAKER_01: You told me you are currently in Poland, you lived uh in the UK.
• 2:18
  SPEAKER_01: So for listeners who've never walked into a cake box store, perhaps just briefly, what is cake box and what makes it like different from the average bakery or a cake chain or whatever.
• 2:28
  SPEAKER_00: Yeah, so cake box is a franchised, egg-free celebration cake chain.
• 2:34
  SPEAKER_00: So it's fully franchised.
• 2:36
  SPEAKER_00: Every single store is on the there's no corporate stores like a dominoes or something like that.
• 2:40
  SPEAKER_00: And what really differentiates them, I think, is that they sell egg-free cakes specifically.
• 2:46
  SPEAKER_00: And everything there is egg-free, everything there is halal, everything there is um, you know, vegetarian, whatever.
• 2:53
  SPEAKER_00: So, and the origin of the business is very Asian, and you know, in UK it might confuse some American whatever listeners, but in UK, when we say Asian, we mean South Asian, quite typically.
• 3:05
  SPEAKER_00: So, you know, Indian, Bangladeshi, Pakistani, Sri Lanka, whatever, right?
• 3:10
  SPEAKER_00: Um, so it is very culturally.
• 3:12
  SPEAKER_00: The founder is from this culture, most of the franchisees are, lots of customers are, and those are the people who eat egg-free cakes for religious or cultural reasons, and they will not consider anything else.
• 3:23
  SPEAKER_00: You can compare it to a kosher store or a halal butcher, you know, for like Islam or uh Judaism, I suppose.
• 3:30
  SPEAKER_00: So that's how it's different.
• 3:32
  SPEAKER_00: Like it's it's culturally and religiously connected to this group of people as well.
• 3:38
  SPEAKER_01: And is that the main customer they're focusing on, or are like the people from the UK also interested in the in this in the store and the products?
• 3:48
  SPEAKER_00: So the way you can look at the customer is this I call them core, like all the Indians, South Asias, whatever refer to core and non-core as and like indigenous white brids, black brids, what have you, right?
• 3:59
  SPEAKER_00: And the core serves as a very good starting base, and it's much more it's much stickier than, you know, because of course they shop there, but for religious reasons, I mean there's nothing more sticky than that.
• 4:12
  SPEAKER_00: But that would not be enough for this business to operate because yeah, Asians are like maybe 10-11% of popul 9, 10 of UK.
• 4:21
  SPEAKER_00: Uh, that would be too niche, uh, way too niche.
• 4:24
  SPEAKER_00: Um, and we actually did uh with my previous job that I did like you know, the the American hedge fund, hedge fund, the investment fund.
• 4:33
  SPEAKER_00: I uh we did uh very long and structured Scattlebosh research when we visited dozens of stores of hundreds of customers, and um most of them are actually non-Indian and are like white, black, what have you, from all sorts of backgrounds.
• 4:50
  SPEAKER_00: And some of the best performing stores are in very non-Indian areas.
• 4:54
  SPEAKER_00: So, like you have a store in Wrexham in Wales, where there is like 3,000 people, and most of them are like very Welsh, you know.
• 5:02
  SPEAKER_00: So I think it has appeal to everyone.
• 5:05
  SPEAKER_00: It's just that South Asians will be buying it much more, and they're just much kind of a sure like core customer group.
• 5:15
  SPEAKER_00: Um, but the current focus of the company is to expand more to the indigenous population and the the sort of like the egg-eating population, let's say.
• 5:24
  SPEAKER_00: So, of course, if you don't need eggs and this is your only scaled, you know, egg-free cake alternative, whether it's religious dietary, whatever, then you're the core customer, right?
• 5:33
  SPEAKER_00: But if you just want a good cake and you don't care about eggs or not, then I consider you non-core.
• 5:39
  SPEAKER_00: And from the people we talked to, I think around 60 something percent of them didn't care about eggs and were of non-Asian background.
• 5:46
  SPEAKER_00: So actually, most customers are uh not core, and a lot of them have shopped at cake box for many years because I think just the business itself has very good economics, and so you could see there's this core group, you know, very good, very sticky, it's kind of a base, right?
• 6:02
  SPEAKER_00: And then there's this indigenous population that just like the taste, and I think there's a lot of I wrote it in my uh substack as well, but I think there's a lot of kind of economic effects that play out, and specifically um egg-free cake chain, but we can dive to that later as well.
• 6:22
  SPEAKER_01: Is there a a comparison you can make to cake box or is it like too different?
• 6:27
  SPEAKER_00: A good thing about cake box is which is interesting, is that it has no like for like competition in UK or anywhere in Europe or in North America as well.
• 6:36
  SPEAKER_00: The only like scaled like for like competitors are in India or in South Asia, of course, right?
• 6:41
  SPEAKER_00: And um, but there's a lot of Indians and South Asians in Europe and in Canada and New York, right?
• 6:47
  SPEAKER_00: Jackson Heights, which is the part of New York, they had last election, you could cast ballots in Bengali and Bangla, and one of the Indian languages, because there's just so many Bengali people there of Bengali origin.
• 7:00
  SPEAKER_00: Oh, what's your question?
• 7:01
  SPEAKER_00: Sorry, yeah, um, I tend to drift off.
• 7:04
  SPEAKER_01: If there is like a comparison you could make too much.
• 7:06
  SPEAKER_00: No, there's no there's no there's no comparison really.
• 7:09
  SPEAKER_00: I mean uh there is um it's interesting because it's a business selling for a P of 16 with no like-for-like competition whatsoever, uh, which is quite good, I think, as well.
• 7:20
  SPEAKER_00: And uh the only alternatives to cake box are supermarkets, mom and pop, and there's two copycats, which used to be franchisees of cake box that left and started their own chains.
• 7:32
  SPEAKER_00: But those guys have 15-20 stars each, and they add one store a year, while cakebox adds 25 a year.
• 7:38
  SPEAKER_00: So I think the scale is massive there.
• 7:40
  SPEAKER_00: And uh yeah, but there's no I never have any comp for cake box because it's hard.
• 7:45
  SPEAKER_00: It's I don't know.
• 7:47
  SPEAKER_00: If you find me maybe even if it's not egg-free chain of cakes or sweets, the closest thing would be umbala, I guess, but umbala just got acquired.
• 7:57
  SPEAKER_00: Unless you find some sort of a publicly listed kosher store chain or like African-American barber, maybe those have similar kind of uh cultural economics to cake box, but I don't know of any.
• 8:09
  SPEAKER_01: Have you ever been to like a cake box or uh, shop there for years, yeah.
• 8:15
  SPEAKER_00: And we we did the skeletal board, so we visited like 50, 60 stores within span of a few months last year, and we did a lot of structured interviews with um customers, franchisees, you know, management, whatever.
• 8:28
  SPEAKER_00: And um, yeah, I I think I've been to by now probably 60, 70 stars of cake box out of 260.
• 8:37
  SPEAKER_00: So yeah, I've seen quite a few.
• 8:39
  SPEAKER_01: What is it like?
• 8:40
  SPEAKER_01: What what are the cakes like?
• 8:42
  SPEAKER_01: Have you tried some?
• 8:43
  SPEAKER_00: Yeah, I before even doing the Scalbot project at my previous job, I I would shop at my local cake box in Southampton for like two years.
• 8:51
  SPEAKER_00: Um, so I'd known that from a purely customer perspective.
• 8:55
  SPEAKER_00: The cakes are much lighter, if that's something you're interested in.
• 8:58
  SPEAKER_00: The taste.
• 8:59
  SPEAKER_00: I know if you've ever had an egg-free cake, I think no.
• 9:02
  SPEAKER_00: They are much lighter, they're much more spongy because if you remove the eggs, they become just very light and spongy.
• 9:08
  SPEAKER_00: And it's and that's one of the cool economic effects here, because for like non-core, non-eg-free people, if you don't like the taste, and it's fair, there's bound to be people like that, you will not show up there again.
• 9:20
  SPEAKER_00: That's okay.
• 9:21
  SPEAKER_00: But if you like the taste and you get the use to it, there'll be no other place to find something like that.
• 9:26
  SPEAKER_00: Uh, because skatebox is unique in that sense, and I guess that really plays in well with Michael Porter and the whole concept of mod being something very unique and very different, and being able to define who are your like anti-customers, who are your people who you don't want to have.
• 9:41
  SPEAKER_00: Yeah, yeah.
• 9:42
  SPEAKER_00: So it's it's very the taste is very different, much lighter.
• 9:45
  SPEAKER_00: The stores are very small, they're not designed to dine in there.
• 9:49
  SPEAKER_00: You just collect and go, you know.
• 9:51
  SPEAKER_00: It's like it's like Subway with cakes, but basically.
• 9:54
  SPEAKER_00: But they're all fresh.
• 9:55
  SPEAKER_00: All of them are fresh, made during like less fresh cream, fresh fruits, whatever.
• 10:01
  SPEAKER_00: And with a lot of competitors, historically, if you want a cake, you would have to wait a day at least, maybe two, three, especially if you wanted to have a text, you know, picture on top of it for your birthday or something.
• 10:13
  SPEAKER_00: With cake box, you get it instantly, or even within an hour.
• 10:17
  SPEAKER_00: And a lot of people we mesh and we interviewed, they would just go there.
• 10:20
  SPEAKER_00: They were on the way to the party and they would just buy it on the way and just go straight there.
• 10:25
  SPEAKER_00: And it's fresh.
• 10:26
  SPEAKER_00: They get the name, the text, the customization option on it, uh, which is something that most others just don't do.
• 10:33
  SPEAKER_01: Nothing.
• 10:34
  SPEAKER_01: How do they uh manage that?
• 10:37
  SPEAKER_00: The thing about cakes is that cake box produces the sponge and there's no royalty in the system.
• 10:43
  SPEAKER_00: Almost all the revenue is the supply chain revenue in this case, and all the custom all the French IZs are expected, and they all buy all of their supplies other than the fresh fruit.
• 10:52
  SPEAKER_00: Everything else is bought from cake box, and cake box bakes it.
• 10:56
  SPEAKER_00: So, as a French IZ as a store, you don't have to do anything.
• 11:00
  SPEAKER_00: Like the cake box makes the sponge, cooks everything, gets the fresh cream, gets all the ingredients, and sends it to your doorstep.
• 11:08
  SPEAKER_00: That's why people work at cake box, they're not bakers or anything like that.
• 11:12
  SPEAKER_00: They're technically referred to as cake decorators.
• 11:15
  SPEAKER_00: That's the official title.
• 11:17
  SPEAKER_00: Because it's like a Lego set with manual.
• 11:19
  SPEAKER_00: What you get, you just get a sponge, you put the cream, you have the special laser sort of instrument that I have in the back that helps them write the names and whatever on top of it.
• 11:28
  SPEAKER_00: And it's ready, you know.
• 11:29
  SPEAKER_00: And sponge can actually, it's good because you don't need to bake, it's not groceries like with delivery, like a dino or something, right?
• 11:36
  SPEAKER_00: There'll be more you need to send every day because the food goes bad, you know.
• 11:40
  SPEAKER_00: You want to have fresh food with cakes and with sponge, really.
• 11:43
  SPEAKER_00: I mean, the cakes last like two, three days, you want to sell them on the same day, but a sponge they send typically is like up to two weeks.
• 11:50
  SPEAKER_00: So it's good with delivering for long distance.
• 11:53
  SPEAKER_00: You you need to kind of uh keep it up to two weeks before you actually sell it.
• 12:00
  SPEAKER_00: So um I think this is good for a longer distance expansion as well and logistics, whatever.
• 12:05
  SPEAKER_01: That is so different than what I would have thought how uh how how cake box would operate.
• 12:12
  SPEAKER_01: Cakebox makes no money from royalties, you said.
• 12:16
  SPEAKER_01: Does this mean that excessive profits go to the franchisee?
• 12:22
  SPEAKER_00: The way it works is that franchisees just the cogs, right?
• 12:26
  SPEAKER_00: So the supplies they buy are from cakebox.
• 12:29
  SPEAKER_00: And yeah, if they make margin, better margin, it just goes to franchisees.
• 12:33
  SPEAKER_00: They do have now the national advert marketing fund advertising fund, which is what Mike, who came in from Dominoes, UK, was uh CFO there and I think chief marketing officer there for many years, he kind of implemented this Domino's model of national advertising fund, which is great because it builds every franchise chips in like a few percent to the marketing and cakebooks the marketing.
• 12:57
  SPEAKER_00: And you know, like Bruce Greenwood, the professor from uh Colombia, he would always say that um the uh scale advantage is relative to your competitors.
• 13:10
  SPEAKER_00: So you have those cake in or cakes and bakes, which are those two small copy cards with 15-20 stores.
• 13:16
  SPEAKER_00: They they can't do that, they can't do national scale, market, national kind of uh marketing, like books can using this.
• 13:22
  SPEAKER_00: So this is great.
• 13:23
  SPEAKER_00: But there's no royalties now.
• 13:25
  SPEAKER_00: And the reason is because Suk, the founder, he realized at the beginning, which you know you can look at the disputes and problems that Domino's had and the fights with the franchisees in UK, which probably might have heard bad, is that if you have royalties, he realized that some franchisees would suppress the revenues on purpose to uh to pay less than royalties, and there's ways of doing it, and then as the management of the company, you just have to go there and you have to police them about royalties, and this doesn't build really an atmosphere of trust as well.
• 13:59
  SPEAKER_00: So not on not only there's this tangible thing of them suppressing the revenue to pay less than royalties, and then the whole policy royalties thing, it's weird for the culture.
• 14:09
  SPEAKER_00: So Suk realized he could just price in the royalties in the supply chain revenues, so the effect is the same.
• 14:16
  SPEAKER_00: But I think the structure is better.
• 14:19
  SPEAKER_01: Yeah, it seems like the incentives are more aligned this way.
• 14:22
  SPEAKER_01: Interesting.
• 14:23
  SPEAKER_01: Yeah.
• 14:25
  SPEAKER_01: Um, you said you visited around 60 stores or so.
• 14:28
  SPEAKER_00: Perhaps 56, 60 things in that range.
• 14:32
  SPEAKER_00: Yeah.
• 14:32
  SPEAKER_01: Can you tell us?
• 14:34
  SPEAKER_01: I mean, I don't go to the UK every year, so perhaps can you tell us a bit about the experience with ordering these cakes?
• 14:40
  SPEAKER_01: How was the service?
• 14:42
  SPEAKER_01: Perhaps give us some insights for those that can't visit the stores or try the products.
• 14:47
  SPEAKER_00: Um so what was interesting is that we looked at many things when we visited the stores.
• 14:54
  SPEAKER_00: We looked at, as you said, the quality of service, we looked at the uh how clean it was, we looked at the speed of the service, the vibe of the employee, we looked at the location, whether the stores were around, the quality of cakes, like were they cracking, were they not cracking.
• 15:10
  SPEAKER_00: Actually, we talked to one of the managers before going there, and we asked him one of the questions we asked him was what sort of things you look at when you do the kind of inspections of cake box.
• 15:22
  SPEAKER_00: So we kind of did some of the things he does as well.
• 15:24
  SPEAKER_00: And I have actual stats, I have actual data, and most of the stores, like you know, there's always a bad apple.
• 15:31
  SPEAKER_00: Like, you can't really avoid, especially if you have a franchise, right?
• 15:36
  SPEAKER_00: And you outsource the management to like 90 plus franchisees, which is the current number.
• 15:41
  SPEAKER_00: There's bound to be bad apples there.
• 15:43
  SPEAKER_00: Most of the stores are, I would say, very clean and they're well managed.
• 15:47
  SPEAKER_00: There are some stores where you waited quite long for the person to come out.
• 15:51
  SPEAKER_00: Some people were rude, but like 80-90% on average in all those categories were very good.
• 15:57
  SPEAKER_00: There's no bad smell.
• 15:58
  SPEAKER_00: You enter, it's a small store, right?
• 16:01
  SPEAKER_00: You just come in and you say, you know.
• 16:03
  SPEAKER_00: They typically there's typically a bell when you enter, so they come from the back or the the front.
• 16:07
  SPEAKER_00: Then what we did, we're actually measuring the average time of service, then coming, and then we had averages for every time.
• 16:14
  SPEAKER_00: Um, which was which was also fun to do.
• 16:16
  SPEAKER_00: But no, the service was good all in all.
• 16:19
  SPEAKER_00: There were some issues that we that we spotted as well.
• 16:22
  SPEAKER_00: Um we talked to the management about this as well, but one of the issues was that you know they have the the loyalty program.
• 16:29
  SPEAKER_00: It's a detail, it's probably not important for like a general podcast about the business, but they this the staff can be passive sometimes, do you know what I mean?
• 16:38
  SPEAKER_00: And they can uh they don't really promote the product, they just stand there and they're like, oh hi, what do you want?
• 16:45
  SPEAKER_00: Like, are you looking for something?
• 16:46
  SPEAKER_00: But they're not really going out of their way to sell it, or you know, I mean, I guess they don't really have strong incentives to it as well.
• 16:54
  SPEAKER_00: But for example, there's a loyalty program where you know you collect points and you get free stuff later.
• 16:58
  SPEAKER_00: But cakebox was rolled out quite recently, and uh they weren't really like you know educated regarding that's the that loyalty program.
• 17:09
  SPEAKER_00: They wouldn't really would point it out, oh, what's this?
• 17:12
  SPEAKER_00: They're like, Yeah, how does it work?
• 17:13
  SPEAKER_00: You know, as I have the app, and some of them didn't know how it worked, whatever.
• 17:17
  SPEAKER_00: Um, so I guess that was that was pretty funny, but overall the uh I think the stuff is good.
• 17:22
  SPEAKER_00: A lot of them are from the Asian background as well, like a majority.
• 17:26
  SPEAKER_00: There's some where it's like black, white, whatever people there, but very often, yeah.
• 17:30
  SPEAKER_00: I mean it makes sense very often.
• 17:32
  SPEAKER_00: It's franchisees who are Asian as well, and of course they have big families quite often, and they would hire their friends, family, whatever, etc.
• 17:39
  SPEAKER_00: And this is kind of how the business has grown without any advertising and a big backlog of franchisees, because um, you know, it's word of mouth.
• 17:47
  SPEAKER_00: There's the com it's community, it spreads through the community, at least originally it has done that.
• 17:53
  SPEAKER_00: So yeah.
• 17:55
  SPEAKER_00: Sorry for ranting.
• 17:56
  SPEAKER_01: Yeah, you can you can't no no no absolutely.
• 17:58
  SPEAKER_01: I mean, it's this is perfect.
• 17:59
  SPEAKER_01: I mean, we don't get these insights uh daily since we we can't visit the stores.
• 18:04
  SPEAKER_01: I mean, we can, but we'll have to uh fly over there.
• 18:09
  SPEAKER_01: Buying a cake at every store.
• 18:10
  SPEAKER_01: So I might just not be understanding you right.
• 18:16
  SPEAKER_01: The cakes are made centrally, so every single franchise e store gets the same quality cake, right?
• 18:24
  SPEAKER_00: Yeah, it's Ponch.
• 18:24
  SPEAKER_00: Yeah, like the the the base, you know, the thing basically.
• 18:27
  SPEAKER_00: And they just decorate it with screen.
• 18:30
  SPEAKER_01: Let's say it's it's my it's my birthday and I want to make like a customizable cake, I can either go to the store or online, correct?
• 18:38
  SPEAKER_00: Uh yeah, you can you can click and collect.
• 18:40
  SPEAKER_00: So you can order it and then you can pick it up from a nearest store uh when it's ready.
• 18:46
  SPEAKER_01: But so let's say I want like a different color, a different taste, I want my name, my age.
• 18:53
  SPEAKER_01: How how does the store manage to customize it since they are just decorated?
• 18:58
  SPEAKER_01: That's it.
• 18:59
  SPEAKER_00: Yeah, they they decorate.
• 19:00
  SPEAKER_00: I think there is specific types of cakes, you know, there's different products like at any store and business, and you can pick this sort of a cake, and then this can have special, you know, picture, text, extra things.
• 19:13
  SPEAKER_00: You cannot make your own cake, it's not like you cannot customize it fully, but you can you can put the name and you can pick one of the types of cakes, and then you can have a name and that's okay.
• 19:26
  SPEAKER_01: So, how much growth do you think is is left for a company like Cake Box?
• 19:33
  SPEAKER_01: Well, I mean, internationally it seems like they have many more places to go.
• 19:38
  SPEAKER_01: For sure.
• 19:38
  SPEAKER_01: But do you think this is like a concept that would scale well internationally as well?
• 19:43
  SPEAKER_01: How how are your thoughts on that?
• 19:45
  SPEAKER_00: Yeah, I mean the thing is it curs, even in UK, there's just so much room to growth.
• 19:51
  SPEAKER_00: Like they're only present in in big cities like London, Birmingham, maybe, right?
• 19:57
  SPEAKER_00: They only started expanding in Scotland and then north of England and Midlands and then Northern Ireland as well.
• 20:03
  SPEAKER_00: And there's the first store in Paris now, which is very successful.
• 20:06
  SPEAKER_00: The thing is that some of the French Azees we talked to, uh, two of them were very interesting because basically the the one of the people I talked to, his brother-in-law, is responsible for the Paris expansion in France because they are French Indians, they first moved to France, and then some of them moved to London.
• 20:24
  SPEAKER_00: So this guy who's a French AZ from East London and has like five, six stars, I had a long chat with him.
• 20:31
  SPEAKER_00: And his brother-in-law is the Indian guy in France, and he's doing that in North Paris, which is very Asian.
• 20:39
  SPEAKER_00: I met another French AZ, and she said that whenever Souk will want to expand to Germany, to Kuln or something, she has family there, and they will be happy and first in line to run cakebook stores.
• 20:52
  SPEAKER_00: Because running cake book stores is very easy.
• 20:54
  SPEAKER_00: You know, you don't need to bake, the margin of error is tiny, you're just decorating ready-made cakes.
• 20:59
  SPEAKER_00: You have this religious like base customer group, so you're guaranteed to stay afloat.
• 21:05
  SPEAKER_00: Um, if you build in a gallery, of course.
• 21:07
  SPEAKER_00: And um, yeah, but but even that, there's so much growth growth, uh room to grow in in UK as well, I think.
• 21:14
  SPEAKER_00: Um because one of our key thesis, elements of the keys, thesis, keys, thesis that I want to check was that um whether cake box has appeal with non-Indians.
• 21:25
  SPEAKER_00: That's like the core thing.
• 21:26
  SPEAKER_00: We want to see it.
• 21:27
  SPEAKER_00: We spent months, that's why we went specifically later towards the project to go like to the uh non-Indian areas in in UK.
• 21:35
  SPEAKER_00: Um, and those were just as busy as the other ones.
• 21:38
  SPEAKER_00: And we we singled out, we did basically there's this database where you can see the ethnic demographic breakdown of every single ward or district in UK.
• 21:49
  SPEAKER_00: There's like hundreds of them.
• 21:50
  SPEAKER_00: And we learned from the CFO that typical cake box store covers like uh 80,000 people, right, in the area.
• 22:00
  SPEAKER_00: Their ADs sort of.
• 22:02
  SPEAKER_00: So I went to every single store and I checked this 80,000 people out of for this star.
• 22:09
  SPEAKER_00: What's the ethnic breakdown?
• 22:10
  SPEAKER_00: So we have a database of exactly every single star.
• 22:14
  SPEAKER_00: And you know, it's 60% white, 15% Indian, 10% black, whatever.
• 22:18
  SPEAKER_00: And we have data like that for every single star in UK.
• 22:21
  SPEAKER_00: And out of these, we took the ones that we kind of refer to as non-Indian, non-Asian, which are the ones with 10% or less in the 80,000 sort of vicinity.
• 22:32
  SPEAKER_00: And out of these, we looked at the stores that were open for at least three years.
• 22:38
  SPEAKER_00: And this narrowed it down a bit more.
• 22:40
  SPEAKER_00: We knew that the management has a naughty list sort of of uh the 20 like worst performing stores, and there seemed to be no correlation at all, whether that's Indian or non-Indian, whether they perform batch.
• 22:52
  SPEAKER_00: Some of the stores we went to that had the most customers uh and were best performing as well, like they seem very busy and whatever.
• 23:00
  SPEAKER_00: We're also in very like non-Indian areas.
• 23:02
  SPEAKER_00: There's less than 10% Indians there.
• 23:05
  SPEAKER_00: Um yeah.
• 23:06
  SPEAKER_00: So it seems to be the case.
• 23:08
  SPEAKER_00: And a lot of people just you know really like the cakes.
• 23:11
  SPEAKER_00: And cakes have great economics, uh, that I can go into, but that's a separate topics topic here for this as well.
• 23:18
  SPEAKER_01: Well, I think I think that's a great little bridge to talk about uh the unit economics because uh for the do you mean for the franchisee or uh or yeah, I'm just interested interested to hear a little bit about um how you think about the numbers, the unit economics for uh for cake box, especially considering perhaps the cakes, the franchisees.
• 23:39
  SPEAKER_01: What can you tell us about it?
• 23:42
  SPEAKER_00: Yeah, so um the typical cake box store makes around 360,000 pounds a year in revenue.
• 23:51
  SPEAKER_00: The eBid margins are around like mid-teens, they should be like around 15.
• 23:58
  SPEAKER_00: Now they're more like 11, maybe, because the cost of living crisis at least they were last year for the franchisees.
• 24:05
  SPEAKER_00: So you're looking at anything between 10 and 20%, depending on the you know, economic sort of condition as well.
• 24:12
  SPEAKER_00: And that's the e-bid that's the eBida, sorry, that's not EBIT, that's EBIDA margin.
• 24:16
  SPEAKER_00: Um I'm looking for um sorry, I'm not that well prepared, I guess, but I have a separate here.
• 24:23
  SPEAKER_00: So a typical food costs for the franchisees is around 40% of the revenue, and the typical revenue is 350, 360k, right?
• 24:32
  SPEAKER_00: Average for a typical store.
• 24:35
  SPEAKER_00: And then labor is around 20% of this, and there's no royalty, there's 1.5% national advertising fund, and then the rent ranges from 8 to 25,000 pounds per month.
• 24:49
  SPEAKER_00: Uh utilities are 800 to 1,000, and then you get a Ebida margin between 10 and 20%.
• 24:56
  SPEAKER_00: Uh, so around 40k EBIDA.
• 25:00
  SPEAKER_00: So the business you get is 350,000 in sales and around 40,000 pounds in Ebida per year.
• 25:12
  SPEAKER_00: Which are okay, I think they're quite good for the size.
• 25:16
  SPEAKER_01: Interesting.
• 25:18
  SPEAKER_01: Well, I mean when we when we look at like the last nine to ten years, revenue has grown pretty uh meaningful, I think around 20% last time I checked.
• 25:30
  SPEAKER_01: Earnings per share about 13.5%.
• 25:34
  SPEAKER_01: I mean it makes you wonder, it's if if it's such a simple uh model, such a simple idea, why is no one else trying to do what they're doing?
• 25:45
  SPEAKER_01: What what what makes them different from like I mean you said there is no one like them, but what makes other people if the economics are quite interesting and if you look at like these financials, what is like the like the barrier that stops other people from trying?
• 26:05
  SPEAKER_00: The barrier the barrier is customers because you can't, you know, it's not a commodity business where you have the lowest price and you know we can have lower price, and it's not a rational decision for the customers.
• 26:16
  SPEAKER_00: So, you know, when you get people who I think typically for most people, I know about you personally, but for most people I think you don't get up every year regarding the birthday or some party, and you think, oh, which of these four or five cake chains I should go to?
• 26:34
  SPEAKER_00: Most people have their kind of trusted go-to thing that their children liked, you know, everyone was happy with them, uh, there was no food poisoning or something.
• 26:42
  SPEAKER_00: And so most people tend to stick to their kind of sweets cake store that they go to for years, right?
• 26:48
  SPEAKER_00: It's not something you decide every month, every year, and consider 20 options rationally.
• 26:52
  SPEAKER_00: Like so that's one thing.
• 26:54
  SPEAKER_00: And the thing is, it's the customer's reading.
• 26:56
  SPEAKER_00: I mean, for cake box, it's there's it's the same thing you would you'd ask, like, I don't know, why if there's like a guy who owns all the culture stores in a Jewish neighborhood somewhere, why does no one replicate it?
• 27:11
  SPEAKER_00: I mean all the customers know it.
• 27:15
  SPEAKER_00: They've been going there for many years.
• 27:16
  SPEAKER_00: They go shop there for religious reasons, for cultural reasons, they trust it, right?
• 27:21
  SPEAKER_00: I it's a very intangible mod.
• 27:24
  SPEAKER_00: I don't think you can just copy it and enter.
• 27:26
  SPEAKER_00: It's a share of mind, you know, like with Coca-Cola or something.
• 27:30
  SPEAKER_00: I mean, it it also shows that you know, cake in and cakes and bakes, which are just two copy cats.
• 27:35
  SPEAKER_00: They they've they've struggled.
• 27:37
  SPEAKER_00: They they never really they've never really grown seriously.
• 27:40
  SPEAKER_00: And they what they did is basically to cake box, change the color, change the name, and did the same thing.
• 27:45
  SPEAKER_00: Some of them have I think literally rebranded their own cake box stores to the new thing.
• 27:50
  SPEAKER_00: So why did they fail?
• 27:51
  SPEAKER_00: What did they do wrong?
• 27:52
  SPEAKER_00: They just people are want to buy a cake box, they want to buy cake box cakes, they're used to it, they trust it.
• 27:58
  SPEAKER_00: They I don't know, their aunt shops their their their brother-in-law runs it.
• 28:04
  SPEAKER_00: You know, it's um yeah, yeah, it's just it's creatures of habit in the end, right?
• 28:09
  SPEAKER_00: It's a cre yeah, we're creatures of habit, and I think trust plays a big part in it.
• 28:16
  SPEAKER_00: Okay.
• 28:16
  SPEAKER_00: So it's a niche, it's a niche business.
• 28:18
  SPEAKER_00: When you think about all sorts of niche businesses, why are they not copied and replicated?
• 28:23
  SPEAKER_00: Yeah, the the niche is also.
• 28:24
  SPEAKER_00: Why doesn't Jeff Bezos come in?
• 28:26
  SPEAKER_00: Like it's too small.
• 28:27
  SPEAKER_00: It doesn't make so for big people, like it doesn't make sense.
• 28:29
  SPEAKER_00: It's too small to specialize, and what Azda is gonna come in now, and they're like size breeze and they're gonna take what?
• 28:35
  SPEAKER_00: Like, have a dedicated team to focus on this.
• 28:38
  SPEAKER_00: Sug's gonna kill them because this is the only thing that Suk is doing.
• 28:41
  SPEAKER_00: He's the they've they've done this forever.
• 28:44
  SPEAKER_00: Can you re- there's a it's economically not plausible for the big guys to compete with them, and for the small guys, like the scale is growing, and you know, for a lot of mom and pop shops that are thinking of starting them thing like that, it's probably a much better deal to join Kickbox franchise.
• 29:01
  SPEAKER_01: Yeah, to be honest.
• 29:02
  SPEAKER_01: Yeah, being the leader in like a small niche is something that doesn't really have a mode, but it's very hard to come in, or just it doesn't make sense economically, right?
• 29:12
  SPEAKER_00: So if you if you look at if you look at Michael Porter and the three types of modes essentially that he kind of nailed it down to, it was you know cost leadership, which is just the price mode.
• 29:22
  SPEAKER_00: It was sort of like big brand differentiation, which I think is also cake box in this case, but the other is niche as well.
• 29:30
  SPEAKER_00: So niches are just economically not impossible to compete for big guys and for small guys alike when you like focus a lot on something, and I think it's also the brand differentiation.
• 29:41
  SPEAKER_00: The brand is very good at this point for cake box, yeah.
• 29:44
  SPEAKER_00: So it's it's it's a it's a brand mode.
• 29:46
  SPEAKER_01: What makes you say that that the brand is strong?
• 29:49
  SPEAKER_00: Because of uh what you saw, or because of what we saw and the people we talked to as well.
• 29:53
  SPEAKER_00: To give you uh I have a very cool here this how did we put it together about the modes?
• 29:59
  SPEAKER_00: Uh yeah, the brand, it's a brand mode.
• 30:01
  SPEAKER_00: Um so um out of people we talked to and accounted when we asked them the question, one third of them shops there at least once a month, which is quite frequent for cake.
• 30:13
  SPEAKER_00: Because you can also buy slices of cake there, right?
• 30:16
  SPEAKER_00: For pounds.
• 30:17
  SPEAKER_00: Yeah, but there's some muffins, there's some adjacent kind of ranges.
• 30:21
  SPEAKER_00: Um, and um we we were very curious, so we asked the question.
• 30:24
  SPEAKER_00: One of our structured questions was if you know there was a competitor called Bake Box, let's say, that built like in front of this one, and it was like a few pounds cheaper, would you check it out?
• 30:36
  SPEAKER_00: Right?
• 30:37
  SPEAKER_00: And it's very interesting.
• 30:38
  SPEAKER_00: Half of the people said they wouldn't even go and check it out, they don't care about the price.
• 30:42
  SPEAKER_00: And most of the 75 or like 80% of people we talked to, they didn't care about the price at all when buying the cake.
• 30:49
  SPEAKER_00: Why?
• 30:50
  SPEAKER_00: Because it's a special purchase that you do once a year, twice a year, three times a year, typically for special occasion, and it's gift economics of cease candies, right?
• 30:59
  SPEAKER_00: So when you when I buy something for someone else, less price sensitive than if I was buying it for myself.
• 31:05
  SPEAKER_01: So you have this kind of yeah, you have this pretty interesting if you look at it from a psychological standpoint, right?
• 31:11
  SPEAKER_00: Yeah, it's like if you have brand modes, like brand modes are purely psychological.
• 31:15
  SPEAKER_00: Think about it, think about coke, think about whatever, right?
• 31:18
  SPEAKER_00: Um, so you have gift economics, so people want to pay more for it because it's a gift, and it's not just a gift for someone special, like with cease candies.
• 31:27
  SPEAKER_00: I think it's even better than cis candies in this sense, because it's also a special occasion because it's a birthday.
• 31:33
  SPEAKER_00: Cakes are very strongly associated with birthday, with Diwali, with Christmas, what have you.
• 31:39
  SPEAKER_00: And you know, you don't want to mess it up when you buy a cake for your kids, for your partner, for your very close friend, for a special occasion, you will not risk it with something that's five pounds cheaper or ten pounds cheaper.
• 31:53
  SPEAKER_00: And that's what people told us as well.
• 31:55
  SPEAKER_00: They we talked to one dad who was shopping there with kids, and he said, you know, I've been shopping here for like seven, eight years, and um, you know, kids love it, they have a lot of allergies with eggs, whatever, and we will never ever, you know, go somewhere else.
• 32:09
  SPEAKER_00: We don't care about the price, um, because it's for the kids or whatever.
• 32:13
  SPEAKER_00: And it was interesting because to me, when I was, you know, when I was at uni in UK, I was a broke uni student, you could say, to me, cake box was on the pricey side of things, because it's like, you know, 30, 40, 50 pounds per cake.
• 32:27
  SPEAKER_00: You know, which is like what 60, 70 euros per cake, probably.
• 32:31
  SPEAKER_00: It's it was more it seemed expensive to me.
• 32:34
  SPEAKER_00: But then you talk to all the people there, and 75% of them thought the prices were reasonable, which was quite interesting to us.
• 32:44
  SPEAKER_00: That most people don't care about the price, they think it's reasonable, and yeah.
• 32:48
  SPEAKER_00: So there is a customer surplus there for sure.
• 32:50
  SPEAKER_01: So, how would you rank like the drivers of success for uh a company like cake box?
• 32:54
  SPEAKER_01: Is it mostly about management execution?
• 32:57
  SPEAKER_01: Is it about the uniqueness of the niche?
• 33:00
  SPEAKER_01: Is it the brand strength?
• 33:02
  SPEAKER_01: What do you think will drive cake box success in the long term?
• 33:05
  SPEAKER_00: Everything you said, and more okay.
• 33:08
  SPEAKER_00: But if you had to rank them for rank them all, Jesus.
• 33:11
  SPEAKER_00: Um I mean uh on the quantitative tangible side, I would say that with every franchise, if the franchisees are happy, it's a rule of thumb.
• 33:20
  SPEAKER_00: If the franchisees are happy, the business will prosper, you know.
• 33:25
  SPEAKER_00: So if you take care of the franchisees, they will take care of the customer for you.
• 33:31
  SPEAKER_00: So the LFL is good on the tangible side.
• 33:34
  SPEAKER_00: You know, if they're adding new stores, there's no store closures, the margins are okay for the unit economics, they are okay, like for like sales are okay.
• 33:43
  SPEAKER_00: Those are the tangible things, right?
• 33:45
  SPEAKER_00: That you would look at system sales, of course, right?
• 33:48
  SPEAKER_00: Um the the split of system sales as well.
• 33:52
  SPEAKER_00: On the more qualitative side, we need to define every time I look at any company, right?
• 33:56
  SPEAKER_00: Um, you look at the modes.
• 33:58
  SPEAKER_00: To me, the task is about thinking from the customer perspective and the value proposition.
• 34:04
  SPEAKER_00: Because if you have a mode, it's addressed at very certain specific needs of the customers, right?
• 34:10
  SPEAKER_00: And they, for example, I know you looked at autopartner, probably, didn't you?
• 34:14
  SPEAKER_00: Or like Intercaras or something.
• 34:16
  SPEAKER_00: Yeah, we did.
• 34:17
  SPEAKER_00: So there, you know, the mechanics care about speed of delivery, you know, and then selection, the price is least important, right?
• 34:24
  SPEAKER_00: And if you if you look at the cake box people, you customers, you also need to think, what do they want?
• 34:30
  SPEAKER_00: Why do they shop at cake box?
• 34:32
  SPEAKER_00: Then because they clearly prefer cake box over all the other alternatives.
• 34:37
  SPEAKER_00: And in this case, you know, the molt is the brand, you know, and the things that drive the brand are the things I just told you, right?
• 34:44
  SPEAKER_00: People would never consider competitors, they're not price sensitive, there's a consumer surplus, they have shopped there for a long time, there's high frequency of shopping.
• 34:55
  SPEAKER_00: Another thing is it's all the brand, you know, how you take care of the yeah.
• 34:59
  SPEAKER_00: I kind of messed up the question.
• 35:00
  SPEAKER_00: Yeah, you asked like specifically to rank.
• 35:03
  SPEAKER_01: No, that's okay, but I I think you you answered them in a slightly different way.
• 35:07
  SPEAKER_01: But just to follow up on what you just said, are those the things or the KPIs you track as well?
• 35:14
  SPEAKER_01: Like like for like sales or store growth?
• 35:16
  SPEAKER_01: What do you track personally?
• 35:18
  SPEAKER_00: Of course.
• 35:18
  SPEAKER_00: Yeah, I can show you my model later and we can discuss it if you want for cake box.
• 35:22
  SPEAKER_00: So then the absolutely yeah, I would love to see it.
• 35:24
  SPEAKER_00: Probably better.
• 35:25
  SPEAKER_00: Okay.
• 35:26
  SPEAKER_00: But that that that the basic rule of thumb is, you know, our franchisees happy.
• 35:32
  SPEAKER_00: So as you ask, franchise unit economics, right?
• 35:35
  SPEAKER_00: How much are they making?
• 35:36
  SPEAKER_00: What are the margins?
• 35:37
  SPEAKER_00: Are they happy with the business?
• 35:38
  SPEAKER_00: Do they see prospects?
• 35:40
  SPEAKER_00: My favorite part, which is maybe not very easy to track, but is to see when I see a franchisee who's already has the shops, but he's opening more shops.
• 35:50
  SPEAKER_00: Because it means he thinks that he or she thinks that the prospects for business are good, right?
• 35:56
  SPEAKER_00: And this is the best thing.
• 35:57
  SPEAKER_00: And I I've met exactly franchisees like that who just open new stores.
• 36:02
  SPEAKER_00: So if the franchisees, if the franchisees think the prospects are good, they're probably good, you know, because they're on the ground, they're down there.
• 36:10
  SPEAKER_00: We we they see what we don't see.
• 36:12
  SPEAKER_00: And there's all those things I told you about the strength of the brand, you know, from the co uh uh the consumer, like the actual customer point of view.
• 36:18
  SPEAKER_00: One thing I'll add here, you can edit it in or out, however you please.
• 36:22
  SPEAKER_00: But um the we we we talked to the we also asked them one of the questions we asked them was about the supermarkets, right?
• 36:31
  SPEAKER_00: Because as the Science Bury styles, they'll typically have kind of free-from section where they sell like gluten-free, sometimes egg-free products, and they're like half the price, they're much cheaper, but they're typically rubbish, you know, they're very bad quality compared to cake.
• 36:46
  SPEAKER_00: And then we asked people, and 76% of people would never ever consider supermarkets when buying a cake, which is also something interesting.
• 36:55
  SPEAKER_00: So cakes are not really uh there's sort of a thing.
• 36:58
  SPEAKER_00: The cakes from the supermarkets are sort of a thing that you go for when you kind of have no time, you want something quick, you want something quick and dirty, whatever, right?
• 37:08
  SPEAKER_00: Not for like very special occasion, unless you're super budget, you know.
• 37:12
  SPEAKER_00: If you're super budget, then yeah.
• 37:14
  SPEAKER_00: And most of the reasons, and we ask them as the people, why don't you consider you know supermarkets?
• 37:19
  SPEAKER_00: And most of them say, A, they aren't fresh, b, poor quality, c the icing is too sweet, and no customization, right?
• 37:27
  SPEAKER_00: Because when you go to supermarket, it'll be in the box already, it'll have this sweet icing on top, and you can't really customize it as well.
• 37:36
  SPEAKER_00: It's not fresh, you know, that's the biggest issue.
• 37:38
  SPEAKER_00: And for the egg-free customers, or core Indians, whatever, for them, they just don't trust it with the egg-free.
• 37:45
  SPEAKER_00: Because there is a reason why when you have a halal store or a kosher store, everything there is halal or kosher, you know, it's this sort of a cleanliness, you know, trust.
• 37:55
  SPEAKER_00: Same with cake box, everything there is egg-free.
• 37:57
  SPEAKER_00: So I don't consider supermarkets competitors, and I think it's echoed even further by Asda kind of teaming up with cakebox, and they started building kiosks at Asda.
• 38:10
  SPEAKER_00: So you have kind of a project they're doing together.
• 38:14
  SPEAKER_00: Um, yeah.
• 38:15
  SPEAKER_00: Oh, that's pretty interesting.
• 38:17
  SPEAKER_01: They recently acquired Umbala, I think it's a South Asian sweet brand.
• 38:22
  SPEAKER_01: Yep.
• 38:23
  SPEAKER_01: Well, we know um lots of acquisitions fail if you're not a serial acquire.
• 38:29
  SPEAKER_01: What do you make of this decision?
• 38:30
  SPEAKER_01: Do you think it adds anything to cake box that it didn't already have, or what are your thoughts here?
• 38:36
  SPEAKER_00: It's purely opportunistic.
• 38:38
  SPEAKER_00: It's a business that has a massive customer overlap with cake box, because now cake box sells equity cakes eaten by Hindus, very often Muslims, Jains, Sikhs, whatever, right?
• 38:50
  SPEAKER_00: And all those people are very often from those cultures who eat those sweets from Umbala.
• 38:56
  SPEAKER_00: So that'll be that'll be an interesting skullback project for the future, which would be to ask the people there and there, do you shop at the other one?
• 39:04
  SPEAKER_00: And they would see the overlap that there is, but uh in my opinion, there's a massive overlap.
• 39:09
  SPEAKER_00: So if you buy egg free cakes, if you're a Hindu, you'll probably know Ambala, if there is Ambala in your area.
• 39:14
  SPEAKER_00: So great synergy.
• 39:15
  SPEAKER_00: Same customers.
• 39:16
  SPEAKER_00: Now what they will be doing, they'll be putting them together.
• 39:19
  SPEAKER_00: So new ambala will often be together with a new cake box.
• 39:22
  SPEAKER_00: Some of the ambalas we visited, they had cake box stand, kind of like a kiosk next to it that they put in inside.
• 39:29
  SPEAKER_00: There is a massive synergy.
• 39:31
  SPEAKER_00: Basically, if you think about Ambala, if you can't really imagine it, so people listening it.
• 39:36
  SPEAKER_00: Uh it's just Indian seas candies, like literally.
• 39:39
  SPEAKER_00: Cake box is different because it's cakes, but umbala is literally just sweets from South Asia.
• 39:44
  SPEAKER_00: The business was founded in the 1960s by a Pakistani guy in UK, but sweets are from all over South Asia, not just Pakistani.
• 39:50
  SPEAKER_00: And the business was doing very well, it's from the 60s.
• 39:53
  SPEAKER_00: They didn't expand a lot because it's a niche, right?
• 39:55
  SPEAKER_00: You know, O'Warren always says that seas doesn't travel, you know.
• 39:59
  SPEAKER_00: I don't think Ambala travels as well.
• 40:00
  SPEAKER_00: I think cake box travels very well.
• 40:02
  SPEAKER_00: Umbala, I'm not sure, right?
• 40:03
  SPEAKER_00: Because cakes are universally cultural everywhere around the world.
• 40:08
  SPEAKER_00: Asian sweets, not really.
• 40:10
  SPEAKER_00: But it was interesting, the business was very good, especially in the Asian areas.
• 40:13
  SPEAKER_00: That's where they are mostly, London.
• 40:15
  SPEAKER_00: And when Souk opened his first store in 2008, then there was Ambala that opened not far.
• 40:21
  SPEAKER_00: They're literally just like two minutes from each other.
• 40:23
  SPEAKER_00: And Souk lost like 60% of sales in a month, apparently, because of Ambala.
• 40:29
  SPEAKER_00: Because Ambala is just such an essential brand to a lot of agents in London.
• 40:33
  SPEAKER_00: So very, very good brands with people who shop there.
• 40:36
  SPEAKER_00: Uh, we even witnessed some people coming in, and I I don't know if this is a pattern.
• 40:40
  SPEAKER_00: I would need to ask people a cake box, but I think Ambalas have a designated English speaker and designated local Asian language speaker at every store, depending on the area.
• 40:51
  SPEAKER_00: Oh, really?
• 40:52
  SPEAKER_00: So, you know, in in uh in Green Street, I think in White Chapel there'll be like Bengali, there'll be Urdu somewhere else, Hindi somewhere else, I don't know.
• 41:00
  SPEAKER_00: Um and I I witness people coming into Ambala and greeting them and speaking their native language, not English with the stuff.
• 41:07
  SPEAKER_00: Like this is this is very entrenched, this is very strong mode, cultural religious.
• 41:12
  SPEAKER_00: You know, if you want to have a customer, if you could have a share in any religion, you would, you know, like this is very sticky, whether it's Christianity, Islam, or whatever, right?
• 41:21
  SPEAKER_00: All of those you want a customer who's irrational, for whether it's good or bad.
• 41:27
  SPEAKER_00: Probably a bad thing to say.
• 41:28
  SPEAKER_00: But you know, you want to have a customer who's irrational in a way.
• 41:32
  SPEAKER_00: Um, because if you have rational decision making, you don't really have a mode unless it's really just low price, sort of kind of very tangible.
• 41:39
  SPEAKER_01: Here it's pricing power as well, yeah.
• 41:41
  SPEAKER_00: Yeah, but but most of the like this type of emote that you have at cake box, which is intangible, which is brand, religion, community, you know.
• 41:49
  SPEAKER_00: That's why I don't think it's it's it's very easy to copy.
• 41:52
  SPEAKER_00: That's why I think the mode is very strong.
• 41:54
  SPEAKER_01: Yeah, it's part goodwill as well.
• 41:55
  SPEAKER_00: Yeah.
• 41:56
  SPEAKER_00: Goodwill for sure.
• 41:57
  SPEAKER_00: And um with Ambala, you know, so it's this is this great business.
• 42:00
  SPEAKER_00: This is this Indian London-based, this candy, very niche, but super powerful, uh, and it's niche.
• 42:06
  SPEAKER_00: Not with a lot of growth, but kind of high heroic, low growth business, right?
• 42:11
  SPEAKER_00: And um, and then the father wants to like pass this business to his sons, who are not very competent in the business, and he wanted to keep it in the family and all that, and uh they um they really mismanaged the business over the last few years.
• 42:29
  SPEAKER_00: It was terribly mismanaged.
• 42:31
  SPEAKER_00: Uh, the oldest son, who was supposed to be the new CEO, was a graphic designer who I think didn't know anything about the suites or cooking, running a business.
• 42:40
  SPEAKER_00: Suk told us that when he entered the manufacturing plant of Ambala, which they bought in this deal as well as a part of it, um, he instantly spotted like 15-20 operational mistakes that would take months to fix.
• 42:53
  SPEAKER_00: Uh so basically those sons were mismatching the business, and then the founder died last year.
• 42:58
  SPEAKER_00: And the business went from doing bad to collapsing and going bankrupt almost.
• 43:03
  SPEAKER_00: And that's when Suk kind of scooped it when he bought it, um, which was fairly opportunistic, uh, I think.
• 43:12
  SPEAKER_00: And so it would take two years to fix to turn Umbala around and fix all the mistakes, and mistakes were quite insane.
• 43:20
  SPEAKER_00: I can give you two funny examples of the mistakes, like how Umbala was mismanaged.
• 43:25
  SPEAKER_00: But one was where some of the franchisees, because those franchise, those 22-20-ish stores, right, of Umbala, most of the franchise, and some of the franchisees started selling chicken kebabs at their umbrella stores.
• 43:40
  SPEAKER_00: Um and what happens when you when you start selling chicken kebabs is that it becomes uh haram, if I understand correctly.
• 43:48
  SPEAKER_00: And especially for Hindus, it you can't take it to the temple anymore if it was with animal products.
• 43:54
  SPEAKER_00: And in like in Hindu and uh culture and Indian culture, it's very common with.
• 44:00
  SPEAKER_00: those suites you bring them to the temple.
• 44:02
  SPEAKER_00: It's a very typical sort of um thing you do.
• 44:06
  SPEAKER_00: And what you do you you you when you when there's a wedding it's very common to actually the guest gives uh sorry no the other way around because for us very often it's like we give gifts to um you know someone's getting married or whatever and there very often what happens is the the hosts give those like sweets as a gift and very often you need to bring them to the temple do that and you can't if you have chicken kebabs being sold around them and it's just messy like I don't know just think about it.
• 44:34
  SPEAKER_00: Imagine cease candy selling chicken kebabs randomly or hamburgers.
• 44:37
  SPEAKER_00: Imagine there's a hamburger stand at cease candy I don't think it will do very well you know like Jen Basis would say that you need to know your customers are you like a French restaurant or are you a fast food chain or whatever.
• 44:48
  SPEAKER_00: And uh and so that was funny.
• 44:50
  SPEAKER_00: And the other mistake was and of course that was terrible for the business right because people just stopped shopping there.
• 44:55
  SPEAKER_00: And another one was where Sug talked to when they were talking about the sourcing and this like where they got the supplies from potatoes in that case I think he asked them why are you sourcing from there?
• 45:05
  SPEAKER_00: It's like double the price from the cheapest source of potatoes and they told him you know what the found the founder Mr.
• 45:11
  SPEAKER_00: Khan said you have to buy from there.
• 45:13
  SPEAKER_00: So just keep buying it from there.
• 45:15
  SPEAKER_00: Because it's like Friend or whatever.
• 45:16
  SPEAKER_00: And Suk was not just go buy the cheaper and they saved like half the costs on that apparently low.
• 45:22
  SPEAKER_00: So for what I understand it will take up to two years to like fix all those things.
• 45:29
  SPEAKER_00: And I think it's a great thing.
• 45:31
  SPEAKER_01: It was purely opportunistic it wasn't planned I think it just came you know how they're going to run it are they going to integrate it and let one CEO run it or will it be like independently or oh there'll be it'll be franchised fully with time after they fix it.
• 45:47
  SPEAKER_00: And there'll be a guy currently there is a guy from from cakebox who managed like relationships with the franchisees he managed the distribution centers he's very experienced and he's from the Pakistani origin as well and he speaks Urdu he speaks the language that they speak at Ambala and by the way it's called Ambala because Ambala is the name of the small village in Pakistan where the founder is from and they had this and they had this they had this weird habit of hiring people from that village only well run out of employees soon.
• 46:20
  SPEAKER_01: So what they started doing is they started putting people also from other ethnic groups black white whatever also because that was another thing this Nepal issue is was quite big at Ambala yeah yeah a great synergy great business terribly mismanaged I think okay interesting yeah I'm very curious to see how that will uh turn out should be good so I think you said kickbox is quite a holding for you position yeah I think we can work towards the end but I I do uh do like inverting certain just inverting certain questions so thinking about it from like uh your thesis point what would be a reason or a clear red flag for example yeah to break your conviction thesis what would make you sell your entire position oh for sure the there could be things like that I don't think there is a fundamentally an issue with the business model I think business model is quite good uh I don't think people will ever stop buying cakes I don't think Indians will suddenly commit apostasy like at high rates every year.
• 47:30
  SPEAKER_00: I think this is okay on that front we're safe it's purely managerial there is a mismanagement risk at cake box there is succession risk which is something we are worried about and have been worried about for some time uh which is Suk is 60 by now he's excellent he's very good he's very good at he is the mastery of the product mastery of the customer you know very founder very energetic founder he's in good health he's very energetic he's very fanatic in a way but he's 60 and he will probably want to he owns 25% of equity as well himself still and he will want to sell at some point at least part of it he'll want to retire in a few years he said he will always be involved with the business uh in some shape or form but there might be a new need to get a new CEO kind of succession plan.
• 48:20
  SPEAKER_00: So I think if they don't find sudden as as for now I don't think there is like very clear successor for Silk.
• 48:28
  SPEAKER_00: Like Mike the CFO is really good but he's he's a CFO you know he's not really the future CEO type of a guy despite being great um what I think could work very well and what worked at Domino's system worldwide is taking people from the the franchisees.
• 48:46
  SPEAKER_00: Some of the biggest and most successful franchisees if they can run 20 30 stars why not 200 300 the current CEO of of Domino's UK from Australia who just took over he was originally a franchisee running 30 stars in Australia as well um I think that could work.
• 49:01
  SPEAKER_00: But what would make me sell is not the succession plan being like not seen for a long time that there's someone capable that I trust who could take it over from SUC in a few years.
• 49:13
  SPEAKER_00: That would be one thing the other thing would be I think cakebox could be this is more of a bonus but I think cakebox could be more financially more aggressively managed.
• 49:26
  SPEAKER_00: I don't think the balance sheet is working as far as much as it could um for example I think buybacks would be great as cake box right now.
• 49:33
  SPEAKER_00: It's very cheap you know it it shits cash sorry for the word but it really does and um at like 30-40% rowic right and it's a P of 16 and you you build only 25 source a year so the growth is fixed.
• 49:50
  SPEAKER_00: Then why not just repurchase the shares like this could if you have a business with very high Rowic kind of moderate growth like single digit growth which could be cake box not currently it's higher but it could be and then you you're kind of discountable on top of this then you you can have multi buggers like this in the future so that that could be a good thing at cake box that's not happening.
• 50:13
  SPEAKER_00: You know but capital allocation and very messy financial management could make me sell it.
• 50:19
  SPEAKER_00: But it's mostly the succession risk the thing if there's no good succession if I don't see someone there being there I might sell it.
• 50:29
  SPEAKER_00: And another reason why I might sell is simply I don't have an upside anymore.
• 50:34
  SPEAKER_00: I mean I'm I'm not a I'm not a I'm not a you know forever never sell sort of an investor I always compare constantly my positions based on the on my models to opportunity costs and to other things.
• 50:47
  SPEAKER_00: So you know if cake box gets overvalued I don't sell it of course if I have other things so boy so it's this it's it's really valuation in the future capital capital management allocation could be there but it's mostly succession that's the biggest thing and mismanagement risk if they suddenly start making silly decisions I think because they're not super professional.
• 51:07
  SPEAKER_00: They're really like founder oriented but they're not like super professional for now at least so yeah there's that risk.
• 51:14
  SPEAKER_01: Yeah fascinating to think about I I would just love to look into the future and see let's say 20 years from now how many stores they have and where where are they operating what do you you think they can eventually get to in the UK for example?
• 51:27
  SPEAKER_00: Oh they could easily double the current store count so like 250 60 they could have 500 600.
• 51:34
  SPEAKER_01: So that's a growth path for the coming 10 years?
• 51:38
  SPEAKER_00: Yeah a little bit more 15 maybe yeah it's like they don't need to grow fast uh and there is also Europe and US and Canada where I think there's there's that there's this massive demand for something like cake box among the Indian communities but nobody's satisfying it.
• 51:56
  SPEAKER_00: And cake box has already grown to be this outside of India this kind of among the diaspora to be this famous thing.
• 52:03
  SPEAKER_00: And there's a lot of people in and a lot of Indians in other countries who are asking for cake box because they have families and they have heard about cake box in UK and they're really jealous and they won't have cake box.
• 52:14
  SPEAKER_00: So I think there is untap demand there for sure as well.
• 52:17
  SPEAKER_01: You've really triggered me with this conversation I'm honestly thinking of diving into the business myself for a deep dive seems like a company that fits perfectly within my circle of competence and the UK is pretty close so I can definitely visit some stores there and I just love the the story the unit economics I do think the future looks pretty bright and clear for this company as well.
• 52:42
  SPEAKER_00: Do you want to see the model?
• 52:43
  SPEAKER_00: Yeah let's do it take us through it this is this is my model for cake box it's conventional you know breaks down the whole thing and the revenue is here this is the next 10 years and the revenue is modeled it's very simple it's based on 25 new store openings a year which will drive the the new this total store's growth here which you can see here and uh we know from the management they've done this for the last few years as you can see here it's in this range uh 26 last year and we know from them personally that they want to open around 25 stores at least 25 stores a year for the next few years so I just run this into the 25 stores a year which gives you like you know 10% to 5% slowly going down growth if you build this in.
• 53:33
  SPEAKER_00: And so you basically get sales from old stores and sales from new stores right and sales from old stores are run on LFL on the like for like sales which are assumed to be 4% management mentioned five over the long term you know you can play with the number that's the whole thing about the model so that you play over basic different scenarios and so I have 4% like for like here for the old stores sales from old stores and you get the sales from the new stores uh which are based on you know the new store additions here and combined this goes to system sales and then the big driver for cake box is what chunk of system sales the company will take right the split like we assume the current one 5050 it could change but yeah so we end up uh with a revenue growth of like you know starting at 10 and then going to 8% um I see yeah yeah that's that's what we get from this the eBit margins are just cap at the current level at 17% but what's interesting is that I think that it could go back up to the pre-COVID like previous levels if you can see here.
• 54:42
  SPEAKER_00: Yeah it's been much higher yeah yeah yeah I mean it could happen there is a cost of living crisis here so if you wanted to be super accurate of the model you could and see it it's already increased a bit over the last three years from the bottom of 23.
• 54:56
  SPEAKER_01: Yeah so 70% is pretty conservative.
• 54:59
  SPEAKER_00: Yeah and and you could what what you could do is you could keep it for example around 17 here for assuming how long the crisis in UK will last which could be 20 years if considering it's UK but and then you know you know but the the cost of the people are bound to start buying more you know because this is a macro thing in UK Domino is going through the same thing.
• 55:22
  SPEAKER_00: So you could run it up to like 2022 right towards the but you know it's not gonna change that much you you're left with the nopad margin of like 13% historically was also much higher.
• 55:35
  SPEAKER_00: And I it's better to be too conservative than too aggressive I think with the model.
• 55:40
  SPEAKER_00: So I'm very happy to to be on the safe side still of the assumption.
• 55:45
  SPEAKER_00: Capex is non-existent almost at cake box is very low because you know it's a friend choice it's very asset lowed the business so yeah they don't own the stores they only own the distribution centers and the manufacturing plasma so it only jumps up whenever they build something as you can see here as well depreciation is also low and you have networking capital which is 4% and then you get to free cash flow and you run the free cash flow and you discount it at the current UK rates of 8.5% you know I don't use the beta like other people use the beta on the volatility because I don't think volatility is the risk.
• 56:23
  SPEAKER_00: But what I learned from my last job how that asset management frame the way they thought about it was to just brainstorm cyclicality of the business right if you assume beta one to be market cyclicality then anything lower will be less cyclical than the market anything higher.
• 56:41
  SPEAKER_00: I think HBOX deserves slightly below one for beta and other submarkets so this is the WAC which is 8.5% and it's adjusted for Umbala by the way this model so it doesn't include we don't know the cash flow so umbala so the debt they issued to buy umbala is also not included and nor are the sales or anything from Bala and so the current price is in my model is three pounds with the current like share price being two so I get an upside of 50% the current price.
• 57:13
  SPEAKER_00: I see and you saw yourself I mean the the listeners will not see it but you saw yourself that my assumptions aren't crazy on the margin side.
• 57:21
  SPEAKER_01: No they're they're pretty conservative actually I think I think the future will probably look a lot better than this.
• 57:29
  SPEAKER_00: So pretty conservative actually so even with this you still get 50% upside on the current price which is yeah I think quite good.
• 57:38
  SPEAKER_01: It's not just a good business it's a cheap business it's a good margin of safety for sure.
• 57:43
  SPEAKER_01: Yeah I mean it's uh it's like uh it's like this um what did Mongo always say uh hats I don't lose much oh that's mon I think that was monish it was Monish quoting Mongo I don't know I don't know I remember I mean he's a copycat right yeah he is maybe maybe it was both of them to be honest it's a good model I mean what we can do if if if you if you if you really want to let the listener see it is we we can manage to put a couple screenshots in in like a file and share it in the description and otherwise I mean if they really wanna want to see it they'll just have to check out your sub stack maybe do you know I can send you the file with the excel sheet to it and then you can do whatever you want with this model.
• 58:26
  SPEAKER_00: You can start it you can share it gonna sell it yeah you can play with it's like a template for you if you want it.
• 58:34
  SPEAKER_01: Alright perfect well um before we go uh Paul what where can people find you I mean especially considering cake box plug yourself where can people learn more about you and your stuff I've never done it before so I don't know how to do it but my my sub stack is bbop value bebop like b-e b o p so like the the anime show or like the jazz genre it's the same yeah and I recently uploaded the the deep dive there yeah so it's that's where it is I'll make sure to put it in the description as well for people to see LinkedIn or you you're not a LinkedIn user?
• 59:09
  SPEAKER_00: I have a LinkedIn yeah I I use it I think it's good uh people always complain about it being like corporate or whatever but I like it you can find you can find cool people there I think especially for investing I think it's very useful to connect with people there.
• 59:21
  SPEAKER_01: Yeah I have LinkedIn do you want to put it there or yeah I'll put it in description for people to to if they do want to contact you or ask questions I think that's the probably the best way that's the best way to reach you yeah we'll make it happen.
• 59:35
  SPEAKER_01: I think many of our listeners will I'm pretty sure will have a much better understanding of the company I do at least so thank you so much for uh taking the time to do this with uh with us no bother a lot of fun doing it uh I like talking about it all right well maybe until next time then yeah for sure all right