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CG: Two Overlooked but Interesting Businesses

In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Dan Kline take a deep dive into Ollie's Bargain Outlet (NASDAQ: OLLI) and Keurig Dr Pepper (NASDAQ: KDP). Ollie's is a well-executed and highly adaptable discount retailer that has done well during the pandemic. Our hosts talk about coffee drinking habits and Keurig Dr Pepper sales during the pandemic, moving forward, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on September 22, 2020.

Emily Flippen: Welcome to Industry Focus. It's Tuesday, September 22nd, and this is your Consumer Goods focused episode. I am Emily Flippen, and today I'm joined by Motley Fool's infamous Dan Kline. And we're going to be taking a deeper look at two interesting companies; Ollie's Bargain Outlet and Keurig Dr Pepper. We're going to be answering the question that has been on everybody's mind, I know it has, which is, have K-Cup sales gone up [laughs] since the pandemic began?

Dan Kline: There have also been Dr Pepper shortages, so it has been a very strange time period for Keurig Dr Pepper. [laughs]

Flippen: Completely strange. You're going to have to stick around for the second half of the show to hear about that, but what I will say is, as an avid Diet Dr Pepper drinker, that is my diet soda of choice, I have been aware of the lack of Diet Dr Pepper that's been available at my grocery stores. We'll address why that may be, why can't Keurig keep up with the demand for Dr Pepper. Questions that are just, you know -- I know they're killing everybody listening right now. [laughs] Dan, how are you doing today?

Kline: I am good. It's one of those weird -- you said September 22nd, and I live in perpetual Summer, so it feels very bizarre that you said that. Tomorrow, Emily, is actually my 20th wedding anniversary, and we've actually --

Flippen: Congratulations.

Kline: Yeah. We've decided we're going to defer. [laughs] We're in a pandemic, nothing is fun. You know, we'll have a nice meal and, kind of, quietly acknowledge it. We're not doing gift shopping, we're not doing... I just turned to my wife and I said, do you really want the stress of this? Our birthdays are in three weeks, can we just not do this? And she said, yes, we will do this as soon as we can do it in some normalcy. So, the date happens, but it doesn't count. Which, you know, you could do that for birthdays if you want, you can get younger this year if you'd like to.

Flippen: I love that. My birthday is actually coming up, I am considering deferring it, is that an option? Can I just stay this age forever?

Kline: I think you can. Mine is October 16th, [laughs] so we can ...

Flippen: We have very similar birthdays; you learn something new every day. [laughs] Well, as much as we could probably just sit here and talk about our birthdays and wedding anniversaries for the whole show, let's roll straight into it. And this is a company that we're going to kick off with, it's a company that we talked a lot about, haven't spent a ton of time taking a deeper look at it. And if you are located in the United States, you may have heard about this company, probably if you're on the East Coast, maybe if you're an active investor into consumer goods-based companies. But I'm willing to bet that 50% of our listeners have probably never heard of, never been in this company, and that's Ollie's Bargain Outlet. What can you tell us about this anomaly? [laughs]

Kline: So, this is one I'd never heard of until one of your colleagues, our very own David Kretzmann, a few years ago we were having coffee and he said, what do you think of Ollie's Bargain Outlet? And I went, I've never heard of it. So, I looked it up and I found that they had a location in Orlando, Florida; not actually Orlando, one of the suburbs. And it's about eight miles from my house, so with Disney traffic that is a 45-minute ride, but I made the ride. And I was super impressed. So, Ollie's is Big Lots done well. So, when you think about Big Lots, there are some nice things about Big Lots too. But Big Lots is a giant store, it's physically a big box. And merchandise is, let's say, sprawled all over the place. Now, that's good if you're buying a couch, which is not something I would buy from Big Lots, because it needs that space, but it's less good when you go to, like, the toy area, and it looks like kids came in and played with all the toys and then left. It's not a particularly well-merchandised store.

Ollie's stores are compact. They're the size of like a Five Below, but they're merchandised floor-to-ceiling. And it's incredibly well done. So, you get that whole treasure hunt experience, but in a much smaller retail footprint, so that makes the company -- you know, think of it like a tall Dollar General in terms of the size of it. Now, it's not a Dollar Store, it's a deep discount store. They might have everything from -- right now they have a lot of grocery, which is not typical, they might have everything from a good deal on a crockpot to K-Cups of a brand you never heard of; that's where I learned that Joey Kramer from Aerosmith had a line of K-Cups, which clearly didn't work, because they were available at Ollie's. [laughs] And some things like, you'll go in and you'd be like, I need a rice cooker. Is it worth it to get 85% off, but it's a Green Bay Packers rice cooker, like it's just like [laughs] some really weird tie-in. And they sell things like desks and chairs. And it's about, I'd say, 50% changing merchandise based on what's available, probably they have better stuff available, and sort of 50% like, well, you know they're always going to have K-Cups, there's always going to be a deal on certain things. If you want a coffee maker, there's going to be some variation of a traditional coffee maker, but it might be a Mr. Coffee one week and something else the next week. It's a really fun store and they're expanding pretty quickly, there's actually one down the street from me in West Palm Beach now that wasn't there a few years ago.

Flippen: Yeah, it's such an interesting store because it has been around for a while. It was founded in 1982 in Pennsylvania, which is still their largest market in terms of total number of stores, but it's expanded relatively slowly, especially when you compare it to other discount retailers. I'm thinking of maybe the Five Below's of the world, which have taken a much more aggressive expansion approach.

Up until this point, Ollie's has really just expanded slowly. If you look at a map where their stores are, it's almost like how the United States was colonized up until people, you know, reached probably California; they still don't have any stores in California. But they just completely spread across the East Coast, just recently reaching Texas and Oklahoma with their very first handful of stores. So, it's still small in terms of the opportunity that's ahead of them. The number of stores they have today, I think they can continue to rapidly grow and expand westward. [laughs]

Kline: Yeah, it's only 345 stores in 25 states. I would say their stores are somewhat of a regional draw, if you know they exist. Especially if you're a member of their loyalty program, you might seek out an Ollie's while you're traveling or while you're someplace else. That being said, they've been building out based on supply chain. So, because it is very much a store-driven business, this is not a digital business, they need to be able to effectively get merchandise into the stores from distribution centers to stores, to move things that aren't selling around between stores, it's why they're, sort of, growing in that, sort of, sequential planned way. I think eventually, you know, 10 years from now, they'll probably be in 45 states, they'll be in most of the places you'd want them to be.

But this is a little bit of a hidden gem of a company; it's not on the tip of most people's tongues. They also tend to not go -- let me put this nicely -- for the nicest shopping plazas. You're not going to find an Ollie's next to a Target in most cases. The Ollie's here in West Palm Beach is in a very sketchy half out-of-business, you know, dd's DISCOUNTS I think is the anchor, it's a gym, that's a very low-end gym, a lot of vacancies. That's where Ollie's chose to go; it's not like that happened after they had already moved in.

Kind of the same thing at the Orlando area store. It's in a very third-tier shopping plaza. And that's because Ollie's knows it's a destination to itself. And about 70% of their sales come from the so-called Ollie's Army, which is their membership program. So, their customers are going to find them, there's no reason to pay for the location an Ulta Beauty would need to pay for it in order to be found. This is a very much, sort of, once you're in, you're kind of in. And if you've seen an Ollie's, you're probably going to seek out Ollie's when you have a chance to.

Flippen: If you're the type of person who's listening and actively enjoys looking up financial filings for companies, many of you listen to us, that you don't need to do it yourself, but for people who do like it, I would really encourage you to look at the most recent annual report for Ollie's. Because as I was sifting through it, I was Slack messaging you, Dan, I was getting so many good chuckles, because it really is a report like no other. The terminology they use, the way they describe their markets, even breaking down their business, it is incredibly unique. So, I want to point out some of the things that gave me a chuckle. The first is, how they define their total addressable market, their total addressable market is, "anyone between the ages of 25 to 70 with a wallet or a purse." [laughs] They genuinely believe that, and I think they actually state this in their report, that all of America loves bargains. I'm not sure if that's limited to just America, I feel like that statement is probably underrating their addressable market. But that within itself says a lot about their expansion.

Kline: Yeah. And it's also the kind of store -- so, let's say you're someone who is not generally looking for a discount, you know, like I'm not looking to save money on everything I buy. That being said, if it's winter and my son needs gloves, but there's no winter here in Florida, but we used to live in Connecticut, and he would go through, like, three pairs of gloves a week, losing them. So, I used to buy my gloves at Big Lots; we didn't have an Ollie's, so I'd take him to Big Lots and I'd buy 30 pairs of $2 decently warm gloves. That's the kind of thing you could do at Ollie's, something that you'd go to Five Below for, like, headphones, especially if you're prone to losing them. That's the kind of thing you can buy there. But it's also shopping as an experience. You literally don't know what you get. You might walk in and they have train sets today, they have patio furniture, like, it could be totally random.

But, Emily, the line you were pointing out, and I stepped out of here, and I'll let you deliver the punchline, but they offer prices up to $0.70 below department and...

Flippen: ...fancy stores. [laughs]

Kline: [laughs] They literally call their competitors fancy stores. And I actually think that's hysterical, because, look, they're trying to play off an ethos; there's no frills when you walk into an Ollie's. That said, it's clean, it's much tighter; I don't know what other word to use. The merchandise is really well done compared to stores in this space. It's closer to, say, a Marshalls, except they don't sell clothes, but occasionally they have some clothes, but they're not a clothes retailer, but it feels like they put a lot of thought into "what does our floor look like, how are we using our space," and just tidying up as things go. And that's something like, you've heard me complain about Dollar General. Dollar General is often very, very messy because there's only one person working there and they're behind the counter. This is clearly a company that wants to connect with its customers, and I think that's really, really valuable. That's also going to give them an automatic audience when they open someplace new, because people are going to be excited, oh, I used to have an Ollie's, now I have one again.

And, Emily, the financials are pretty good as well.

Flippen: Yeah. And before we get to the financials, I'm going to spring this on you, Dan, we did not plan this ahead of time, but as we were talking, I thought this might be kind of fun, the people listening at home can play along with us. Ollie's breaks down their merchandising into a few different segments. And I'm going to read them off to you, Dan, but as I'm reading them off, and as our listeners are listening at home, try to think to yourself what you think the largest segment would be for Ollie's. And this isn't something I expect [laughs] for you to know, unless you happen to have seen this chart on their annual report, Dan, but I'm going to read them off to you and I want to get your thoughts on what you think the biggest segment in terms of total sales would be for Ollie's in 2019. So, this is pre-pandemic.

They have houseware, food, bed and bath, books, floor coverings, electronics, toys, health, and other. That was a lot, that was nine. Do you have any inklings?

Kline: What's the "other?"

Flippen: Oh, you ruined it; yeah, you got it right. It's "other" by a long shot. That just shows you the collection of "stuff," for lack of a better word, that Ollie's has. Other is 28% of their total sales in 2019; items that just simply have no other designation.

Kline: It's a very strange store. It's also a store you should not go in if you don't have fiscal discipline. Because you might come out of it and be like, why did I just buy a race car set, like, I'm not going to play. You know, the ones with the little buttons. I'm not going to play with this, I don't have a kid. But it is a very much an impulse purchase store. Or you leave with a 200-cup K-Cup pack, and you realize you drink four cups of coffee from your Keurig machine a year. I did that and had to throw away a lot of K-Cups.

You know, it's definitely a fun place to go if you need something, but also a fun place to go if you don't. And they're growing. And actually, I think what's most impressive is they did really well during the pandemic. And that's because while they're not generally selling food, they made a quick pivot to be able to get food. So, they went to their vendors for food-like stuff, maybe they sell, like, some candy, and I've mentioned coffee, and they said, like, what can you get me? Can you get me soup? Can you get me toilet paper? And they changed their business model on the fly for a short term, for the term that was most necessary. And that, to me, speaks to management, which is really important, because this was a founder-led company until not long ago when their CEO passed away. So, seeing that the management team that's now in place is able to think on its feet and still, sort of, have that work ethic that built the company from one store to 354 stores; that's very encouraging to me.

Flippen: I had forgotten that they had lost their founder. And it's a challenging thing for a company to go through, especially when you're in such a state of expansion like Ollie's is. Despite the fact that they're an old company and clearly a successful one for many years, I think this is a company that's still hitting its stride in terms of potential opportunities. It would be interesting to see how the new management team handles that transition, but I think it's been a good while now. And presuming, based on the most recent quarter say anything, it hasn't negatively impacted them yet.

Kline: Yeah. My only concern here is that they're not growing fast enough. I don't understand why they, sort of, grow at a Costco-like speed when the stores are smaller. But my guess is that strategy is related to capital and borrowing money and, sort of, self-financing. This feels like a model that would work elsewhere. It also feels like there's a lot of holes in their network, like I mentioned West Palm Beach and Orlando. And this may not be true, but last I looked, which is probably a year ago, those were the two closest stores to each other in Florida, and there's a lot of space in between, obviously, that you could fill in.

They opened six stores in the last quarter, that's actually relatively typical, they're growing by 10% per year. So, about 35 stores per year. Their net sales have been rising. Their comp growth was 2.4% up. [five-year average] Total net sales, Emily, I think this is the quarter, 58.5%. That is a stunning amount, so obviously what they're doing during the pandemic is working. I'm sorry, the 2.4% is the five-year average, so obviously they're outpacing what they're doing during the pandemic. And their operating income is up. So, even with all the added expense of operating during this, they're doing really well.

And it's just a very thoughtful company. They still do old-school marketing. They send a physical circular. Now, you can get it digitally, but it really is, hey, what's on sale at Ollie's that week, and that drives business, that sort of activates the customer base. And right now, when we're looking for any level of entertainment, a store we can pretend to go to because we need something -- oh, no, I need a potholder, and then it's fun to walk around -- I think that's going to be a good business model.

Flippen: Yeah. I'm happy that you, kind of, dove into the finances there. And one of the things that you mentioned was that this is a company that hasn't expanded super quickly, in large part because they're self-financing their expansion. To further highlight that, this is a company that's doing over $1.5 billion of sales a year from their 300 or so stores. They have no debt. So, no long-term debt. The only debt they have, to the extent that you as an investor consider it debt, are their long-term leases. So, they have lease obligations, as you would assume, from a retailer, but no long-term debt. They are truly a company that is consistently not only profitable, but strongly cash generating. And that's what they've used to expand their stores. And while they haven't expanded at the rate that they could have, I would assume, if they were going to take on a lot of debt to expand, they still have a five-year growth rate for store counts of greater than 14%. So, it's slow-moving in the sense that they're not growing at Five Below's rate, but at the same time, they're still growing and they're still getting there, just slower than you may have assumed.

Kline: That no debt essentially means they have no risk, because they know how to run their business, they've proven they can execute. And there are going to be some bargains for Ollie's in the next couple of years. Right now, there are a lot of retailers going out of business, there are a lot of retailers that want out of their leases. There are going to be an awful lot of landlords that come to Ollie's with very favorable deals, because they're a tenant which can pay its bills. It's a really good opportunity.

They're not going to go dramatically faster, because there are still buildouts, there is still the cost of merchandise to operate a store. But they know how to open a store, they know how to get it to profitability quickly. I wouldn't be surprised if six months from now, assuming we're living in a non-pandemic world and construction can be normal and shopping habits can be normal, if they didn't slightly pick up that pace of openings, because they might get landlords who say, hey, if you do a 10-year lease, we will pay for the buildout, which is not -- you know, that's actually fairly typical in a time where it's hard to rent space out. This is a really favorable operating market for Ollie's.

And while I don't think being in a sort of down economy, or at least let's call it a cautious economy. Even if you're working, chances are you're being a little tighter with your money than you normally would be, that helps Ollie's, but I don't think it matters, because even when you're doing great nobody is like, you know what I want to do, I want to pay full price for my whatever. Like, if there's a chance to get a deal on it -- and Ollie's is sometimes a place where like, if you have something in the back of your head, like, huh, my toaster is not great, and you go into Ollie's and you see, oh, they have Black & Decker toasters for $18, like, you buy one. It's that kind of store. So, the current climate absolutely helps, they've adjusted really well, but I'm not worried, if there's an economic rebound, that all of a sudden we're not going to want deals or not remember that money is valuable.

Flippen: One of the things that you could argue is a big risk to Ollie's is the fact they have no digital presence. You mentioned that they issue these circulars. And while I can see them online and you can become a member of Ollie's online, for the large part they don't really focus on any sort of digital strategy. Do you think this is a long-term risk or is this just playing into what Ollie's does best, which is foot traffic and that shopping treasure-hunt experience?

Kline: Yeah, I don't think they -- look, do I wish they did something fun online, sort of, like the old days before Amazon bought Woot, when Woot would literally be one thing, like they would literally be like, today we have a coffee maker; until it sells out. And it was really exciting to get up in the morning and go to Woot. I think Ollie's could do that from its distribution center. Okay, what's not selling, what's too bulky to send to all our stores that we can still get a good deal on? I think they could do some fun online stuff that would leverage the fact that they have -- I forget the number, but it's over 10 million loyalty members. I think they could be doing it. I don't think it's necessary. It's like TJ Maxx and Marshalls, they've dipped their toe into the digital waters, but these are going to be experience-driven stores.

So, what's the only worry you'd have, if somehow we had a total lockdown and you literally couldn't even go do curbside pickup of groceries at Ollie's? That being said, they'd figure out how to deliver, I wouldn't be overly concerned about it. I think this is a really safe bet. It's going to grow as a stock, sort of, herky-jerky, because I don't think the market really knows how to value it. I think we see that problem with Dollar General, we see that problem with Costco. But if you look at the long-term trend of their business, I think the needle is going to pull significantly up and, you know, I could be wrong.

Flippen: And before we lead off here or leave off here and talk about Keurig Dr Pepper and K-Cup sales -- I'm excited for that conversation -- one of the things that we didn't mention yet with Ollie's, that is probably important to mention as part of the investment thesis is merchandising. We always talk about retailers that struggle with merchandising and that being a large contributing factor and part of the downfall we've seen of department stores, for instance.

What's interesting about Ollie's merchandising is that its product lineup depends entirely on the brands that Ollie's has supply relationships with. And that can sound like a risk, but actually no single brand or supplier represented more than 5% of their sales in 2019, and 30% of their total sales are actually Ollie's private label products. If you had told me before I did research for this podcast that Ollie's had private label products, [laughs] I would have said, "you're crazy." But it's been so wildly successful for them. So, in my mind, that as a merchandising aspect differentiates Ollie's from a lot of other competitors.

Kline: Yeah, they've also done a good job. I mentioned it before, like, if you need a coffee maker or like a basic inexpensive appliance; so, a blender or a crockpot or a rice cooker. They might not have the one you planned on but they will have one at a good price, and I mention that because there are times when we've been traveling, you know, before we permanently had a place in Orlando, where we went to Ollie's and we just bought, like, a coffee maker for that trip whenever we were renting, because we didn't like what they had and it was, you know, you spent $15 and you left it there or you threw it away when you were done.

There's a reliability to their merchandise, but they have such a diverse supply chain. You know, at Christmas time, they might not get candy canes from whoever they got them from last year or Christmas lights or whatever it is, but they'll have them. So, they do a really good job with the staples. And then mixing in, maybe like a third of it is just like, "oh, wow! they have pool toys this week," and you know, you pick up a noodle and you're on your way. That's a bad example, because pool noodles average $1; [laughs] like, they're not an expensive sale. But yeah, this is one of my favorite retailers, and it's so obscure I forget about it a lot of the time.

Flippen: And what else could be obscured during the pandemic but a company that seems to have so many brand names they can't even settle on a good name for their company -- Keurig Dr Pepper at some point was also inclusive of Snapple in that name. Keurig Dr Pepper, you raised the question to me last week. How do you think K-Cup sales have been?

Kline: I was wrong. I would have assumed that they do, like, 300% up year-over-year as people sit at home, not able to go to Starbucks, and hoarding coffee. I didn't recognize how much of their business is office-based; and that was a mistake on my part.

Flippen: I had the exact same reaction, because when you sent me that question, my immediate thought was, well, we've seen the sale of instant coffee, I think, it was like, quadruple or something [laughs] over the past few months, it would only make sense that people are either buying more K-Cups and not going to Starbucks or even buying new K-Cup machines. But if you look at their most recent call, the management came out and said, and this is a direct quote, "The COVID crisis is by no means a windfall for Keurig Dr Pepper." And that statement was kind of mind blowing to me, because same as you, I didn't realize just how much of their sales were dependent upon offices. Offices aren't buying K-Cups.

Kline: Yeah. And I should have thought about this, because back when I worked in an office, when I lived in Connecticut, I worked out of an office with some friends of mine. So, I didn't do what they did, but we had an entire wall devoted to K-Cups, because the younger generation is not used to, somebody comes in, they brew a pot of coffee, maybe they brew a pot of decaf next to it, and you just pour out of the pot and it's coffee. Like, it's not a flavor, it's not vanilla, it's not pumpkin spice. And when we said that to our three or four employees that were under 30, what if we just got really good coffee and you know, gave you some input as to what types we bought and maybe brew different ones on different days, people looked at us like we were insane, you know, they really wanted their K-Cups.

So, my former business partner built a holder, we had a wall with hundreds of K-Cups in it organized by flavor. And that was an important part of the business day. There's a lot of waste to that; that was kind of painful for me. I don't think we have any Keurig machines at The Fool, we have a communal coffee maker that grinds the beans and that's what my office has here too. That said, Keurig is committed to getting rid of K-Cup waste by, I want to say, 2025. And they do make 82% of all K-Cups sold; I was surprised by that number. But this is a business that's been relatively resilient. So, K-Cup sales are up 9.5%. Brewer volume up massively, 11.6%; that's a big number for something that's $100 or more. I guess there's like an $85 version.

But that is offset by the weakness in the business group. And that just says, people are going to get their Keurig coffee wherever they go. And let me ask you personally, Emily, before we dive into some of the numbers here. I'm over Keurig, I had a Keurig, and I felt like none of the coffee was ever that good. So, I got a Nespresso and the coffee was a little bit better, but it's very hard to find the Virtuoso fancier full-cup coffee cups, you have to order them. And honestly, this week I just decided I wanted to counter space more. I unplugged it; it's sitting in the corner of my house. I don't know what I'm going to do with it. You know, if you want it, Emily, I will happily send it your way, because they're expensive.

But that said, I just bought a pour-over coffee maker. I'll have some ground coffee in a pinch. It just seems to me like, this seems so convenient, but the execution is not that great. Where do you come out on the Keurig?

Flippen: I'm a bad person to ask, because for a young person I think there's a stereotype that we care a lot about our coffee, right? If we're not shopping at Starbucks -- you know, I'm a young millennial female -- I think the assumption is that I'm getting pumpkin spice lattes every day. But if you're not getting the pumpkin spice latte, then you're probably going to some fancy place that does pour over brews.

I'm actually not part of that demographic. I have been subsisting off of instant coffee since the pandemic began. And the only time I used Keurig's K-Cups were when I was working at GE, because that was what they had in the office. Again, I'm kicking myself that I didn't make that connection, because my only experience with the product has been in an office setting. But I think that this demand that they get from that, that almost 12% growth in the brewer volumes they've sold, those are people that spend greater than $100, let's say, to buy themselves a machine to brew coffee in K-Cups. Those are people that are probably still going to continue to order K-Cups in the future. So, again, while I might not be the [laughs] best example, I guess, for their demographic, there's clearly a demand for their product.

Kline: And I knew that too; I knew your coffee habits. I was actually curious if whether -- because for a long time we kept a Keurig just for guests, because I drink iced coffee, but I kept a Keurig in my house if someone -- you know, we'd have people over for dinner, they'd want a cup of coffee, I'd have K-Cups on hand. We do have a Keurig at the vacation place, we also have a Keurig Drinkworks, which is a product they don't break out. But the Keurig Drinkworks I think is a big opportunity for them, but it's only legal in a few states.

This is essentially a K-Cup machine, but for alcohol. So, if you want a Manhattan, you put in the Manhattan pod. And it's an expensive device. It's a $299 device. But I got it because it's fun. And it has UV lights that clean it, so there's a whole system to keep it clean and make different drinks well. They're very expensive pods; it's about $4/DRINK, so it's more of a party trick than something you would do regularly. But I think there is a lot of, sort of, upscale optionality there, because if you can afford a $300 machine, having a nice cupboard full of, oh, you'd like a Manhattan, you'd like a Martini, you'd like a Rum and Coke [Coca-Cola] -- or actually it's a Rum and Cola, because they don't have a coke deal. I think there's some optionality there, but it's not showing up on their balance sheets.

It's important to know that their net sales of the most recent quarter were up 1.8% to $2.86 billion. That's really important, because the Dr Pepper part of the business has been resilient as well. They're selling out in grocery stores. But right now, they're not selling nearly as much Dr Pepper as they did in restaurants, in on-site locations. I'm not sure exactly where you would go -- I guess Chipotle has Dr Pepper on tap, if I'm -- they might have Mr. Pibb actually. So, it's a harder soda to find. But, Emily, you've noticed those shortages?

Flippen: Yeah, I have. And the way I noticed it, it was actually something that Keurig talked a lot about, I should stop calling it Keurig, Keurig Dr Pepper talked a lot about their most recent quarter, which was the launch of Dr Pepper Cream Soda. They combined Dr Pepper and cream soda; and I'll tell you one thing, as somebody who did try that product, [laughs] it was a huge success and I think it led to a lot of reinvoked interest in Dr Pepper.

What I think I will say, and I don't have any stats to back this up, so, you know, take my opinion with a grain of salt here, is that, if you're the type of person who is going out to a restaurant and ordering a Dr Pepper at locations that would have that option for you, you are also the type of person that during this pandemic was going out [laughs] of their way to fill their Diet Dr Pepper, Dr Pepper needs by buying the two-liter options or whatever the cans were in your local store. So, I think that the people who are consuming these on location were also the people that were going out to buy them from stores, which is -- and according to my theory -- the reason why they were having supply shortages in a lot of locations, in particular in the South. I was raised in Texas, so there's not a lot more Dr Pepper drinkers down there than there has been up here in Maryland.

Kline: Yeah, and it's also a production shift. We talked about this a lot with toilet paper early in the pandemic. It wasn't that we had a shortage of toilet paper, it's that the toilet paper for your office isn't the same as the toilet paper for your home. So, when you're selling less office toilet paper, you have to shift your production. If you wanted to buy during the worst of the pandemic, those giant rolls of toilet paper that go on the office machine, you could get those. So, that's what Keurig Dr Pepper had to do, they had to switch from making concentrate to making more cans and more bottles. And well, you have to ramp up making more cans and more bottles and all the different pieces that go into that. It's not an easy shift. So, at the end of this, I actually think Keurig Dr Pepper, like a lot of companies, is going to have a blueprint for how to move production around as demand dictates.

And they're going to come out of it a little bit stronger in their ability to, sort of, OK, there is a hurricane, we need more at-home Dr Pepper. All right, let's make a change. We know which machines to turn off and turn on and how to move people around. This company is in really good shape. And again, like Ollie's, Emily, is this one you ever remember even as a fan of Dr Pepper, did you even remember that it was Keurig Dr Pepper before we brought this up?

Flippen: [laughs] No. And to make matters even worse, the area that I was raised in Texas is right next to Dr Pepper's headquarters. So, as somebody who really should be [laughs] aware of the corporation, I have to be completely honest with you, Dan, I forget that it exists sometimes and I forget that it is in fact publicly traded. In my mind, I think there's probably better places for your capital. If I was choosing between investing in Keurig Dr Pepper and choosing to invest in Ollie's, Ollie's for me wins out by far.

Kline: I agree as well. I don't want to own the No. 3 beverage brand. I'm good with owning a best-in-class discounter that has no debt. [laughs] I think that is a really exciting perspective; there's nothing wrong with Keurig Dr Pepper, they've done a good job, but they're tied up with JAB Holdings, which is a private company that you don't really have a lot of financial insight into. So, how Keurig Dr Pepper is managed and how its portfolio is used and exactly where it's leveraged into stores it sort of has relationships with? Like, it's not going to sell at Panera Bread, that's a Jab holding, but it might sell at, say, Caribou Coffee. And they don't always pull those levers and you can't ask those questions, because it's sort of separate management. So, it's a little bit of a "no buy" in my opinion.

Flippen: I completely agree. And either way, I think that this is one of those examples of, Ollie's, buy the stock, buy the product; Keurig Dr Pepper, buy the product, maybe don't buy the stock. [laughs]

Kline: Yeah. Here's the thing. It's just an OK product. It feels more like a novelty to me. And I'm a coffee guy, I thought it was an OK cup of coffee through 95% of the K-Cups I've ever tried, and I've probably tried 300. To get coffee I really liked out of a Keurig, I ordered K-Cups handmade by a guy in Peterborough, New Hampshire. I'm sure if you Google "Peterborough, New Hampshire coffee maker," you could find the name of the roaster; it's not popping to my head. That's a really difficult road to go to get coffee that tastes good when I can make perfectly good pots of coffee if I wanted to.

People also have pointed out that you can use the refillable K-Cups with ground coffee and that's more environmentally friendly. It is. And I think that is the big risk to Keurig Dr Pepper at the moment, until they achieve some of those environmental goals, this is a company that pollutes an awful lot. They create an awful lot of trash. And they've experienced backlash from it, and I think they've handled it well, but that could flare up at any time.

Flippen: I know we've gone a little bit long here, but I'm going to make us go a little bit longer to talk about that point even more, because I think this is where Keurig has really been pushing up against a wall, is that the entire value proposition of their pods was you stick it in, you press a button, you have a cup of coffee, it's simple, it's easy, and it's supposed to be a pretty decent cup of coffee.

Now, people were aware of the fact this was causing massive environmental pollution. I believe it was even the Founder of the company who came back and said something along the lines of, I wish I had never created this machine, [laughs] because that's how much it's polluted. Here's the problem. When you want people to put their own grinds into a machine and refill that every day, clean it out, that's the problem, because not only are you buying a machine, but you're essentially going through the steps that it would take if you're going to make a cup of coffee the traditional way anyways. [laughs] So, it was like, what's the value of having the Keurig machine if you don't have the convenience. And you don't want to buy it for convenience, because you realize the environmental impact that it has. It's kind of a catch-22.

Kline: It is. It's a little easier to make a single cup with the refillable K-Cup than it is to brew a small amount of coffee, and even like a 4-Cup Mr. Coffee ...

Flippen: But who only has one cup of coffee anyway? [laughs]

Kline: [laughs] No. I would say, when you're talking K-Cups, two cups would be basically the normal coffee order for most people. Look, it gives you a lot of optionality in an office. If people can't agree, it does give a lot of choice. That being said, any bigger company -- I'm a really big fan of the machine we have at Fool HQ, which looks like a square box and it could make a few basic drinks. You know, it could make a latte, it could make a coffee with milk, it could make some espresso shots. And is it amazing? No, it's not, but it's fresh and it's pretty good. And you can always buy syrups and other things if you want to doctor up your coffee or all the different Starbucks creamers just hit shelves, so if you want your caramel macchiato, you can get that.

Yes. [laughs] I know Emily, who likes her coffee more as the stuff that goes in coffee than the coffee. Yeah, you can make your coffee. I highly recommend, the one piece I kept from my Nespresso, was I have the aerating machine where you pour a tiny little bit of milk in or creamer, I like to put a little milk in and a little sea salt and do the sea salt foam like you can get at Starbucks, and it whips up really, really well; creates a lot of volume.

Flippen: It sounds delicious. I'm going to steal that idea from you.

Kline: I don't think it was my idea uniquely.

Flippen: [laughs] Well, Dan, thank you so much for joining me. And I apologize for keeping you and our listeners a little long here, but it was, of course, a fun conversation.

Kline: Always happy to be here.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, you can always shoot us an email at IndustryFocus@Fool.com or tweet at us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for his work behind the screen today. For Dan Kline, I'm Emily Flippen, thanks for listening and Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline owns shares of Starbucks and Walt Disney. Emily Flippen owns shares of Ulta Beauty. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, Ollie's Bargain Outlet Holdings, Slack Technologies, Starbucks, Ulta Beauty, and Walt Disney. The Motley Fool recommends Costco Wholesale and Five Below and recommends the following options: long January 2021 $60 calls on Walt Disney, long January 2022 $115 calls on Five Below, short January 2022 $120 calls on Five Below, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, short October 2020 $125 calls on Walt Disney, and short November 2020 $85 calls on Starbucks. The Motley Fool has a disclosure policy.


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