Black Rifle Coffee Company is set to go public via a merger with special purpose acquisition company (SPAC) SilverBox Engaged Merger Corp I (SBEA). In this video from Motley Fool Backstage Pass, recorded on Dec. 6, Fool contributor Jon Quast talks about the growth drivers for this coffee company going forward and discusses its brand imaging with fellow contributors Danny Vena and Jason Hall.
Jon Quast: With that, so with that I don't want to waste too much time here. I don't want to get into what are the growth drivers for this company going to be? If we come over here, like I said, 84% of revenue right now in 2020 was from their direct to consumer business. Most of it coming from the South, from Texas and from the Midwest. That's maybe why it's not as well known out in California and in the West where Danny is located but why I've heard of it here in the South because it's a big part of their business is coming from this area.
But they estimate the direct consumer coffee business to be at about $4 billion. If you look at their estimated sales for their direct to consumer business for 2021, estimating $163 million, that's only around 4% market share, so a very small market share right now could definitely grow that. They hope to grow that over time.
Experiential retail outposts. They just started opening up physical locations, I believe it was last year they started doing that. They see the opportunity to be 1,300 plus locations in the US. Right now, they have 16 and very interesting returns here so 45% cash-on-cash, that means that the money that they put into it to open up a place, they are generating a very nice return on those dollars over time. $2.5 million average unit volumes for the couple of locations that they have right now. If you're familiar with Dutch Bros Coffee, very good unit volumes there, but only $1.8 million as of the most recent quarter. Right now, better unit volumes, keep in mind that it is coming off of a small base. It could come down in time.
Ready to drink, new product innovation. I did a little homework before the show, went out and bought a can of Black Rifle, ready to drink. If you ever seen the Starbucks in your store or whatever, same thing. They just started launching these about 18 months ago. They are in 33,000 points of distribution right now, looking for over a 100,000 by 2023 over 300. Go ahead.
Danny Vena: Let me just say that you can only get that kinds of boots on the ground research from our folks here at The Motley Fool and way to go the extra mile for our viewers there, Jon.
Quast: Yeah, no problem. Taste test it's irrelevant. I'd say it's on par with the other ones I've drank. But the real thing here is distribution, whether they can expand that distribution and hopefully get those sales. They're hoping to 10X that distribution long term but 100,000 points by 2023.
Then the wholesale points of distribution so looking for more than 5,000. This is like Bass Pro Shops and different stores that might sell the actual coffee grounds, things like that you could buy merchandise as well. They have 2,200 today, so more than doubling the points of distribution.
Coming public at a $1.9 billion market cap and estimating $230 million in sales for 2021. That is a concern, a price-to-sales ratio of about eight. Compare that to something like Starbucks, which is still a good growth company trading at around four, so valuation is a little high.
Vena: One thing I wanted to ask Jon since you brought up Dutch Brothers. It's interesting because Dutch Brothers, I think originated up in, I want to say Oregon, which is where they kicked off and started their expansion. You've got these regional coffee chains that are coming into their own. They're expanding, they're trying to become the next Starbucks. Do you think we're going to reach a saturation point here pretty soon.
Quast: With coffee shops in general?
Jason Hall: Never. [laughs].
Vena: Would be Starbucks competitors.
Quast: Yeah how about this? I think that you're seeing that a lot of these coffee companies, especially Dutch Brothers, that drive-through optimized and we have other things here in the Florida-Georgia area that are more regional and private companies that are also optimized for drive-through. I don't know if Black Rifle is trying to be that. It doesn't look like it from the pictures I've seen out there outposts. What I will say generally is that I'm a Starbucks shareholder, very happy to be a Starbucks shareholder and I'm not selling my shares of Starbucks on the news that Black Rifle Coffee Company is coming public. I am interested in Black Rifle Coffee Company though as well, at the right price. To me it's coming public at a price that doesn't make a whole lot of sense for me. However, if it was to come down with something more in par with Starbucks's valuation, it's something I could see owning both.
Vena: There was one other thing I wanted to bring up on actually I wanted to do both to chime in on this. I want to warn ahead of time that I want to stay out of the political quagmire. But there was a new story that broke this weekend about a particular person in Congress who had posted an image of him and everyone in his family, all of them holding automatic weapons in front of the Christmas tree. He posted on Twitter with the caption, "Santa bring us..."
Hall: "Santa bring us ammo." Yeah.
Vena: Yeah.
Hall: The timing was the thing this was right after the school shooting that just happened.
Vena: Right. I actually saw an op-ed piece where they were wondering whether or not Black Rifle Coffee Company's association with weaponry would be something that would hurt it over the long run. Again without stepping into the political quagmire. Maybe Jon, you could start us off any thoughts about how do you think that is a concern?
Quast: I'll say generally, Danny, that I think that, compared to Starbucks, Black Rifle Coffee Company is looking at a very much more limited market opportunity. What I mean by that is, especially look at their mission statement. It's for those who love America. Is this something that is going to be able to go international with a mission statement like that? It doesn't seem quite as likely whereas Starbucks is this incredible international business. Most of their revenue comes from international locations. I don't see that being a thing with Black Rifle Coffee Company. I could also see them struggling to enter certain markets because of their brand positioning.
However, to the same token, we've seen Chick-fil-A -- not involved with controversies -- but controversy surrounding the Chick-fil-A brand at times past, threats of boycott from certain people, and what it does is that actually makes their loyal customers even more loyal. In the last boycott attempt to Chick-fil-A, we actually saw sales go up. As their loyal customers dive even deeper. That's why I say this could be that.
I think this is something that maybe the market opportunity is more limited than something like Starbucks because of certain brand imaging. At the same time, I think that the brand imaging can really resonate at a very deep level and do very well.
Hall: Yeah, I've been thinking about this one too. I come from a military family as well. I think it's definitely one of those things where the name, just the connotation of the name alone could limit interest from some consumers but I do think this isn't their mission. Their mission is not to put Black Rifle Coffee on every corner on the planet and eventually have to open Black Rifle Coffees and the bathrooms of Black Rifle Coffee to meet demand, you know the old Starbucks joke. That's not their mission. They have a very specific mission that they've stated and they're looking to go public to grow and to raise more capital to continue to grow.
I think it can be a limited success and probably a good investment. Jon just like you said at the right valuation. That's the key. They can probably be just like Starbucks and just like Chick-fil-A. The unit economics should prove very good because this isn't competing on price.
Vena: It sounds like if I was to maybe just to wrap this up, say, it seems like they might have a more limited market than Starbucks. And their brand positioning might hurt them with some potential investors, but help them with other potential investors and it sounds like it's one worth watching.
Quast: That's how I would wrap it up.
Hall: Let's be honest, everybody has a more limited market than Starbucks.
Vena: [laughs] It possible that there's anybody out there? I just don't know
Hall: Yeah.
