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| 8-K - CURRENT REPORT - PARK CITY GROUP INC | pcyg8k_aug52020.htm |
Exhibit 99.1
Zooming
with LD Micro – Fireside chat with PARK CITY GROUP CEO RANDY
FIELDS
August 5,
2020
Chris Lahiji:
Dear patrons. Good morning. Our next presenter has been a mainstay
on the LD circuit for nearly the past decade. The company provides
solutions that millions of Americans take for granted each and
every day.
Chris Lahiji:
No one here will argue about the importance of food safety. No one
here will argue how important the supermarket chains have been post
COVID now that more restaurants have limited capacity, more people
are working from home and times are increasingly tougher on the
unemployed.
Chris Lahiji:
Park City Group, ticker PCYG, is a SAAS company focused on helping
grocers keep food safe, help suppliers make better forecast
demands, and does everything in its power to reduce out-of-stocks,
which have become a more common occurrence here in Northern
California.
Chris Lahiji:
The company is unusual, but in a good way that it generates cash
flow, is profitable and has a strong balance sheet. Not many small
cap tech companies can say this, but discipline from the top down
goes a long way. Joining us on the call today, it is my pleasure to
welcome the chairman and CEO of Park City Group, Mr. Randy Fields.
And for full disclosure purposes, I own shares in the
company.
Chris Lahiji:
Randy, you serve the largest retailers in the world. Work with
thousands of unique suppliers. You connect buyers and sellers every
day and you help grocery stores manage their out-of-stocks. Can you
please tell me why the hell I couldn't get a roll of toilet paper
for three months?
Randy Fields:
Well, actually that's a really good question, Chris. One of the
things to think about in today's world is the idea of substitution
when you can't get exactly for what you're looking for. So perhaps
given your background, you should trade Bounty towels for Charmin
Ultra Soft, and then you would have plenty.
Randy Fields:
No, I'm only kidding. Actually, how about if I leapfrog from that
into something that's very, very interesting and I think a problem
that all of us now see when we go to the supermarkets, how's
that?
Chris Lahiji:
Absolutely.
Randy Fields:
Conceptually, the supermarket industry over the last 10 or 15 years
has been following a course, call it "just in time inventory." And
the consequence of that is you can't find toilet paper.
Interestingly, the whole idea of just in time inventory really was
based on a pretty simple notion that capital is expensive and that
carrying large amounts of inventory leads to obsolescence, higher
costs, et cetera.
Randy Fields:
But the truth of the matter is the supermarket industry, frankly,
was relatively ill-prepared for what happened. 10 years ago, a
typical supermarket would have had two months supply of almost
anything that was non-perishable in a warehouse. It got down to two
weeks just before COVID.
-1-
Randy Fields:
So the fact of the matter is that the industry has changed
dramatically in the last decade. Not necessarily by the way, for
the better, and it creates a terrific opportunity for us. So I
don't want to say, I'm glad you couldn't find toilet paper exactly.
But I do want to say that those out-of-stocks, which are now the
Achilles heel of physical retailing, that drives people to Amazon
is the opportunity for our company to gain market share in terms of
our offerings. So thank you for not finding toilet
paper.
Chris Lahiji:
So my take is, Randy, you look at all of these grocery chains right
now, and they're all basically flushed with cash because from my
understanding, pre COVID, in terms of people relying on food in the
US alone, about 40% of that food is coming from supermarkets. No
one really knows what the number is post COVID, but many assume
that the number has probably gone to 60, 70, 80% of all food
consumption comes through supermarkets. Do you agree with that
number and how does that benefit you guys directly?
Randy Fields:
Yeah, I'm not sure it's as high as 70 or 80%, but clearly the
restaurant and food service in general is in deep trouble. And it
could be years, if ever to see a significant recovery. So
increasingly we rely on supermarkets as a place that you have to
go. We're relying on supermarkets for a greater percentage of our
food. And we have a whole generation of people, millennials who
have now discovered this amazing Og, son of fire, cooking idea
instead of Whole Foods service counters, including my children, by
the way. I get calls that say, "Dad, somebody invented this idea
called cooking and it's almost fun."
Randy Fields:
So the reality is the supermarket industry is very well positioned
and frankly that's who we serve. So it's been an interesting
transition, it's settling down now. I think you're going to see the
out-of-stocks declining. Our customers are doing well. And of
course, if our customers do well, that creates a bigger opportunity
naturally for us.
Chris Lahiji:
So let's go back. I mean, what was the origin of the company? I
mean, what made you ultimately decide to make this your life's
pursuit?
Randy Fields:
Well, years ago I was a retailer. The namesake company was Mrs.
Field's Cookies and inside of the world of Mrs. Fields Cookies was
actually a lot of technology around supply chain. We used really
high tech kinds of ideas to figure out how many of what sort of
cookies to make in every one of our 900 locations around the world,
every day, every hour.
Randy Fields:
So we had a very interesting view of supply chain. And when we sold
that company back in the '90s, I took a little bit of time off and
thought about what's next. And what's next turns out to be using
those same kinds of supply chain technologies in an industry that
has tons of data, the supermarket industry. Think of the data,
every single transaction, every single day for every single
product. Huge amount of data, but frankly, low margins, not
exciting, not growing rapidly. So it looked like a perfect industry
for us to approach.
Randy Fields:
In fact, it was known then as a defensive industry, meaning that no
matter what else happened to the world, people would eat. And
thankfully through this COVID problem, that's been true. So we were
lucky that we positioned ourselves against the supermarket industry
with frankly, the idea of bringing technologies to them that would
reduce their cost of being in business, improve their ability to
reduce out-of-stocks and frankly, make them more competitive with
the online world of someone like an Amazon.
Chris Lahiji:
Right. Historically speaking, the grocers have not been an easy
customer to obtain. I mean, what type of cycle have you gone
through into ultimately convincing these guys that you have a great
ROI for your product?
-2-
Randy Fields:
Well, we're sort of an old fashioned company, I suppose, in a high
tech environment. We have tremendous technology, but we're really
old fashioned in the sense that we think that what matters to our
customers is that we actually are successful. In other words, we
tell them what we're going to do, and we do it. And after we do it,
they find that we've taken great care of them from a service and
relationship perspective and they tend to refer us.
Randy Fields:
So most of our business actually comes from market reputation and
referral. And the reality is that we've been very lucky. We've
gotten exclusive endorsements from the primary trade associations
in the industry. So in the sense we're an industry player, the
industry for the most part likes us, our customer retention rate is
incredible, but it's not because we're lucky in that case, it's
hard work. It's operational focus. It's talking to our customers
frequently. But most importantly, making sure that we do what we
say. As I say, it's a little bit old fashioned, but it's worked
terrifically for us.
Chris Lahiji:
Randy, one of the interesting questions that came out this morning
was there was this gentleman who was a portfolio manager. He said,
he's seen the company a couple of times present at conferences, but
he still doesn't exactly know what it is that you guys do. And he
says, can you explain it to me as if I'm a
five-year-old?
Randy Fields:
I could hitchhike off of that, but I won't. If you think about the
supply chain, and we believe we are a supply chain company, perhaps
maybe the first of a breed of an approach to supply chain. Let's
think about the steps that someone that has to have a supply chain,
say a food retailer, what are the steps?
Randy Fields:
Well, there's three aspects, we think to supply chain. The first
step is find a vendor. Think about that. There are tens of
thousands of new vendors every year with new, interesting products
to be sold by supermarkets. So you have to find vendors. That's not
very easy. Today, people use Google and they used to use trade
shows. That doesn't work very well anymore.
Randy Fields:
So we developed a marketplace that brings buyers and sellers
together. So you can think of that as discovery, sourcing new
vendors. Well because of litigation and because of this enormous
change in food safety regulation that happened a number of years
ago, the fact is doing business with just any vendor is dangerous.
It literally can kill your customers. Always a bad
idea.
Randy Fields:
So what we found was that there was a need to help people vet their
vendors, we call that compliance. So step one is sort of like the
recipe for rabbit stew, first catch the rabbit. Well, okay. Find
the vendor. Vet the vendor, make sure that they have all the
documentation that's appropriate and they maintain that
documentation so that you know you're dealing with someone that's
safe and less likely to kill your customers.
Randy Fields:
And then finally is what most people think supply chain is. Let's
be the way that you forecast, that you order, that you replenish,
that you look at the movement and sale of goods and services across
that supply chain.
Randy Fields:
So three steps. One, find a vendor. We do that. Two, vet the
vendor. We do that. And three, transact with the vendor. We do
that. So we believe that if you take a step back and think about
what does it mean to be a supply chain company, we believe we've
defined it and we do it. We do all three of those on behalf of our
customers.
-3-
Chris Lahiji:
Was there a specific segment of the supply chain that you targeted
first, where you felt was low hanging fruit?
Randy Fields:
Yeah, we actually did this all backwards, if you will. We started
as a transactional supply chain company doing forecasting,
ordering, replenishment, et cetera. And frankly, we're very, very
good at it. I'm not a tout. So I'll tell you pretty straight about
how our customers see us.
Randy Fields:
And then a few years ago, an old and dear friend of mine, Mike
Lovett, who used to be governor of Utah and then became the head
of, if you will, the Secretary of Health and Human Services, the
FDA reported to him. He came to us with the idea of helping
companies become compliant because of the new Food Safety
Modernization Act. So that clearly was vetting the suppliers for
whom we handled transaction work.
Randy Fields:
If you think about that, before you buy one item from someone, you
need to make sure that you should buy any. Are they a good guy or a
bad guy? Pretty simple. So, that got us into the compliance
business. And then a couple of years ago, our customers came to us,
in fact one of our customers put it really nicely, he said, "Randy,
you're a little bit like Santa Claus."
PART 1 OF 4 ENDS [00:13:04]
Randy Fields:
... Randy, you're a little bit like Santa Claus, you know who's
been good and you know who's been bad. Help us find the vendors
that are good vendors, meaning they're reliable, they're safe, and
we should do business with them. So conceptually, we backed into
each one of these product offerings, if you will.
Randy Fields:
Our approach up until a couple of years ago was a mixed bag of
think of it as one time revenue and recurring revenue. And over the
last year, starting about last April, call that 15, 16 months.
We've made a major effort to significantly reduce the one-time
revenue in our software business and move that as much as we could
to recurring revenue. And as we indicated in our last conference
call, we are in a quiet period, obviously. But in our last
conference call, we indicated that we were just about done with
that. So now to a great extent, we've replaced that one time
revenue with recurring revenue, we've maintained our profitability.
We're producing cashflow very positively. And the fact is we feel
very good about where we are right now.
Chris Lahiji:
So Randy, let's talk about the addressable market. You say that
it's $2 billion. And there are several tailwinds that you guys have
right now. What I'm reading is increased risk of liability, rising
competitive threats, and escalating consumer demands. Can you just
touch a little bit on all three?
Randy Fields:
Yeah. Let's start with the need to find vendors, the marketplace.
The fact is, inside of a marketplace, if it's well-constructed and
we'd like to think ours is. We're finding for example, right now, a
big demand for PPE kinds of things. There's always a desire on the
part of retailers, I'm going to be careful how I say this to find
hot new products, things that they can put into their stores that
will bring in more customers and keep the customers that they've
got.
Randy Fields:
So marketplace, as we've mentioned in our conference call was up, I
don't know, 66% or so in the last few weeks of our third quarter
that ended in March. So obviously don't have to be a rocket
scientist to figure out that our marketplace activity is doing very
well. The secondary is this idea of vetting and compliance. We're
finding a great deal of interest in this notion of vetting
suppliers to be sure that they are safe, that they're solvent,
they're someone you can rely on.
-4-
Randy Fields:
And now we're seeing the more interesting trend and that's helpful
to us, which is people are no longer willing to risk having their
supply chain based on a single supplier. So second sourcing and
third sourcing because of shortages has become a more important
activity and we're helping people vet lots of new vendors. So that
area is also doing very well, we feel very good about it. And then
finally, this whole transactional area, especially our focus on
some very interesting, exciting algorithms we've developed to help
people avoid out-of-stocks.
Randy Fields:
Clearly the out-of-stocks of the last few months, were the result
of I'm going to call it an accident, a tragic accident for all of
us, COVID. But before that, and now, as we leave the COVID induced
part of the shortages, there's nothing more annoying, and
especially in the world of COVID, there's simply nothing more
annoying than getting in your car, driving 15 minutes or 20 minutes
to a store going in and finding it isn't there.
Randy Fields:
So out-of-stocks drive people to Amazon, and it's our job, and
we're finding tremendous success, roughly 70% of the suppliers
using our outer stock system have reduced their out-of-stocks by
more than 50% over just two or three months. So we've been very
successful at helping people, even in today's strange world of
reducing out-of-stock. So all three of those have a tremendous
opportunity. I don't think we have more than a two to 3% share of
any of that.
Randy Fields:
Although in some cases, like our compliance business, where we have
no more than 100,000 facility level connections between suppliers,
retailers, and other suppliers. Even at that scale, we think we've
got a market share that's under two or 3%. So we have lots of room
for growth, however, because we're old fashioned here,
profitability is very important to us. A strong balance sheet is
important, because our customers rely on us.
Randy Fields:
Our customers want us to be stable, solvent, and here for them. So
in a way, we owe it to our customers to maintain our financial
strength, and we've done that. We've been very good at
profitability for the last several years. But in addition to that,
we think that there is a really compelling need to execute on
behalf of the customer. Our customers don't care if we grow, our
customers care for successful for them, you have to think about
that.
Randy Fields:
No customer simply wants to be left behind because we have a high
growth rate. What they want is to be front and center of our
attention space. That we deliver on our promise, and then they will
give us more business. And that's the way we're growing, now that
we've replaced our one-time revenue. That's going to begin
obviously to show up in our top line growth as we went through this
period of getting rid of one time revenue.
Randy Fields:
So at the current moment, it's fair to say that all three pieces of
our business, the marketplace feels good, the compliance business
it feels very good as we look out, there's a great deal of
international interest in our compliance management business. And
then finally, our transactional business, where we help people
reduce their out-of-stocks, wow. What can I say?
Chris Lahiji:
Well, Randy, I had a quick question. A lot of people have a hard
time putting a face next to the name. What type of retailers are
you currently helping right now?
Randy Fields:
Up and down. I think our sweet spot is typically what we would call
a midsize regional retailer with one to 200 retail stores. On the
other hand, we do business with some of the largest retailers in
the country. We've disclosed we do work with Target, we do work
with CVS, people that have thousands of locations. But for the most
part, our customers in the sweet spot are people that are midsize
100, 200 stores. We also do business with some very small
retailers, meaning 10 or 15 stores. And there's hundreds and
hundreds of these kinds of supermarket retailers that are prospects
for us.
-5-
Chris Lahiji:
How has the sales cycle changed since COVID has taken
place?
Randy Fields:
Well, it didn't really change, it came to a stop when COVID
started. As anybody would know, immediately has the lockdown
occurred, supermarket sales exploded. But it also meant that they
were literally goodbye pillar, hello post in terms of organizing
themselves. So meetings were canceled, getting decisions made
slowed down.
Randy Fields:
So it impacted our sales cycle, certainly. But remember we have
several pieces of our business. So while the sales cycle for some
of our services slowed down, marketplace helped people find things
that were in short supply. So the idea of building this three
legged stool, if you will, and we're about to add a fourth leg,
we'll talk about that if you'd like. That three legged stool meant
that at any given moment, even if one area of our business was
sluggish, other areas of the business had the opportunity to move
the company's top line. And that's exactly what's
happened.
Chris Lahiji:
There's a page in the deck that's titled, three solutions, one
platform scaled and proven. It says here that you do 20 million
transactions every single day. Can you give us just a sampling of
what some of those transactions might be like?
Randy Fields:
Yeah. We developed a very interesting capability to help retailers
bring suppliers into their business on a consignment inventory
basis. In other words, if you are a retailer, you only have two
assets on your balance sheet, typically. One would be your real
estate and the other is your inventory. So if you want to improve
your financial ratios, if you can reduce inventory at the same
time, you could increase sales, that's like magic. And that's what
we do.
Randy Fields:
We do that magic for retailers. We take their inventory, get it
back into the hands of the suppliers, so the supplier still owns
it. He owns it until it sold, meaning it goes through the point of
sale device. So we technically take a look at the transaction logs
from retailers. We see how many cartons of milk, for example, were
sold at a particular store of a retailer. And then we generate an
invoice based on those actual sales, and we get the payment made,
if you will, from the retailer back to the supplier. So that's why
there's millions of transactions a day and hundreds of thousands of
invoices a week. We track vast amounts of data to help our
customers do this transactional flow.
Chris Lahiji:
Let's talk a little bit about your balance sheet top line, bottom
line. I know that, given the fact that you and I have known each
other for over a decade now, and I've been a longtime shareholder,
I think revenues for the last five years, they've been growing all
a bit slowly. But then on the gap, net income side, you guys have
really showcased the scalability and the value of your business.
Can you kind of comment on how the last five years have looked like
in terms of both top and bottom line?
Randy Fields:
Yeah, actually the last five years really constituted a transition
for the business. First, we went from being transactional only. We
added the compliance management aspect of the business, and then we
added the marketplace aspect of the business. So we had major
development cycles. But that also complicated the operational
execution aspects of our business and taking care of our
customers.
Randy Fields:
That's something we were not willing to sacrifice. It's an
obsession of our company, it's part of the culture. So we spent a
lot of time developing operational capabilities and deficiencies,
so that as we added to what we could do for a customer, we didn't
massively explode the cost structure of the business. And we
invested very heavily in technology to automate much of what that
would have led to. So the focus was on profitability, not top line
growth per se. Stage two of that period of time, started about a
year ago was, much of the growth that we did experience, and over
that period of time, I think we went from 11 or 12 million to call
it 20 million. Not insignificant, but not
extraordinary.
-6-
Randy Fields:
But we then made a very important decision, which was that we were
having too much of our growth and too much of our revenue, excuse
me, based on one time transactional stuff. So we made a very tough
decision to try and hold the line, try and get more of our
customers to use the SaaS aspect instead of licensing our business.
And what we technically did was we had seven or eight million of
one time revenue out of that 20.
Randy Fields:
We were able to get that number down to a very small number, two or
three, and replaced it with recurring revenue. So strangely enough,
if we had pulled our income statement apart, it would have shown
that the recurring revenue in the business, the subscription stuff
was going up nicely year by year, but that the one time revenue was
being pulled down deliberately strategically. And now we're at a
place where the one time revenue is diminutus except for
marketplace.
Randy Fields:
Where the one time revenue is diminimous except for Marketplace,
and now obviously we've made that crossover point actually faster,
we had planned on two years to do that and it took a little bit
more than one year.
Chris Lahiji:
Does Park City actually disclose what percentage of their overall
revenue is reoccurring?
Randy Fields:
We don't put it in the financials, but we do talk about it in
conference calls and quarter by quarter, that number has gone from,
I think, don't hold me to the exact number, but I think when we
started, it was about 65% of our revenue was recurring. And if you
take Marketplace out, I think we last quarter were at 85 or 90%
recurring. So we're pretty much there where we want to be. Our
revenue is now recurring, that makes it much easier for us. Much of
the investments that we had to do to get to that place technically
are done. So our expenses therefore are down, our revenue is now
up, and you can probably figure out what that means.
Chris Lahiji:
So, Randy, I think you and I are kind of old fashioned in the sense
of how we look at cash. From my understanding the cash balance is
roughly around 20 million, as of March 31st?
Randy Fields:
It was a little bit under that as of March 31st. Cash is more
important to us that it might be to a typical business because our
customers cannot afford to have a vendor that goes out of business.
Billions of dollars of transactions that we process and settle for
our customers wouldn't happen if we suddenly closed our doors. So
our customers want to do business with a counter party like us that
is extremely strong and they measure strong in terms of cash on the
balance sheet. Now we're proud of our number and it will continue
to go up over the next several years, but that attracts more new
business for us. And in the context of companies doing billions of
revenue, 20 million of cash or some number like that is still
pretty tiny, but better than anyone else in this space. And
frankly, a number we're very proud of.
Chris Lahiji:
We had a small private investor ask us a question this morning, but
I thought was very fair. They said, if the company has in this
case, 17 or 18 million approximately in cash, what's that five or 6
million in debt and why do they have it on the books?
Randy Fields:
The fact is it's largely for measurement purposes. You'll notice
our net interest will begin to change as we invest more of the cash
and in short term kinds of instruments. So as long as we're in a
net cash position, it's valuable. And for the most part, those
lines are important to maintain, especially at the end of quarters.
So there's a certain level of optics associated with that. But our
customers like it.
-7-
Chris Lahiji:
Another question somebody had, what is a connection and what was
the last disclosed number in terms of connections that you guys
have had?
Randy Fields:
Yeah, that's getting more complex to calculate because of
Marketplace. But the number of connections we have is continuing to
grow very strongly because we're now focused on smaller suppliers
and bringing them into the network. I'm going to guess that we
still in our compliance business typically add 10 to 15,000
connections per year because of our supply chain business. That
number is also going up pretty dramatically. So I'm going to guess
all in we're north of 300,000 connections between stores,
suppliers, et cetera. It's a big, big number.
Chris Lahiji:
When does a customer decide not to use you anymore? And what's the
main reason they give?
Randy Fields:
Well, there's really three pieces to why somebody would cease to do
business. First of all, that doesn't happen very often. Our
retention rate is 98, 99%, which is amazing, honestly, but if
somebody leaves it's typically due to one of three. One reason
would be that they went out of business. A second reason would be
that they were acquired by another company, so two different
vendors became one. And the third possibility is that they either
no longer do business with the partner, because everything we do is
di-addled, everything involves two trading partners, but if they
ceased to do business with one of our partners, we would also lose
them. And then a tiny amount, just say they don't appreciate what
we do for them. So we're very proud of our retention rate, but it's
because we really are obsessed with being successful for the
customer and being in relationship with the customer.
Chris Lahiji:
And Randy, I wanted to touch on that. There has been a lot of
consolidation on the grocery side over the last 10, 15 years. Do
you see that continuing and how will that positively or negatively
impact Park City?
Randy Fields:
Yeah. You know, this is one of those statistically interesting
things. If you take a look, the number of stores is about the same.
The number of players has changed, but typically what happens is
this: a big company acquired some regional player. The FTC says,
"Okay, but you have to spin out 25 of those stores." And that
becomes another chain. So oddly, the number of supermarkets is
about the same. I don't think it's going to change much. If
anything, what's happened because of COVID is it's reinforced the
need for local grocers. They've become in some ways the hub of
communities. So we don't see that. And people, as far as I can
tell, except for you, Chris, because you've lost so much damn
weight. Everybody else is still eating. You're the only guy left
not eating, but the rest of us still eat, and that's really good
for supermarkets, and it's really good for us.
Randy Fields:
Two things we do that are important: we help maintain the safety of
food, the sustainability of food, meaning that our customers rely
on us for determining sustainability as well as safety and the
other is that we help people stay in stock. And I think, if you
think of COVID, think this is likely to be a problem for some time,
that it shifted patterns, the future is pretty good for us now, now
that we've come out of this darker period and there's better
visibility that we didn't have a few months ago, it's better now to
say the least, because the supermarket industry is experiencing a
relatively good times. Maybe it's the best of times for
supermarket.
Chris Lahiji:
Another question that I thought was pertinent is have supermarkets
ever gone through something like this? What has happened, what has
transpired since I want to say early March. And was there anything
to learn based off the dynamics of what has happened in the past,
when you've had a huge rush of interest, but only a certain amount
of supply?
-8-
Randy Fields:
Yeah, actually the only time they ever experienced anything like
this was during the '70s, during the oil shortages and toilets, if
you remember, Johnny Carson came on TV one night when he was
talking about the shortages and said, "Was everybody aware that
there was now a toilet paper shortage?" Does that sound familiar?
And sure as hell the next day you couldn't find toilet paper
anywhere. So the only time that's ever happened before was back in
the '70s and nobody has enough memory to realize the response. But
we were critically ill prepared because we'd reduced storage
capacity, people were outsourcing to China and other places. So the
reality is we were about as ill prepared as you could imagine for
what happened. And I don't think that's going to happen again. I
think that the lesson has been learned and the more the lesson is
learned, the better it is, frankly, for us.
Chris Lahiji:
So here's a couple of questions that I had for you. Why the hell is
food so much higher now in terms of cost? I'll give you a great
example. Shredded Mexican cheese, a bear essential for a guy like
me, who just needs to take a tortilla, some shredded cheese, put it
on top, fold it, and then put it in the oven or microwave. It's
basically gone from 10 bucks to 18 bucks at Costco. If you look at
almost everything categorically has moved up in price. Can you tell
us as to why this has happened? Is it just demand is outpacing
supply or these guys have realized that people will have to spend
money at any cost at this point because they don't have any other
viable options?
Randy Fields:
Well, actually that's a terrific question because this one is
different. Historically, the industry has been deflating, meaning
over the last six or seven years, until a few months ago, unit
sales were falling and prices were roughly flat, going up a little
bit. But unit sales of most products were actually falling. The
consequence was that people tried to get price relief when their
costs went up. So it became a whole industry, the largest industry
in the world, by the way, the largest single industry on planet
earth is retail food in the US and the suppliers to it. But the
consequence was that people didn't think about demand driving up
price, they thought about costs driving up price. So they were
trying to get cost pressure relief.
Randy Fields:
This is different. This is demand driven and cost driven. So in
some cases, proteins, pork, beef, et cetera, you've simply had an
inability to supply the market with the quantities that were
needed. The supermarkets have done an incredible job by the way, at
keeping prices below what the suppliers would like to have. Now,
we're pretty quickly re-emerging at the other end of this tunnel.
So I suspect that food inflation over the next year or two won't be
anything like you've seen for the last few months. And once the
supplies come back online, and that'll happen over the next six
months, my guess is food inflation will be a thing of the
past
Chris Lahiji:
In terms of products that are still hard to get and in demand, what
are they? Because I know that there are certain things like you
still can't get disinfectant wipes. You can't get Lysol
disinfectant spray. It's hard to get certain types of flour. What
have you seen internally that basically goes to show you that even
with the increased supply, demand is still far outstripping
it?
Randy Fields:
Yeah. Remember a lot of that demand is timing demand, not real
changes in demand. So the consequences that you're going to see,
for example, has the usage of flour for home baking clearly gone
up? Yep, sure as hell has. So that's a demand-based, and honestly,
what do you think has been happening to home-based baking over the
last 10 years before COVID, it was going the other direction. So
there wasn't a lot of additional capacity to be ready for that
demand. Ditto for paper goods. Oh my God, a paper mill is a very
expensive, it's not something you put in your backyard, it's kind
of a big deal. So lots of those kinds of things had relatively
fixed supplies against enormous changes in demand. Some of that
demand is sustainable, but I could be wrong, I don't think people
are using vast amounts of toilet paper more than they did
before.
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Randy Fields:
Part of it was lots of paper products and other kinds of things,
like flour, were being sold through the food service channel, not
through retail food. So if you wanted a 25 foot diameter toilet
paper roll, you could get that. You'd have to have pretty big house
to fit one of those in, by the way, Chris, but for the rest of us
mere mortals, you still need toilet paper on smaller rolls. So it
was really-
Randy Fields:
Portals, you still need toilet paper on smaller rolls. So it was
really a mismatch of packaging sizes. This was a confluence of
about eight or 10 things that are likely, hopefully, once in a
lifetime. It will get back to a much more normal. Some things like
Clorox wipes, well, they can't add capacity enough. And now ask
yourself the question: if you were them, would you add 25% capacity
to be able to make this stuff, knowing that six months from now
this could go away? No. So, what you do is you add shifts and you
run your plants flat out to try and make it happen. Some cases you
use third party co-packers, most people don't want to do that. But
this will sort itself out. It already is. So a little with a little
patience here and a little bit less forward buying would
help.
Chris Lahiji:
Randy, do you mind if we take a couple more questions from the
audience?
Randy Fields:
Sure, absolutely.
Chris Lahiji:
So we've talked about this briefly in the past. International, are
there any countries that are similar to the U.S. in terms of supply
chain? And if you can give me one or two countries where you
believe are low hanging fruit for you guys, in terms of future
expansion.
Randy Fields:
Yeah. We already have a partnership in the UK. We are looking for
some additional expansion in Europe, Asia, and South America. I
would be very surprised if in the next year, something South of the
border doesn't happen. And really there's two drivers behind this.
One is domestic consumption. So in other words, if I'm making this
up, if you're a country, say China, one of the fears that you have
is that food is unsafe. And that would be true.
Randy Fields:
So how do you fix that? We'll use an international standard, like
ReposiTrak, like us to help get compliance to a much higher level
and reduce the risk of catastrophe from food. So, developing
countries are interested in what we're doing for domestic
consumption purposes, meaning their own food supplies. But turn
that around, the biggest market now for produce, et cetera, canned
goods are for export from these countries. So, partially, you'd
want to use something like ReposiTrak to improve how you look as an
exporter to a place like the U.S.
Randy Fields:
So we're benefiting really from both domestic consumption in these
countries, as well as the desire to export. So, I think you're
going to see more interest internationally. Obviously, getting
something going in the midst of COVID is a little tough. But we
still see a great deal of interest outside the U.S.
Chris Lahiji:
Excellent. And then what is the longterm aspirational model for
PCYG in terms of top line growth and profitability?
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Randy Fields:
Well, for the total business, we would like to get top line growing
at 15% to 20% per year. We think that's a lovely number. Obviously,
if we do that, it has a very substantial impact on our
profitability. Profits would grow far faster than that. And that's
really our mantra: generate cashflow profits and a reasonable top
line growth. Not an explosive top line growth, but a reasonable top
line growth. How's that?
Chris Lahiji:
Sounds good. And then to end this off, you and I have spoken about
this privately at length in terms of food safety. And it is
remarkable how much food ultimately gets consumed and the
parameters of safety around it. How have they changed in the last
five to 10 years? Is the government doing a good job of protecting
us? Is it their responsibility? What's your take on this? Because
that's always one of the big things that scares the living crap out
of me. How do I know what I'm eating is going to be okay? What's
your mindset towards that?
Randy Fields:
Yeah. I think you have to think of food safety in two buckets.
There's the accident bucket, meaning that someone who is a good
actor simply has an accident. We'll talk about that a little bit
more in a second. Then there's the other side of it, which is a
substantial proportion of the food providers, I can tell you from
having looked at their compliance levels, are not people we should
be doing business with. They crept into the system over the last 10
years. They weren't checked. Nobody credentialed them. Nobody was
able to maintain their credentialing and they got away with
literally murder.
Randy Fields:
So, we are finding a large number of bad actors that should be like
Gresham's law in reverse. We should be squeezing them out of the
system because they create risks for people like you and I. So,
there's what I'm going to call the process bad actors. They simply
don't pay enough attention to safety. They're not credentialed.
They're not audited. They're not people that we should be buying
things from and ingesting them.
Randy Fields:
But the others are the accidents, where it's a good player. And
frequently now we're finding, last year, 60% of the problems in
food safety came from the suppliers to that supplier. Meaning, he
bought an ingredient that was adulterated or an ingredient that was
a problem. So, policing the whole system has become terribly
complex. The regulations have exploded. The Food Safety
Modernization Act has created a landmine field for people to get
through regulatory wise. And then, of course, there's the
lawyers.
Randy Fields:
So, the net of all of it is, it's a more difficult proposition to
maintain food safety than it was. And we'd like to think that we're
almost, in fact, I would say we are the industry standard now in
terms of compliance. And we're pretty excited about being in that
position. But it puts us in a place where we have visibility and
we're not pleased with what we see yet. It's moving in the right
direction, but it's not there yet.
Chris Lahiji:
Final question. Because of the demand, there are suppliers that are
looking to make as much product as possible. And, especially in
produce, what I've noticed in the last few months is that a lot of
the produce that I'm buying, it goes bad much faster than it
typically would. I almost feel there's a lot of bad product being
put in because they can put it with everything else. How do we
ultimately combat this as consumers? Because the logic is if you're
paying top dollar for crappy strawberries, what's the recourse? You
can always go back. But I'm just curious to see if you've seen that
dynamic take a hold yet.
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Randy Fields:
Yeah. There's been a huge disruption to the supply chain that we
can't ignore. And that supply chain disruption is really that about
half of the food that was produced, used to go to food service.
That's probably off 70%. So, you're seeing an influx of product
that would have gone to food service. So, think of it this way. I'm
making this up, but it's strawberries that might have gone into
strawberry pie. So if they were a little blemished, et cetera, "Oh,
who cares? Nobody sees it." And now, Eagle eye Chris takes it home
from the supermarket and goes, "What the hell is
this?"
Randy Fields:
Well, it's the piece of the puzzle that the nearly half of all the
food that we grow and raise that needs to find a home, or it's
going to get trashed and bankruptcies and all ugly stuff. It's
trying to find a home in the supermarket industry, which has been
unable to meet demand. So if you put those factors together, I'm
not surprised. Feel lucky at this point, you've got strawberries,
even if they're ugly ones.
Chris Lahiji:
So, this is a private question to you. And you have influenced me
in a big way to cut weight and eat more healthy because you were
essentially the only guy at conferences that would basically say,
"Jesus, look at you. What the hell are you consuming?" And it was
tough love to say the least, but it worked. And I remember the type
of diet that you were on. And a lot of people know that what I've
been doing for the last three and a half years is intermittent
fasting. But I'm curious, has your diet changed, Randy, at all
since, since COVID has hit the U.S.?
Randy Fields:
I think a little bit, not much. I also do intermittent fasting. My
body likes it when I'm more ketogenic than I am carbohydrate
drenched. I'm not sure there is one size fits all. But the business
reality is that this is made the supermarket industry almost crazy.
Let me describe that and show you what the negative impact you and
I are having on the supermarket industry. The best known
supermarket in the country that's respected is called Wegmans. If
you'd gone into a Wegmans 15 years ago, 10 years ago, you might've
found 20 different skews of mustard. There would have been French's
mustard, big, medium, and small, and Grey Poupon, big, medium, and
small, and a few others. They have 200 skews in mustard today
because Chris wants non-GMO organic, Randy wants natural with GMO.
And in other words, it's caused the number of skews to
explode.
Randy Fields:
Well, the consequence of that is it's made the industry more
complex, more prone to out of stocks. It's making them absolutely
dinghy. So, it would be nice if there were a way of eating, it
would be nice if the identity view that each you and I have, and my
children... One of my children eats vegan and another won't eat God
knows what. But the reality is this has made the supermarket
industry a very difficult business. But that's good for us. That
helps our business. So, Chris keeps being weird about food. It's
helpful to us and our shareholders.
Chris Lahiji:
Randy, as I could speak on most of the millennials, we will
continue to keep it weird. But I will tell you, with your children,
with people my age, with even young children, I'm talking 10, 12,
14, 15 year olds, their dietary patterns have changed drastically.
And I think that this is going to be a tectonic shift. They want to
know where their food comes from. They're skewed towards eating
healthy. It's pretty remarkable.
Chris Lahiji:
So, this is not going to be a three to five year blip. I think that
this is going to be societal. I want to end it right now. I
apologize because there was a lot of questions that came in, but we
are out of time. I will forward them on to Rob and Randy so that
they can answer it later.
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Chris Lahiji:
Randy, thank you so much for your time today. Just a couple of
disclosures. For full disclosure, I own shares in the company and
you guys can find out more. Randy, your website is
parkcitygroup.com, correct?
Randy Fields:
That's correct.
Chris Lahiji:
Awesome. And we will be in touch. Hopefully, we will see you guys
sooner rather than later. And, just try to stay safe. Try to stay
healthy and I'll see you shortly.
Randy Fields:
Thank you Chris. Fun times.
Chris Lahiji:
Of course, you be well. Bye.
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