Mexican Taco Bell & Chinese Tortillas
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“Whether it’s the restaurant or the supermarket or the kitchen supply shop, it’s hard to think of sector that is more commercialized and more replete with entrepreneurship and innovation. It is all monetized. … Quality customers are often more important to a restaurant than a quality chef.”
Professor Tyler Cowen’s recent book, An Economist Gets Lunch, is his latest success at illustrating “markets in everything” – and like his wildly popular blog, Marginal Revolution, the engaging read’s ideas and insights are also directly applicable to making discerning choices in stocks, partnerships, and other investments.
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Slepko: You are a huge booster of all things Mexico, from art to food to economics. However, you mentioned in your book that Taco Bell [a division of Yum! Brands (NYSE: YUM)] outlets in Mexico are often better than many of the available options – though to be fair, you weren’t saying that Taco Bell offered better Mexican food.
Cowen: It is kind of a cultural experiment. If you're there and you want to try some American food that doesn’t taste too strange, you are likely to go there rather than McDonald’s (NYSE: MCD). Personally, if I wanted American food and I was in Mexico, I would choose Mexican Taco Bell over Mexican McDonald’s – though it’s not what I do of course.
Slepko: In your book you discuss the economics of cheese throughout, especially when exploring the dairy versus non-dairy hemispheres. But even within the diary-sphere, you point out divergence and what a difference regulation can make. As is allowable, Wal-mart retails some Mexican cheeses along the Texas border, but not much, and Kraft experimented with a line of Mexican cheeses in America, but the cost of specialized production made turning a profit difficult. Similarly, how does a corporation like Kraft enter something like the Mexican cheese market? Is it better if they adapt their recipe, or would it just be better to try to change local tastes?
Cowen: They can do a lot of things more cheaply in Mexico. However, if a cheese doesn’t taste good, Mexicans aren’t going to buy it. Cheeses wrapped in plastic will continue to make progress in their middle class and suburban markets, but they are far from taking over in Mexico.
Slepko: Is lactose intolerance a deal breaker for the Asian markets?
Cowen: We’re seeing dairy products make more progress in Asia than had been expected a decade ago.
Slepko: A major aspect of this phase of globalization is the trade and interaction that is occurring among emerging market economies. What are your thoughts about Mexico’s Gruma (NYSE: GMK) and its attempt to push tortillas in China?
Cowen: I think the real future for Mexico is in the technical sectors – which I think is counter-intuitive to a lot of people. Mexicans are excellent workers with a great work ethic, and many are able to execute excellent logistics and planning, plus they have a lot of experience working with American technology.
I'm not sure tortillas have a bright future in China. They may find some kind of niche with a billion people and rising incomes, but I hardly expect China to be the next major driver of tortilla demand. I think Mexico will export technical goods to China, and they are already exporting cars, which is an important development (as people expected the opposite).
Slepko: McDonald’s is one of the many US corporations that now receive over half their revenue from overseas. Why has McDonald’s been so successful outside the US? What other US fast food/casual dining “experiences” will likely do well?
Cowen: McDonald’s has a great product, even if it’s one I don’t like. But keep in mind the last quarter, McDonald’s has not been doing so well, and their business model is in some trouble. I think their problem, in a way, is too much success. What they do, they have made perfect, which is admirable and the results have been amazing. Still, it is hard to improve on perfection, and that’s the margin where they are at. Plus, there are a lot of competitors that are not yet perfect. I’ve never felt Taco Bell was perfect (and, indeed, they’re not.) I think maybe the McDonald’s business model has peaked, but only for the best of reasons. It’s a funny place to be.
Slepko: Are there any foreign restaurant brands (fast or not) that could successfully penetrate the US market? (And Tim Hortons doesn’t count.)
Cowen: I would think the foods would penetrate here, but I don’t think the future is in foreign brands, but it is in foreign ideas. You can’t prevent someone from copying your food ultimately unless you have superior logistics – and Americans are great on the logistics. So we’ll just take the best foreign ideas and do them and sell them. Chipotle (NYSE: CMC) connected Mexican food with McDonald’s logistics.
Slepko: What about Yum! Brands? In addition to their tacos, pizzas, and wings, they have two Chinese subsidiaries specializing in hot pots and dumplings. What are the chances they will be successful in bringing “Chinese fondue” to Europe and “Chinese Chinese” food to the US in a fast food package?
Cowen: I haven’t been to those yet, but I think doing with Asian food what Chipotle has done with Mexican-linked styles will be a thing. I’m not sure which companies will manage that…It requires rapid-fire response in the cooking, very often, some real training, and an understanding of spices and freshness. It’s not easy to put all of those together.
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Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.