$TBBB: Tiendas 3B is Mexico's Aldi. Is it too late to buy? | Fruit Tree Capital
- Alberto Vadia of Fruit Tree Capital pitches Tiendas 3B ($TBBB) as “the most affordable way to buy groceries in Mexico” — a copy of the Aldi/BİM hard-discount model with roughly 3,700 stores, about 1,000 SKUs versus a supermarket’s 30,000, over 60% private label, no marketing spend, and a two-year store payback highlighted by Andrew Walker. Founder Anthony Hatoum, an investor in Turkey’s BİM, moved to Mexico in 2004 without speaking Spanish and opened the first store in 2005; the chain remains concentrated in central Mexico.
- The compounding math is the thesis: Vadia says the 38% figure from last year could continue to compound, and that halving it over the next two or three decades creates “a potential 100×.” His frame is “like buying Costco in the 1990s or Walmart in the 1980s”; Walker notes that Costco grew 27.5× over 20 years versus 7.5× for the S&P.
- On Walker’s central challenge — the stock moved from roughly $30 in March toward $48, so “didn’t we miss this?” — Vadia gives a split answer: “If you’re just looking at next year, probably yes.” But for a long-term owner, he invokes Peter Lynch on Walmart: you could buy Walmart 10 years later, watch it grow 10×, and still be 100% cheaper. In a worst case of 160 million shares, he describes the result as “about a 25× increase in our free cash flow.”
- Walker’s sharpest structural pushback: US retailers can post exceptional returns in dense home markets, then see returns deteriorate as they expand. Could 3B’s two-year payback become a four-year payback going from 5,000 to 15,000 stores? Vadia’s answer is the cell-division distribution model: each distribution center ideally serves about 150 stores, adds two or three per month, and splits near 200, with regional managers choosing sites; management explicitly refused to jump straight to Monterrey.
- Mexico risk is real, but Vadia argues the business deserves a smaller discount: “If this were traded in the U.S., the price would be twice as high.” Currency moves can hurt in the short term, with prices taking about nine months to adjust, but inflation-related pressure can push consumers toward the cheapest grocer. Politically, “you’re probably not the smartest politician if you’re targeting the most affordable grocery store for people.”
- The fruits-and-vegetables expansion is the live operational risk: Walker says it requires retooling distribution centers, sourcing directly from farmers, and planning suppliers for 7,000 stores rather than 3,700. Vadia has “no problem with it at all”: the goal is a one-stop grocery store, produce has been tested in Mexico City, and management will not roll it out until it can work economically rather than as a loss leader.
- Governance quirks explain the setup: unlike Aldi, Lidl, BİM, D1 in Colombia, and Trader Joe’s, 3B is NYSE-listed because Hatoum raised mostly European outside capital through a British Virgin Islands entity and chose the U.S. market. Vadia interprets the Class C shares, locked up for 2.5 years and now unlocked, as allowing some holders to sell; Walker says the company increased funds by $500 million and refers to a roughly $90 million offering to investment bankers at a discount. Stores have negative working capital and can self-finance growth. A Trader Joe’s-style concept, Yema, with four stores is “the cherry on the sundae”; “I wouldn’t bet on this company just because of Yema.”
1. The pitch: Aldi’s model, transplanted by a founder who’d seen it work
- Vadia’s setup: Tiendas 3B (“good, cheap, better” — alliterative in Spanish) sells roughly 1,000 SKUs instead of 30,000, buys in bulk, turns inventory faster than other grocery stores, and “can pass those savings on to the consumer.” Founder Anthony Hatoum invested in BİM, Turkey’s version, concluded “Mexico has all the characteristics necessary for success,” moved there in 2004 without speaking Spanish, and opened store one in 2005. Today: over 3,500 stores — Vadia later says over 3,700 — concentrated in central Mexico. He says its three competitors are far behind and largely copy the model.
- The price proof from Vadia’s store visits: 3B’s private-label ibuprofen (400mg, 10 count) at 22 pesos versus 58 pesos for Walmart’s identical private label and 80 for Advil. Walmart owns Bodega Aurrera, another competitor. “Sam Walton would be turning in his grave.”
- Fruit Tree’s four-part checklist, Munger-style (“what won’t change?”): everyone needs to eat, wants convenience, and prefers affordable products; long-term debt was paid off at IPO; management is judged “based on what they do, not what they say” — Hatoum is “a rock star”; and valuation is “not a flashy deal... but a compound-interest machine.” Vadia says the 38% figure from last year could continue to compound, and even halved over two-to-three decades, creates “a potential 100×.”
- The evolution argument for a long runway: the chain started with 300 SKUs and no freezers, now runs 900-plus SKUs with over 60% private label — milk was the first — and each private label can take roughly three years to develop because suppliers are local. “They are still not complete,” including the absence of fruits and vegetables, which Vadia sees as another source of business compounding.
2. “Didn’t we miss this?” — the valuation fight
- Walker’s honest framing of the bull fatigue he is hearing: he referenced TIKR call transcripts from around March that put 2030 fair value near $80 with the stock around $30; now the stock is approaching $48 after a major equity offering. “The IRR drops significantly... didn’t we miss this?”
- Vadia doesn’t dodge: “If you’re just looking at next year, probably yes.” But “if you’re a real Charlie Munger” and see the power of compound interest, he says you can be happy owning it for 5–10 years. He cites Peter Lynch on Walmart: you could buy Walmart in 10 years, see it grow 10×, and still be 100% cheaper. He calls this “like buying Costco in the 1990s or Walmart in the 1980s.” Walker’s own back-check: Costco grew 27.5× in 20 years versus 7.5× for the S&P.
- The downside anchor: Vadia says that even in the worst case, if the aggressive post-IPO incentive plan brings the share count to 160 million, “that’s about a 25× increase in our free cash flow.” He does not present the business as cheap on a static basis; the point is the compounding machine.
3. Can the two-year payback survive 15,000 stores?
- Walker frames the core underwriting question as whether the current economics can carry the business from roughly 3,500 stores to potentially 15,000. His broader concern: US retailers with 200 dense home-market stores can be modeled toward thousands of locations, then see returns deteriorate in less dense markets where the brand is weaker. Could 3B’s two-year payback become a four-year payback from stores 5,000 to 15,000? He concedes counterexamples exist: Aldi has not crushed it in the US, and some very cheap, sub-$5 discounters had problems.
- Vadia’s rebuttal is the growth mechanism itself: self-distribution DCs each ideally serve about 150 stores, add two-to-three stores per month, and split near 200 — organic cell division, not random leaps. Hatoum does not micromanage; the DC head in northwest Veracruz “will know better than someone in Mexico City where to find places to rent.”
- The telling anecdote: Vadia asked management why it would not go straight to Monterrey, the obvious next city. The answer: “No, we’re just going to go organically... we’re going to split here, and then we’re going to grow.” They have already expanded from Mexico City through different cities and jurisdictions, from Acapulco to Veracruz.
- Elevated stock-based compensation after the IPO is framed by Vadia as investment in talent and a meritocracy that he believes is more abundant in the US than in Mexico.
4. Mexico risk: discount deserved, inflation can support trade-down
- Vadia’s country-risk math: “If this were traded in the U.S., the price would be twice as high” — the discount is real, but the business has proven itself in Mexico for 21 years. Politically: “you’re probably not the smartest politician if you’re targeting the most affordable grocery store for people.”
- Currency risk cuts both ways: repricing takes roughly nine months, so devaluation or other currency moves can hurt in the short term. But Vadia connects currency risk to inflation, which can squeeze household budgets and push shoppers toward the most affordable grocery store — the pattern he says was visible in the US in 2009.
- The anecdote from Vadia’s unguided Mexico store tour: the driver described his family switching to the store during hard times; when conditions improved, they continued shopping there. “It takes people a while to move in, but once they move in, it’s hard for them to get out.” Walker’s Trader Joe’s parallel is similar: once he saw the price and quality gap, “I always want to shop at Trader Joe’s.”
5. The produce gambit: completing the grocery store, or breaking the model?
- Walker’s risk case: fruits and vegetables mean direct-from-farmer sourcing, retooled DCs, changed store layouts, and regional supplier networks. He cites rough figures from the discussion of roughly 4°C for regular refrigerated products and 18°C for fruits and vegetables. “You have a model that works, and you add something very complex” in a category where “there are lots of places where you can buy an apple.”
- Vadia embraces it: “I want to make a cheeseburger” — bread, meat, ketchup, cheese, tomato, and lettuce in one stop, with produce trips pulling through the rest of the basket. The track record of adding freezers shows they can adapt; produce was being tested in Mexico City about a year earlier, and Vadia says they will not implement it until it can succeed economically rather than function as a loss leader.
- Vadia also invokes Costco’s no-loss-leader discipline: subsidizing some products can force higher prices elsewhere. The forward-planning tell he likes is that management is already thinking about suppliers for 7,000 stores, not 3,700 — “it’s not about what they will offer in 2–3 years, but about what they are working on today.”
6. Why NYSE-listed, why selling stock — and the culture check
- Every cited peer is private — Aldi, Lidl, BİM, D1 in Colombia, and Trader Joe’s. Vadia’s explanation is that Hatoum raised mostly European outside capital through a British Virgin Islands entity and chose the New York Stock Exchange as the better market. Walker also mentions ChatGPT’s view that Mexico’s IPO market is “practically dead,” and raises Arcos Dorados as a cautionary US-listed Latin American category-killer that disappointed.
- On the equity offerings despite stores’ negative working capital and ability to self-finance growth: Vadia says there have been two offerings and interprets the Class C shares, locked up for 2.5 years and now unlocked, as allowing some holders to sell. Walker says the company increased funds by $500 million and refers to a roughly $90 million offering to investment bankers at a discount. Vadia says that if the company does not raise more money, he sees no problem.
- The soft signal both liked: an investor deck a college student would grade “A-plus” — no gloss, just numbers — and a headquarters visit that left Vadia calling it one of only two offices that ever impressed him. Walker’s closing observation on the debate’s shape: some bulls say they would buy at a 20% discount, while others value it at $35 against a stock price around $48. “Everyone understands how good it is. The thing is, how good is it?”
Full transcript
I have a great episode today. If you watch on YouTube, you’ll see that I let my mustache grow out, and my wife came at me, saying, “You can’t wear that mustache anymore.” I shaved it a few days ago and said, “Honey, it’ll have to wait. We’ll wait until I can get proof of this beautiful thing on YouTube, and I’ll probably shave it tomorrow.”
More importantly, today we have Alberto Vadia from Fruit Tree Capital. This is his first appearance on the podcast, and I think you’ll really like it. We’re talking about TBBB, a dominant, fast-growing discount retailer in Mexico. As you’ll hear in our conversation, discount retailers operate all over the world, so the potential to acquire one of these businesses is really interesting.
I wish I had done this when I first saw it about a year ago, but it’s a fascinating long-term story. The key question is: They’re at 3,500 stores—is it worth analyzing the economics of going from 3,500 stores to potentially 15,000 stores in Mexico? Will the economics stay the same? That’s the first question.
The second question is that the valuation here is high. The stock has gone up a lot, and I hate to just look at the stock price and say, “Did we miss this?” But did we miss it? I hear from a lot of people who were once bullish who say, “Hey, I’m having a hard time underwriting this at really attractive internal rates of return.” But again, going from 3,500 to 15,000 stores with a 2-year payback—that’s how you get there. It doesn’t matter if you pay 20 times, 40 times, or 100 times earnings at the beginning, because when you go from 3,500 to 15,000 stores, profits grow very quickly.
I’m pushing Alberto into all of this, and he has great answers. I think you’ll really like it. I think this is a great interview.
1. Sponsor: Trata
Before we get to that, let’s get straight to a word from our sponsor. My sponsor this time, as with many of my podcasts, is Tratta. If you liked this podcast, you’ll love Tratta. Why? Because these are two insiders talking about stocks. They are two smart insiders who have a position in the stock, talking about what they think about the stock, what concerns them, the advantages, the disadvantages, and why they own the stock. And you know what? They have not one, but two interviews on TBB that I used to help with my preparation. You’ll hear me say throughout the conversation that it was very helpful for me to prepare for this, to think about the business, and to understand, as someone who’s starting almost from here in this company, what’s the story here? So if you like this podcast, I guarantee you’ll like Tratta. Go to tratta.com/tbbb. It’s tratta, t r a t a dot com/t and three letters “b” behind it. And you’ll actually see a sample of one of the calls that I used to prepare for this podcast. So thank you, Tratta, for sponsoring this podcast, and now let’s get to the interview. Today, I’m pleased to have with me for the first time Alberto Vadia from Fruit Tree Capital. Alberto, how are you?
Good.
Good. I just messed up your last name, didn’t I?
It’s Vadia.
Vadia. Well, this is a bit awkward to start with, but we’ll continue. Two things before we start. First, a disclaimer: Nothing in this podcast constitutes investment advice. The full disclaimer is at the end of the podcast and in the show notes.
The second caveat is that you came highly recommended by David Bastian of Kingdom Capital. He’s my friend, and I think very highly of him. When I first trained an AI model, I actually fed it letters from Kingdom. I said, “I want this to be something that Kingdom is interested in.” So my AI loves him, and I love him. You come highly recommended, so I hope you’re ready to turn up the heat.
Let me just say that David is brilliant. I learned about Warrior Met Coal from David Bastian of Kingdom Capital. He was about a year ahead of me on that issue.
Regarding HTC, yes.
Yes, yes. I would also like to say that what I really like about your podcast is that you bring in people who, in most cases, actually have some experience in this business. Two of our ideas, one of which still exists, came from that podcast. We’re very focused; we have about 8 names.
2. What is Tiendas 3B, and the Aldi playbook
I really appreciate it. I’m glad you’re here. Let’s delve into the company we want to talk about today. The company is traded on the New York Stock Exchange under the symbol TBBB. This is Tiendas 3B, a Mexican retailer.
I believe it’s an abbreviation for buena, which in Spanish means “good,” “cheap,” and “better,” but I don’t remember exactly. What is TBBB, and why is it so interesting?
Yes, it’s “good,” “cheap,” and “better,” but in Spanish it’s like alliteration, so it actually sounds nice. Tiendas 3B is, in my opinion, the most affordable way to buy groceries in Mexico. They do it very simply by copying the Aldi model. Instead of selling you 30,000 items, they sell you 1,000. They can buy those items in bulk, get a better price, and sell them much faster than other grocery stores. They can pass those savings on to the consumer.
The short story that I think is important is that it was started by a guy named Anthony Hatoum. Anthony invested in BİM, which is the Turkish version of this company. He said, “This is a great model. Where can I do this myself?” He looked around and said, “Mexico has all the characteristics necessary for success.”
He didn’t speak Spanish, moved to Mexico in 2004, and opened his first store in 2005. Today, they’re in neither northern nor southern Mexico; they’re located only in central Mexico, and they have over 3,700 stores. Just for comparison, that’s more than Aldi has in the U.S., and it has the second-highest growth rate in the U.S.
Why do we like this business so much? There are 4 main things we pay attention to. We’re very long-term investors—Charlie Munger-style, you could call it. We like a business that will grow over the next 20 or 30 years and still be strong in 20 or 30 years.
That’s hard to say because so many changes can happen that are very difficult to predict. But what we can ask ourselves, in Charlie Munger style, is, “Hey, flip it. What won’t change?” Everyone needs to eat. Everyone wants convenient products. Third, they want the most affordable products. No one has ever said, “I love the chicken nuggets you sold me, but I wish they were twice as expensive.”
Wait, maybe I’m just laughing because you say everyone wants to eat, and I agree with you, but with the rise of GLP-1, who knows how long everyone will want to eat at this point? I’m saying this jokingly, but it just occurred to me. I was thinking, “How much GLP-1 is in Mexico?” I don’t think that’s really necessary.
3. Why they own it: no debt, management, compounding
That’s a great idea. Please forgive me for interrupting. Please continue.
No, no, no, that’s great. People still need to eat even with GLP-1. What else? Another thing that we pay attention to is debt. If you’re a long-term investor, you don’t like a lot of debt because it will drown you in the worst of times. They paid off their long-term debt when they went public, and they have some small cash reserves.
Third, they have excellent management. We judge management based on what they do, not what they say. This guy’s track record speaks for itself. He’s a rock star.
Fourth, from a valuation perspective, we like a margin of safety. But if you look at it from a static perspective, it’s not a bargain. This is not a flashy deal. What it is, though, is a compound-interest machine.
We think the 38% from last year will continue to compound. Let’s take that 38% and divide it by 2. We think this can compound over the next 2 or 3 decades, creating the potential for a 100× increase. It’s just a phenomenal business that puts its customers first and passes its savings on to them. I think they’re building that goodwill.
4. What is the market missing?
That’s basically a summary. This is a wonderful presentation. I have notes on this subject from a year ago, and sometimes the podcast prompts me. As I was preparing for this podcast, I thought, “Andrew, how stupid were you to give this up a year ago?”
As you said, there’s a long history of discounters and resellers. Aldi in Europe is the most famous example, right? But there’s also Trader Joe’s in the U.S. Everyone would like Trader Joe’s to be publicly traded. When these businesses come out, they’re extremely low-cost, mostly private-label, and they just eat up market share. The one that gets big dominates, and it just kills it. That’s roughly what’s happening with TBBB.
I think you gave a great overview. I hope listeners understand that this is the discount Aldi in Mexico. What do you think the market is missing? As you mentioned, the market has caught up with the story, and I think many of my questions will be about that.
The stock has risen significantly over the past year, and it trades quite well. People came to the conclusion, “Hey, this is a great business,” perhaps about a year later than I did. What do you think the market is missing, given that it seems to have caught up? I still think I can get a lot of alpha in this as a risk-adjusted opportunity.
Listen, if you're looking for the way we see it, you're looking for next year; I have no idea what's going to happen next year. There's a lot of volatility here, but if you add the compounding aspect of this business, then over time the cash flows will reflect it. We just think we can't deny it, and we don't see it stopping.
5. The equity offerings, and who was actually selling
And I can give you reasons. Let me point out one thing: we actually went to Mexico without a guide. We met with management afterward, but we visited the shops. We visited stores in different cities, and what we can say is that this is the retailer with the lowest cost. There are 3 that we can call competitors, but they're all far away—really far behind. They all just copy this model. Some of them don't have it as their main model, so it's a kind of conflict of interest, you could say.
Going back to Trader Joe's, they actually bought a company, but they don't publicize it. It's called Yema. We toured it. When we toured it a year ago, there were 2 of them; today there are 4 of them. This is the Trader Joe's model—they copied it. There is a lot more product in their base model, which is a national base, but this is still early days.
I would consider it the cherry on the cake, on a sundae. I wouldn't bet on this company just because of Yema. Their core business is such a phenomenal business that you don't need it, but this is something extra. That's essentially what we see: it's a great business, and I'm happy to talk a little bit more.
6. The chicken and egg problem in hard discount
It's like one of our children, so let me rewind time for a second. I'm interested in the history because, as you said, these businesses have a proven track record around the world. The CEO here, the founder, didn't speak Spanish. He just said something like, “I've seen it work in Turkey, I think. I want to bring this somewhere,” right?
With these businesses, there's a chicken-and-egg problem, right? All these companies will tell you, “Hey, we have 1,000, 2,000, 3,000 stores.” I think this company had 3,500 of them at the end of the second quarter. “We use our store base to negotiate scale and get the best terms. We have distributed networks, so we can be more efficient for distributed networks.”
But how do you start? If you and I were to say that, for some reason, there is no discount store in Canada, how would we start? We don't have a warehouse when we start. We don't have a base of stores; we're starting with 1. So how do we solve the chicken-and-egg problem?
I ask because I'm curious, and because when you think about it, they have a 2-year payback on their stores. When you say 2-year payback, the first thing that comes to mind is competitors. If we explain how they overcame it, it might help people understand why no one else can overcome it, or why it would be very difficult to overcome, if that makes sense.
7. Private label, 900 SKUs, and beating Walmart on ibuprofen
Yeah, so I think that, first of all, this guy was successful in everything he did. That's what you could see from the record. He started with 1 store, but he had a model. He saw how successful it was, and I think that was his advantage.
Today he has a little over 900 products. I would say 1,000, just to round up. But at that time they had 300. They didn't have freezers; now they do. He was just doing what you could call basic things.
It was a grocery store—a convenient grocery store. By the way, instead of 12,000 square feet like all these other stores, the model has 6,000. Think about it: twice the size of a 7-Eleven. So it's very convenient for people to go. You get off the bus and buy what you need.
Over time, he created a white-label model. He probably didn't know what his prices were at the beginning, but he knew exactly what he was going to do. It was a few years in, wasn't it? I remember his first white-label product was milk.
Today, over 60% of its products are white label, or private label. That's just developed over time. It takes them about 3 years to develop a private label, for example, because this is local, too—a local milk producer, for example.
The most amazing thing is that people who went there 10 years ago see a store today that has so much more. This is part of the compounding aspect for the whole business. And the most amazing thing is that they still don't have any fruits and vegetables, so it's not even a full-fledged grocery store. Twenty years ago, Costco was pretty small compared to what it is today. They're still not complete, and this is another reason for the same compounding in sales.
One of the ways they save money is through word-of-mouth advertising. They don't spend money on marketing, so they can pass the savings on to consumers. Let me give you one specific example.
They created a line of medications—the basic things you need, like cough medicine and ibuprofen. They have ibuprofen that sells for 22 pesos. They have an even cheaper one, but this is a good comparison: 400 milligrams, 10 tablets, for 22 pesos.
I went to Walmart, which is the largest grocery store in Mexico and owns Bodega Aurrera, their competitor. Walmart offered me the exact same ibuprofen, the exact same amount, for 58 pesos. It was private label. Advil was 80 pesos. I think Sam Walton would be turning in his grave if he heard that, because this company passes the savings on to the consumer. That will just build goodwill. We saw this with Costco, and we've seen it with everyone. It's just going to continue.
8. The stock has run: have we missed it?
No, I mean, listen, again, I'm ashamed to have missed this. If you've studied this field, as I have, and looked at everything you could find—all my notes and some of the other things that other people have written—there's a history of this model working all over the world. Once you have one that works, it really takes off, and these things really work.
So let me suggest, and hopefully the audience can agree with this: this is a very good business, right? I hear it all the time when I'm researching it and reading other people's work. For example, there are some transcripts from TIKR calls that I link to in the show notes because, first of all, they're a sponsor, and second of all, they're really good.
There are some transcripts from TIKR calls from around March, and people talk enthusiastically about the company. They say, “Hey, they know the model works. All of this is growing.” There are people who say, “Hey, I think in 2030 the fair value here is going to be about $80 a share.” The problem is that we're in 2026, and they're talking about March and saying, “Hey, these stocks are worth about $30.”
Therefore, the internal rate of return drops significantly. And you know what? We're no longer in March; we're in early September. The stock is approaching $50 a share, right? It's now in the $40s. The company just did a major IPO.
So I guess my first question to you would be: I agree with you. The market is with you. This is a great business, but I hate talking about something that's going up and to the right. Did we miss it? That's really lazy thinking, but everything here screams to me that the market has caught up. So my question to you would be: didn't we miss this?
9. Why every other hard discounter stayed private
That's a great question. I think if you're just looking at next year, probably yes. But if you're a real Charlie Munger and you really see the power of compound interest, you'll be very happy to own it for 5–10 years.
The other thing I'll say about it is that I think of it as a purchase. I remember Peter Lynch talking about Walmart: you could buy Walmart in 10 years and it would grow 10 times, and you would still be 100% cheaper. In my opinion, this is like buying Costco in the 1990s or Walmart in the 1980s.
Another thing that says a lot about this type of business is that you have the entire business privately owned. You have Lidl or Aldi—I never know how to say it. They're private. By the way, they're all private. You have DIA. You have BİM in Turkey. You have D1, the Colombian version, where they copied this model, also private. Why are they public?
I think one of the ways the founder developed it was that he had a background in private equity and brought in a lot of private-equity investors. To maintain control of the company, he went public and also paid off their debts, but that's my opinion. That's why you have this opportunity to buy it.
10. Costco at 40x, and the Mexico haircut
From a risk perspective, there is a pretty aggressive incentive plan within the IPO that will be implemented. Even in the worst case, at 160 million shares, that's about a 25× increase in our free cash flow. Again, if it's just for tomorrow, next week, or 2 years from now, I'd say don't buy it. But if you're considering it as a business, I think you'll be very happy if you buy it.
No, look. Own it for 5 years or more—10 years. I think that’s a great idea, don’t you?
Like everyone, you really don’t have the ability to own all of them. I understand Trader Joe’s, like all of these businesses, is private because the payback periods are incredible, the economics are great, and people support them so much.
And you mentioned that they don’t lose it, right? As you said, I opened the Costco spreadsheet. Costco has grown 27.5 times in the last 20 years, compared with the S&P, which has grown 7.5 times. So you thought you missed out?
No, it’s a huge business. Once this happened in 2020 and people really started to realize it, there was multiple expansion. So I think you’re right.
I have 2 questions about this. The first would be: every time someone comes along and proposes international expansion, the first thought is that Costco is a different model, right? But then I look at Costco, and Costco is trading at 40 times earnings right now.
So the thesis here would be: “What kind of multiple is this trading at in 2030 or 2031?” It’s an interesting thought, isn’t it? On the one hand, you get the economically protected discount business that we talked about. On the other hand, this is a Mexican retailer. There’s a lot of crime there, and there’s a lot of other risk.
How do you think about the long-term compounding of compounders, or maybe the long-term valuation target, when Costco at 40 times is the upper limit? How much do you discount for the Mexican peso, the crime risk, and all this other risk? How do you think about this in the long term?
I’ll look at Costco first, then the other one. Costco is a phenomenal business. I like Charlie Munger’s line: I would never sell it, but I wouldn’t buy it. This is a mature tree. It’s still growing, but it’s quite mature, I think. It’s a strong tree that still grows at a fairly fast pace.
As for country risk, it’s Mexico, so there’s definitely country risk here. I would say that if this were traded in the U.S., the price would be twice as high. Based on its growth and everything else, this is an American company that’s growing, so you get a discount for that.
They’ve proven to be successful in Mexico for 21 years. Politically, that’s my opinion: you’re probably not the smartest politician if you’re targeting the most affordable grocery store for people. Do you understand?
Another aspect of risk in Mexico is currency risk, or foreign-exchange risk. In the short term, this may affect you. As a business, it can take about 9 months to adjust prices because it’s not like an office building where the prices are fixed for 10 years.
However, this has been proven in the U.S. and other countries. For example, in the U.S. in 2009, there were a lot of customers because people didn’t have that much money. Generally, when you have currency risk, it’s related to inflation. During inflation, people have less money in their pockets, so they go to the most affordable grocery store.
Let me tell you a story. When we went to Mexico and toured stores in different cities, we hired a driver. Our driver told us about the hard times they had as a family, and how all of his kids, as they grew up, would go shopping at a different grocery store. They would start shopping at that store. Luckily, things got better, but they still went shopping there.
It takes people a while to move in, but once they move in, it’s hard for them to get out.
No, look, I’m not comparing myself to a Mexican driver, but I’ve always gone to Trader Joe’s. I’m like, “Oh, the line is wrapping around the building.” Again, I understand that Trader Joe’s is a little different. The line stretches along the building, and they don’t have any of the brands I like because almost everything at Trader Joe’s is private label, right?
I always resisted it because it’s a completely different experience. But once you do it once or twice and then you like it, you see the prices. By the way, the quality at Trader Joe’s is incredible, and I’m sure the quality here is really good too. Once you see the difference, you always want to shop at Trader Joe’s.
It’s funny because it’s obviously very different, but once you have to go and do it, and then you think, “Oh, this is what I want—better quality and lower prices,” that’s what you want.
So now the company has 3,700 stores. I can’t remember off the top of my head.
11. Do the unit economics survive stores 5,000 to 15,000?
They reported over 3,500. I don’t remember the exact number. I would say over 3,700, because this is the second quarter, so there’s no doubt that they’re opening over 150 stores per quarter. They’ve already exceeded 3,000 stores. They grow quickly, as you said. I mean, they open 500 stores a year.
My other concern is that we talk about this as a compounder business, right? If this stock is going to work, it should reach that valuation and more. It can do that if they open over 500 stores a year with a 2-year payback, right?
But my other concern is that you mentioned they’re not in the north or south of Mexico. I’ve seen this happen before. Again, I may be a little too focused on local investments, but I’ve seen this happen to American retailers when they opened their first 200 stores, all on the East Coast in densely populated cities. Let’s just use New York as an example: Boston, New York, Washington, D.C., and Philadelphia.
They have transplants going on, and they’re very densely populated. People model it and say, “This is going to be a killer, right? They’re going to go to the West Coast. If they have 300 stores in the Northeast, that’s going to be a 5,000-store unit.”
Then, once they start going to other places, they don’t have the brand at first. They just pick something dense. They try to transplant it to Los Angeles, but it doesn’t have the brand that New York has. Then they try to transplant it—forget about New York—to Syracuse or anywhere else in New York or the Northeast, and it’s not as crowded.
Stores 1 through 200 have incredible returns, but from stores 200 through 2,000, the returns start to deteriorate. They’re approaching 4,000 open stores as we speak, but they’re all in their ideal locations, where they have the DC area, where they have the brand, and where it’s really dense. I know a lot of people walk there.
My other concern is, “Hey, stores 1 through 5,000 had incredible returns, but when we go from stores 5,000 to 10,000, and then stores 10,000 to 15,000, does that 2-year payback turn into a 4-year payback?” Suddenly, the profitability looks much worse, and it can’t grow into that valuation. I’ve expressed a lot, but I’d like to hear what you think about this risk.
I think it’s best to understand how they grow. It’s not a big problem as far as Greater Mexico is concerned. They’ve already grown from Mexico City to other cities in the east. They go all the way from Acapulco on the west coast to Veracruz on the east coast. These are different cities and different jurisdictions. They’ve already proven it; they just need to go north and south.
How they grow is really interesting. This is essentially a self-distribution model. They have a distribution center, and a distribution center ideally serves 150 stores.
Another way they grow is because Anthony is very intelligent. He doesn’t micromanage. The person who runs a distribution center manages everything related to that area. Someone in northwest Veracruz will know better than someone in Mexico City where to find places to rent.
Growth is very simple. Each distribution center should increase the number of stores by 2 or 3 per month. Once they get close to 200, they divide them into 2.
If you look at the stock, one thing you can probably look at is the stock-based compensation. Even after the IPO, it’s a little high, but that’s because they invest in talent and they have a meritocracy, which is abundant in the U.S. and less so in Mexico. That’s my opinion, again.
They grow in a self-splitting pattern, so it’s not like they’re growing randomly. I actually asked them, “Why don’t you just go straight to Monterrey?” That’s the city after Mexico City where you want to be. They said, “No, we’re just going to grow organically. We’re going to split up here, then we’re going to grow, and then we’re going to grow.”
It’s a really methodical way of doing it, and it has been successful. I only asked once, and I may be wrong.
No, I could be wrong, but this reminds me of how Walmart grew in the 1970s. They started in Arkansas and said, “We grow, and then our distribution center meets the needs here. Then we open a distribution center nearby, or in the state, or somewhere else, and it grows from there.” It’s a little different, but it resembles this.
Let me go back to your point. That’s actually a valid point. If you look at Aldi, Walmart, more affordable grocery stores, and even Costco, they’ve had no problem growing in the U.S.
Maybe in the higher segment. But that's just a quick observation without any data to back me up.
12. The self splitting distribution center model
I understand you. I worry that it's easy to say, “Hey, the successful retailers we can imagine had this, did well, and grew well.” But there are always counterexamples that I struggle with. I mean, Aldi—I don't think they've crushed it in the U.S. I haven't paid much attention to it, but I can think of a few cheaper American retailers, especially those that used somewhat differentiated models. grocery store salespeople used to be really happy about the growth. Growth there has really stopped.
That's on a slightly different model, isn't it? That's a lot of surplus goods and typographical errors. I think some of the very cheap stores under $5 had problems, but, yeah. Let me get back to the valuation, shall I? Again, I don't think anyone would look at this model, study it longer than I did last year, and not conclude, “Hey, this is a pretty good model,” right? I think the question is, can you scale? And I think you've already considered that. But then I would go back to the valuation; that would be the second question.
The other thing that comes to mind as we talk, and as I think about our conversation, is that all the competitors are private. You talked about why it's public. They took private equity money. They probably needed some money to open a bunch of stores so that this chicken-and-egg problem we talked about earlier could really grow. But all these competitors are privately held. They can finance the stores themselves.
The stores here actually have extremely negative working capital. So when you open a store, you actually have an influx of cash. They held a stock offering earlier this year—I think when the stock was in the mid-$30s, right? They held a stock offering. So I would come back to you and say, “Hey, you have this brilliant CEO-founder. He doesn't need capital because each store he opens self-finances future growth.” And they decided to raise equity.
When I look at it again, I go back to the valuation. I say, “Hey, everyone I've seen who likes this model loves it.” The objections I hear from a lot of people who liked it a few years ago are, “Hey, it's starting to seem a little expensive to me.” And I see the company issuing shares, and we talked about why this business model doesn't need that. So I just want you to talk about that for a second.
Yes, absolutely. They did more than one. They've done 2, I think, IPOs now—one around February 2005, and one recently, about 2 or 3 months ago.
The first thing, if you look at what they did when they did the IPO, is that they didn't just want everyone to sell all their shares, like a SPAC—after 60 days they sell them, or after 180 days they sell everything. They had these Class C shares that were locked up. Again, this is just my opinion from reading the documents, but most of them were like, “Hey, let's make those Class C shares. They were locked up for 2.5 years, and now they're unlocked. Now they've all become Class A shares. But let's let some of these people who want to get out sell.”
That was my interpretation. Maybe I'm wrong, but if you look at the business and they don't raise more money, I don't see a problem.
No, you increased the company's funds by $500 million. No, but $90 million—this is actually what they offered to investment bankers: “Hey, if you become an expert, you can sell this and buy it at X price. We'll take cash, but you get a discount.” So that's, I guess, part of the way we do business. This is quite logical.
What else? Is there anything else you think we should think about when it comes to this company or this business, or do you think we've covered it pretty well?
No, I really think you're right. For example, if you just looked at it like, “Hey, how much does this cost? What is the cash flow? And how much does it cost today?” it's not a very good investment.
13. No loss leaders, and the missing fruits and vegetables
If you're a person who's long-term-oriented and you saw this, it reminds me that they have so many things they do that remind me of Costco and Walmart. I'll give you an example. You could argue that at Costco, hot dogs and maybe chicken are loss leaders. But Costco once had the idea of not selling any loss leaders—not selling products cheaply to get people into the store—because then they would have to raise the price of other products. And that's exactly what they do, and they just go crazy about it.
That's why, in my opinion, they don't have fruits and vegetables yet. They're working on it. They need to retool all their distribution centers, and that's why. Another advantage they have is that if they convert their distribution centers, they will need a separate cold-storage room for each one. They'll also have to find suppliers for not 3,700 stores, but 7,000, because that's where their growth will be.
So it's not about what they will offer in 2 or 3 years, but about what they're working on today. That's another one of their advantages.
Let me come back to that. Offering fruits and vegetables, right? I've seen discount companies that are really focused on one niche, and they're expanding. Fruits and vegetables, as you mentioned, are a completely different system, right? You need to work with them differently, and I think they mentioned that on the second-quarter call.
They also talked about selling perishables during the second-quarter call, if I remember correctly. They mentioned it and said something like, “Hey, we're going to work directly with the farmers here, right? So we're going to get rid of the middlemen. This is what we do. This is private label. We're going to get rid of the middlemen. They'll send everything directly to our distribution centers.”
They'll have to retool their distribution centers, change the layout of their stores, and, if they want to sell refrigerated goods, do all of those things. I've seen this in other companies before, and it's a risky proposition, right? You're completely changing the model.
My question to you is this: for me, fruits and vegetables probably lead to a lot of repeat customers. It really broadens the field, broadens the average ticket, and all that stuff. But to me, you have a model that works, and you're adding something very complex. I would probably say that about dry goods, too, but it's a pretty competitive environment. There are lots of places where you can buy an apple.
Do you think this makes sense, or does it increase your risk? It's not completely a one-way street, but if you're redesigning your entire footprint, you're going to have to change the layout of these stores. Because of fruits and vegetables, you either have to build bigger stores, or you have to get rid of the 800 SKUs that you have and reduce their productivity in some way.
It seems to me that this is a rather risky maneuver. Do you like the idea of them going into fruits and vegetables?
I don't have a problem with that at all. I like the idea. Ultimately, you want to complete the grocery store. I want to make a cheeseburger. I want to be able to buy bread, meat, ketchup, cheese, tomatoes, and lettuce, right? So it's a one-stop shop for groceries.
Even if I only need onions, if I buy onions or some tomatoes, I also buy other produce. So it's more of a full-fledged grocery store.
Going back to their track record, they haven't had freezers before, and they've adapted to the fact that they now have freezers, right? When we went about a year ago, they had fruits and vegetables in Mexico City. It was a test. They're testing, and they're not going to do it until it makes sense and it's a loss leader.
So in this case, under this leadership, I have no problem with it because, as I see it, they're not going to implement it until they can be successful at it.
I will say that one of the things that makes it difficult is that your suppliers must be in different parts of the country. For example, if you have dry goods, you may only need 1 private-label supplier. In this case, you need a supplier in the west—or rather, in the middle and in the north. So it's more complicated.
As for the distribution center, I don't know the exact degree, but regular refrigerated products are at about 4°C, and fruits and vegetables are at about 18°C. I'm just going by the numbers they gave me. I'm a Fahrenheit fan myself, so—
No, I was just joking. I think most of our audience is local. You say 4°, and I immediately switch to Fahrenheit.
No, I'm a Fahrenheit fan.
14. Why is a Mexican category killer listed in New York?
So, no—but, you know, let me ask another question that's been going around in my head. It goes back to the ownership structure. Let's call this a Mexican category killer, right? Hopefully, if you're right, they'll become the dominant Mexican discount grocery store.
When I think about category killers in general, they usually trade on domestic exchanges, right? The history of companies in the U.S.—domestic and foreign companies listed in the U.S.—and I understand why.
They say, “These are the most liquid markets.” But the foreign stocks that are category killers listed in the U.S. are quite mixed. A lot of them are ambiguous because many came out during the SPAC boom in 2021, and it turned out to be garbage. The one that really comes to mind for me is Arcos Dorados. I don’t know if you’re familiar with it. Neither here nor there, but this is the McDonald’s of Latin America.
I remember a lot of people loved this pitch 10 years ago: the McDonald’s of Latin America. It didn’t work well for a lot of reasons. But I always think, “You have a company that should be a Mexican category killer. Why aren’t they listed in Mexico? Why are they listed here? Are there any signals?”
No, I think if you look at their stock, it just depends on how they started. Anthony started with 1 store in 2005, but he knew what he was going to do. He knew it would be crazy to grow this business, so he got a lot of outside capital, mostly from Europe. When you do that, you place shares, so he did it through the British Virgin Islands. He could place shares in Mexico or the U.S. The company was already officially incorporated in the British Virgin Islands.
I think that’s why he said, “I’ll probably get more capital in the U.S., so I’ll move to the U.S.” I think that’s exactly what happened. I don’t know, but it seems reasonable to me.
No, that makes perfect sense to me. I’ll tell you, when I asked ChatGPT about it, they told me, “The Mexican IPO market is practically dead, so it would be really hard to do an IPO in Mexico.” So I think you’re right, but I was just asking because we had a little bit of time. In my head, I always hear people say, “This German automaker”—Germany may not be a very good example—“this Spanish automaker trades in Spain. I think it’s trading at a big discount. We need to relist it on the American stock exchange.”
I say, “I understand that the U.S. markets are really liquid, but if all the employees are in Spain, all the income is in Spain, and the shares are traded in Spain, I don’t see why relisting it on the U.S. exchange would create any value.” It’s different, but it’s just something I think about because this could be the largest retailer, or one of the largest retailers, in Mexico, and it’s selling in the U.S. It seems strange.
Yeah, no, that’s a little weird. But you can also notice it in the nature of the business. For example, if half of their business is investor relations, that sounds like something they’re listing because they’re trying to raise more capital, even moving from the over-the-counter market to the New York Stock Exchange. They just want more capital.
15. The bare bones deck and the HQ visit
I really think it was based on their story. I mean, yes, it was just a better market. Since they were in the British Virgin Islands, they decided to choose the New York Stock Exchange.
No, it’s funny that you say that about investor relations because I was laughing. I’m looking at the deck right now, and I was looking at it for preparation. That’s the type of deck I like, right? They have a deck, and it has numbers on it, but it’s as if a college intern or a college student gave you that deck. You would say something like, “A-plus.”
There are almost no images, just some color formatting. You would say, “Hey, I think the colors might be different on this point compared with this slide.” It’s very, very simple. This is a company focused on business. They’re not trying to impress you with unnecessary photos, and I really like that about them.
Let me say that I agree with you 100%. That’s what I saw. When I had a meeting with them at their headquarters after the tour, I thought, “Man, I’ve been to 2 offices that really impressed me, and this is one of them.”
You could see the level of professionalism in everyone, and you could tell when people were working and when they weren’t. Everyone is working hard. That was much more impressive than I had expected.
16. Long term, volatility, customer first
Yeah, that was a lot of fun. If you have nothing else you want to talk about with 3B, I think that was a really comprehensive review in 45 minutes. If you have nothing else, we can probably end this here.
No, I would just say, essentially, I’d like to reiterate that this is a long-term investment. If you are a long-term investor, you should familiarize yourself with it because there will be volatility. But we really like it in the long run, and at its core, they put the customer first.
Well, that’s funny because you say there will be volatility. Again, lazy thinking, but it’s been up and to the right over the last year. This is a type of good volatility.
But this is just ridiculous. This is the first stock I’ve come across in a while where the debate I see has shifted from people worrying about the business to a bunch of bulls saying, “I love this business. I think it will be great in the long run.”
That’s quite a lot. Again, when I read that comment by Trota [?] or when I read some interesting letters, I hear people say, “Hey, this is going to be very volatile. I think I can buy this with a 20% discount.” They say it’s worth 35, and the stock is now worth 48.
When I hear a guest say, “If you’re willing to hold this for 10 years, that would be great. I don’t know what will happen in 1 year,” I’m like, “Well, yeah, nobody knows what will happen in 1 year.” But it’s just an interesting push-and-pull dynamic. I think everyone understands how good it is. The thing is, how good is it?
Yes, exactly.
Alberto, Fruit Tree Capital, that was awesome. We’ll have to do this again sometime soon. I know you mentioned Concentrated, but I know some other names, so we could discuss something else.
Anytime, friend. It was truly a pleasure, my friend.
A small disclaimer: Nothing in this podcast should be considered investment advice. Guests or hosts may have positions in any of the stocks mentioned in this podcast. Please do your own research and consult a financial advisor. Thank you.