The Motley Fool Interviews Karat Packaging CEO Alan Yu: From Boba Tea Shop to Packaging Powerhouse

In this podcast, Motley Fool CEO Tom Gardner and Chief Investment Officer Andy Cross talk with Karat Packaging co-founder and CEO Alan Yu about the evolving business of packaging. Topics include:

• Boba tea beginnings.
• Eco-friendly alternatives.
• Partnership and leadership.
• Strategic expansion.

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A full transcript is below.

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Alan Yu: Even though our company has grown from a start-up to almost half-a-billion-dollar company, we still act as a start-up. We treat our customer, as our family, as our core customer. Every customer is a VIP.

Mac Greer: That was Alan Yu, co-founder and CEO of Karat Packaging. I'm Motley Fool producer Mac Greer. Now, Karat Packaging makes all sorts of food and drink supplies. The stock trades under the ticker, KRT on the NASDAQ. Motley Fool co-founder and CEO Tom Gardner and Motley Fool Chief Investment Officer Andy Cross recently had a chance to talk with Alan Yu about the business of Karat.

Andy Cross: Hello, Fools. Welcome to another Motley Fool conversation. I'm Andy Cross, joined here by the co-founder and CEO of the Motley Fool, Tom Gardner and Tom. We're really pleased to welcome Alan Yu, the co-founder and CEO of Karat Packaging, one of our recommendations across our Hidden Gems Universe, and Alan is coming to us on Fool 24 here. Alan, great to have you here. Thanks for joining us.

Alan Yu: Thank you, also. Thank you for inviting.

Andy Cross: Alan, maybe we can just start, Tom. Let's just start the conversation. Alan, just in your own words, talk a little bit about what is Karat Packaging? You mentioned you're the co-founder of the company, you're the CEO. Just lay out its business and its strategy for us and for our listeners here.

Alan Yu: Sure. Well, Karat Packaging started in the year 2000. I mean, we originally started as a Boba Tea Shop, and we expanded our offering not just to selling the raw material that actually made these Boba milk tea, but we move into transitioning to packaging. We first started with the Clare Cup and then we added additional utensils, straws and napkins and paper product and packaging. Now we're into paper bag, paper shopping bag, and SOS bag. Today, we're actually a one stop shop for any restaurant or chain or convenience store or supermarket. You name it. As soon as you have demand, we'll definitely catering and we'll bring a saucer for you. Also we not only bring the product and we stock it with all of our 10 warehouses throughout the US, we also manufacture some of these product here in Texas, as well as Chino and in Hawaii. Basically, people originally thought of us as a Boba Tea Shop, but now our fork product has migrated, shifted into packaging. Our customers are actually in every day of your life, if you go out and buy food and restaurants, you will be using our product. You will see our name carried a lot of these lids and bag and containers. If you go to Panda Express, you go to Raising K, you go to I and out Burger, you go to Chili's, you go to Apple Bee's, Chipotle, even Burger King in Hawaii Islands or ABC food stores, you'll see our product. We're everywhere that you can't miss our product.

Andy Cross: Tell me a little bit about what did you see in the market opportunity that you just didn't think was getting fulfilled? As you were, again, moving from the Boba Tea side to the packaging side, was there something key in the market opportunity that you saw that said, Wow, we can fill that.

Alan Yu: Yes, definitely. When we started as a small retail restaurant with just 100 stores, I mean, there was a need for custom printing design. We want to have our local. We have our name on our cups and that's where we couldn't find someone who could do it quick enough, affordable enough, and fast enough for us. We went ahead and we developed a program for custom printing on everything that we do on the cup, on the containers, on the back, and other things and we made a low minimum MOQ. You don't have to you'd be a large huge corporation company with 1,000 store, 100 store. You could be a growing business which is five restaurants or a start-up you can have your own name brand on your takeout container, your soda cup. I mean, for example, we started with a company called Dave Hot Chicken at one store, 5, 6 years ago. Today, they have over 200 stores, and they're everywhere, and people love it. The kids love Dave Hot Chicken. This is why I say that. If you were one single retail start-up these large manufacturer would not even talk to you on that part, and it's hard. I mean, but this is your baby. You founded the business and you want to have your name printed on these container and take-outs and deli wraps. Basically come to us and basically we will treat you as basically regardless if you're a one store or 100 stores or 1,000 store, we'll definitely take care of you and meet your needs, and that's how we found the niche in our markets going through the smaller sized restaurant. Now today we're also servicing the larger national chain accounts.

Simply thing that every company restaurant, I would say, in the food service sector, mainly use a very similar concept in terms of packaging. But some of these start-up are being very creative and they have their desire and needs and certain type of packaging, making it more convenient and having their food service served in a container, that can be well kept, better presentation, and basically, they are more creative. Today, nowadays, these large national chain account, they want to move away from Styrofoam. They want to move away from plastic bag. They're also being very creative, designing different type of packaging to enhance to create a better appealing for their clients to the customers when they put their service, their food in it. I see that more and more, especially those companies moving away from Styrofoam and this is a huge market in the US, moving away from Styrofoam. Most Asian country have already moved away from Styrofoam and we're still there's still a lot of companies in the US are still using Styrofoam, but I see that more and more are converting away from Styrofoam into a more eco friendly packaging, and that's where we see the opportunity. Also, there's a lot of cities and states are banning Styrofoam and plastic. That also creates opportunities for eco friendly product packaging, and that's what we are good at.

Tom Gardner: You would say that you would be excited if you heard and you are excited whenever you hear that a different district, city, a different locale has decided to ban plastic or Styrofoam. That is both core to your mission and a great opportunity. If you heard that more and more over the next three years, that's a very good sign for Karat, yes?

Alan Yu: Definitely and we are seeing that. California, I believe, they just banned plastic bags starting 2026 January, so everybody have to start using paper. California banned Styrofoam January of this year, and we seen opportunities started coming everywhere, the takeout containers, into the paper container or even plastic container, but definitely not Styrofoam containers.

Tom Gardner: Why would a national chain come to Karat Packaging rather than one of the major national or global competitors?

Alan Yu: Well, one key thing is we are very nimble and flexible. I mean, even though our company has grown from a start-up to almost half $1 billion company, we still act as a start-up. We treat our customer, as our family, as our core customer. Every customer is a VIP. Basically, our sales we actually go directly to our customers, and for a large national large competitor of our Rs, they only serve as national brand, and they don't service these smaller midsize chains. We love to service the small we treat small chains, midnight change and large chain, very similar. I mean, we have different type of sales rep that caters to different type of customers, so that's the major difference between us and our competitors.

Andy Cross: Alan, can you talk a little bit about just some of the recent innovation. Just for some contexts from Lister, you have almost 7,000 different skews out there, I think, around there, SKU, so different product offerings. I think you added like maybe 500 or so in the last year. Just talk about some of the innovation and packaging. You mentioned the move more toward cardboard and away from plastic. Are there other key innovations that Karat is pushing into the marketplace?

Alan Yu: Yes, there are. As I mentioned earlier, if you go to convention at the hotels, they're servicing your lunch not in a regular plastic containers. They're now servicing in a barn box, a folded cardboard containers, and there are different type of cardboard containers. They used to use those cardboard containers for just the Kentucky fried chicken. But now they're different design. You can actually put other stuff in it, and you can put sandwich in it, and there's different type of bag, grease resistance bag. We're seeing that people are being creative in terms of moving away from plastic, moving away from Styrofoam into a different type of packaging. Also, it's not only appealing to the public, it's also economic. It is cheaper to have corrugated boxes or cardboard boxes versus a plastic containers or eco friendly container. They're recyclable.

Andy Cross: How do you do your R and your research and development? How do you decide to make this product versus that product? Where are you getting your ideas from? How does that flow throughout the organization?

Alan Yu: I actually travel to Asia often almost every month to visit our vendors overseas, and just happened that in other countries like China and Korea, especially Korea, they're being very creative in terms of making different types of packaging. A lot of times a restaurant, drink shops or Boba Tea Shop or tea shop in Asia, they can actually attract customers, not because they drink. It's because they're packaging, the take-out packaging. You'll see that there's different creative packaging out in Asia, and just like the foods. Basically, a lot of these local food that we see that are being popular, they have been popular in Korea, other places, and now they're coming abroad overseas to US and this is where I get our creative concept. There's if this idea it's good in Asia and sometimes it's actually great, I think we can do it here domestically.

Tom Gardner: I wanted to talk a little bit about the partnership in the business between you and Marvin, and it's an unusual thing in public companies to find two founders who own more than half of the business. That's not a common thing in the public markets. We generally at the Molly Fool view that as a very positive thing. Can you talk about your partnership between you and Marvin?

Alan Yu: Yes. Marvin and I actually, we met each other back in high school, and we went through different type of business doing our after the school, and we try different type of business, not just in restaurant business. We worked very well in terms of me going out on the street, Marvin behind the scenes, working out with manufacturing, working with vendors in that part. Like you said, it's not common to have a founder with over 50% in shares. I mean, in our case, we've been working diligently with our bankers and we're trying to get more shares out in the market. That's why in the past two years, we sold off some shares through our bankers, and so we can get more flow in the market. That is one thing that we've been trying to do, and this is actually good for our company because it also we have more employees that have ownership in the company. We passed out after we went public, we've given some RSU to our employees that have helped the company grow and continue working with the company. These are avenue that we're working on in terms of putting more shares out in the market.

Andy Cross: I just want to talk a little bit, Alan, about the distribution and manufacturing facilities. You mentioned that. Chinos, I think the latest one you just brought online, ironically in California, which, as you mentioned, is a little bit tough on businesses in some ways these days. But you have the Chino facility, you have a Hawaiian facility, and I think you have 10 different distribution points almost in every region of the country. Just talk about on a geography basis, how your sales are evolving. Are you feeling pretty good with that 10 right now or do you see over the next couple of years you're gonna have to continue to expand that out?

Alan Yu: Well, we started with just California location because we thought that this is our home base, and I live in California over almost 40 years in California, and I love California, and California has changed today versus 40 years ago, of course. One thing in Calva California is where all the containers are mostly coming in from Asia into California. That's where most of our products are made into California. But we feel that we want to grow the market into different segment, and our online business is one of the key component of our growth of our company. Now, for online business to be successful, we got to have a distribution center that is closer to our customers. We realized when we first started online store, online business, back in 2004, a customer in New York, Boston, ordered a product online. It will take them 12 days, at least seven or actually, 10-12 days to get their product shipped from California. There are some of the customers when they see that transit time, they cancel their orders. That's why we opened up the New Jersey facility, and then we opened up the Texas facility and South Carolina facility to service customer because as our customer base grow, we feel that more and more customers are outside of California and that's why we decided to set up different distribution center in different state. But when we first started, we started small, in a smaller warehouse, much smaller warehouse. Today, we've grown double the size of most of our warehouse in that area in the city and state. Instead of adding additional warehouse facilities were increase we're actually increasing our sizes of our current distribution center in the area that we have a concentration or customer base. We're putting a warehouse into Metropolitan city that we feel we have a good base of customers that we can get the product ordered, received, and ship if not the same day so the customer can receive their product within 40 hours. That really helped our business model growth. It's a last mile how fast can you get the product to the customer in the last valve that dictates the success of an online store.

Andy Cross: Talk a little bit about just the sourcing of product. I know you've talked a little bit about this in the call, but for those who are still who don't follow Karats closely, talk a little bit about the China impact, how you've been diversifying away from there, and just what do you see going forward over the next year or so as you navigate this very tricky environment that businesses are operating in today.

Alan Yu: Sure. I mean, this sure has been challenging for everybody that imports product, and also even for manufacturers has been challenging because they don't know where to get their source raw material. I mean, yes, we can manufacture domestically US, but we still need some raw material equipment from overseas and we just have been moving around, waiting for the administration to figure out what is the final tariff rate it's going to be. Even till today, there is no final rate because it could go up or down depending how the talk is going on right now. But four or five years ago, most of our product was coming out of China. Today, I would say only less than 10% of our product from China, and we're trying to move away that 10% within the next 60 days because we don't know what's going to happen after 60 days. It's going to be 200% if out of China. In that case, basically, nothing can be purchased bought out of China. I heard that starting yesterday, you can't get anything out of India either because India just went from 15% to 50% tariff rate. Right now, luckily, we diversify into sourcing to Taiwan, Korea. Vietnam, Malaysia, and now Indonesia, and now we're starting to move some of our sourcing into Latin America. We feel like I think that the administration might punish all the Asian country, but might be still a good friend ally with the Latin American country. I think that's a good way to go to, and also it's closer to US, so that's where we feel that we're going. I mean, Canada is not safe anymore. [laughs]

Andy Cross: Alan and just very quickly, is it maybe on a scale of 1-10 where it's nearly impossible and one is super easy, how hard is it to shift those sourcing countries? I mean, it doesn't happen overnight, but it takes time. Like, what is the availability for you to be able to switch countries like that, so quickly or not quickly?

Alan Yu: Well, as I mentioned earlier, we are very nimble. The way that we're able to quickly find a new vendor is one way is send our equipment over to the vendors. Basically, they don't have to look for the spec and we have everything. What we've done is we have equipment that we can move around quickly, and we can just ship it, dissemble it, and ship it to the country that we like, or buy use equipment for one of our existing vendors and ship it to another country. That will have the same spec and everything outfit. That is the best. Rather than having discussion with a new vendor, Hey, can you make an investment? If you invest this much, we will buy this much from you. That will take years to transition. The quickest way is we invest in that vendors, and we give them the equipment, we give them the tooling, and we give the order. That will only take around two to three months, and we can start a new country. That's something we do. Other people do not do that. [laughs]

Andy Cross: It's great. Alan, just talk a little bit about maybe just you're all in the United States. The United States is your market? Thoughts on international? Is that an opportunity we look over the next few years, and how difficult would that challenge be for you?

Alan Yu: I always say that. I mean, the market in the US is so big. Why spend the time and effort to go to a market that is that we're not familiar with? And we don't know how to compete in that market, like Mexico market or Northern Canada market. We try that market, it's different. We have to set up in company, and then we have to spend more time and effort versus the result. It's going to be better, faster, easier if we're just in the US and there's so much room to grow within the US. Why risk, why even spend time to other country?

Andy Cross: How about technology innovations. What are you investing into? Is AI playing a part into your logistics or into your business at all?

Alan Yu: Yes, actually, we are as a company grow, I mean, we're going to say that four years ago, we have over 1,000 employee in the company. Today, we have a little bit under 700 head counts. Every department, we haven't seen a major increase in terms of staffing, but we've seen a steady declining of staffing, less paper, where we have become almost paperless in the company. More using tablets, in terms of online ordering, it's mobile application. Also, we do get over 1,000 question a day, but 99% of that is answered by AI. Less customer service needed, required and also push a button, 60% of the online order are processed through mobile application. We're saying innovation and technology is actually helping the business to grow.

Tom Gardner: I'm wondering what would happen because you're so knowledgeable about the category. What would happen in the scenario where you became very acquisitive? Now, I want you please feel free to go with best and worst case scenario. Like, here's why we're not yet doing that or haven't done that because these roll ups and these efforts can spill I mean, a lot of acquisitions fail and that's not maybe the discipline and the focus that you want to have as a company. Alternatively, we've known some companies generally in the category that you're in, in and around restaurants that have been acquisitive systematically because they see what the chains need in advance and they buy in advance and start making those acquisitions. Imagine the scenario where carrot packaging became very acquisitive. What would work and what would not work about that?

Alan Yu: Well, during the past 24 months, we've tried and made several offers to different companies. We've seen our categories. Basically, our competitor peers merging, acquiring different company. There's a lot of merging activities out there in the marketplace. But a majority of them have not been very successful in terms of integrating. I mean, the key challenge is integration in that part. They spent a lot of money, and they took a lot of debts, and it has not been very rewarding for them. So we've been very careful in terms of how much we pay. Is this company somewhere that it's similar sharing a similar culture with us? We'll be very careful. That's why instead of acquiring different company, we actually just brought in more categories. We added more categories, adding 500 SKU. Again, why buy a company when we can just bring the product ourselves and having our existing sales represent ourselves and sell it. We have been able to grow this year, we're estimated growing over double digit, 10% versus our competitors are either declining 5%, 3%, or actually growing two or 3%. We're actually the only company in our peer group that's actually seeing a double digit growth in volume and revenue wise.

Tom Gardner: Thank you. Andy will have the final question, but I'll just say, Alan, how much I've really enjoyed this, and thank you so much for the hour. But, Andy.

Alan Yu: Thank you, Tom.

Andy Cross: Well, I'm just going to wrap us up, Tom. I think that's a fun way to end. Alan I love to hear the focus on the sales growth. Obviously, sales growth is really the driver of so much toward a company's success, and Karat Packaging does more than 440 ish million dollar. In annualized sales, and we hope you can continue to drive that higher and higher as we are investors in Karat Packaging as you are as a very significant shareholder. We not only thank you for joining us today for this Motley Fool conversation, but we wish you and your team all the best success in the near future as we continue to be a long term investor in Karat Packaging.

Alan Yu: Thank you, Andy.

Andy Cross: Thanks, Alan. Thanks, Tom and thanks, Louis for watching.

Mac Greer: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. Don't buy or sell stock spased solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Mac Greer. Thanks for listening, and we will see you tomorrow. Thank you!

Andy Cross has no position in any of the stocks mentioned. Mac Greer has no position in any of the stocks mentioned. Tom Gardner has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Karat Packaging. The Motley Fool has a disclosure policy.