LOS ANGELES/MANILA -- Lavinia Caratay's family has a dining ritual every weekend that is rooted in memories of her youth.
"I've always loved Jollibee," Caratay, 46, told the Nikkei Asian Review in late June after ordering a Yumburger for her 11-year-old daughter and Chickenjoy for her 10-year-old son.
While the Caratays wait for their food, other Filipinos begin to queue up at a cashier counter manned by their compatriots to pick from a menu that includes a hamburger topped with a juicy slab of pineapple, spaghetti topped with a sweet sauce and chopped hot dogs, and palabok, a noodle dish with shrimp sauce.
The scene is common across the Philippines, where Jollibee outsells all other fast-food chains, including Western giants like McDonald's and KFC. But this isn't Manila -- it's Los Angeles.
It's been more than a decade since Caratay migrated to the U.S. and started a family with her Filipino husband. Her two kids were born and raised there. "Our taste is still Filipino," she said, explaining their shared craving for Jollibee.
At a Jollibee outlet in Virginia Beach on the east coast, Filipinos -- some having made the two-hour drive from Maryland -- waited for about an hour to get their food during one Sunday in late May. Two years ago, the opening of a branch in Illinois in the Midwest drew large Filipino crowds comparable to a blockbuster movie premiere.
The crowds at Jollibee's 37 locations are a reminder of the size of the Filipino population in the U.S. -- over 3 million, according to the latest official data -- and its loyalty to their favorite restaurant chain from back home.
But these crowds also highlight a key challenge for Jollibee founder and Chairman Tony Tan Caktiong, who has set his sights on joining the ranks of global giants like McDonald's and Yum Brands: The food at his flagship restaurant mainly appeals to Filipinos.
Jollibee Foods, the holding company of the eponymous chain and its sister brands, this year made its biggest move yet to go mainstream in the U.S. when it raised its stake in Colorado-based Smashburger to 85% from 40%, bringing its total investment in the chain to $200 million. Jollibee could buy it out as early as next year under a 2015 deal.
Smashburger has over 300 branches in 37 states and logged sales of around $200 million in 2017, according to Nomura. By contrast, the Jollibee and affiliate Filipino brands Chowking and Greenwich Pizza have around 85 stores, mostly located in Filipino communities.
Jollibee made its goal clear when it first negotiated to buy Smashburger, according to CEO Tom Ryan, recalling a meeting with Tan Caktiong and his brother, Jollibee CEO Ernesto Tanmantiong, in mid-2015.
"They said: 'We think the brand is really strong and we are looking to establish a U.S. or North America-based beachhead. We think burgers are the first natural choice because it's America's favorite food,'" Ryan told Nikkei in an interview in Denver.
But Smashburger is only a part of Tan Caktiong's grand ambitions for the company he founded in the 1970s. He wants Jollibee to become one of the five largest quick-service restaurants in the world -- within five years.
Jollibee's sales from its 13 restaurant brands and over 3,000 outlets worldwide rose 15.2% to $3.4 billion last year. Euromonitor ranked it as the 16th largest in the world by sales, excluding convenience stores that also sell cooked meals. It needs to eclipse the $11.2 billion sales of Dunkin' Brands Group to hit its goal of breaking into the fifth spot.
"Since the start of Jollibee Foods 40 years ago, I have always dreamed it to be the largest food company in the world," Tan Caktiong said in a press statement on June 29 at the company's annual shareholder meeting.
The game plan is to keep growing in the Philippines, where around 300 new stores are to be opened every year, and ramp up expansion in the U.S. and China to bring the share of foreign sales to half of the total, from the current 30%. A $1 billion war chest for acquisitions -- built from internally generated cash and loans -- has been earmarked to accelerate growth.
Jollibee's next target is a Mexican restaurant chain in the U.S., and the company is hoping to seal a deal by the end of this year, CEO Tanmantiong said. "The Mexican market in the U.S. is growing," he said. The brothers, speaking to reporters in June, declined to name the companies they are in talks with, although Tan Caktiong suggested popular brand Chipotle might not be for sale -- or cheap.
In China, the company plans to open around 1,500 Dunkin' Donut outlets and expand its Yonghe King noodle and Hong Zhuang Yuan congee chains, which together operate over 300 shops. In 2014, Jollibee and partner Jasmine Asset Holding secured the rights to operate the U.S. doughnut and coffee chain in China.
In May, Jollibee teamed up with a private fund to buy the Asia-Pacific franchise of Tim Ho Wan, a Michelin-rated chain founded in Hong Kong known for its dumplings and baked pork buns.
But while the company was on an expansion and acquisition spree, it had to deal with some acquisitions that did not perform as well as hoped.
Last year, the company unloaded underperforming chains in mainland China -- 12 Hotpot and San Pin Wang. Jollibee also bought out its partner in a food processor to control the quality of its supplies in a market still reeling from food-safety scandals a few years ago that hurt broader industry.
"Our important criteria is that the food should be really good"Jollibee founder and Chairman Tony Tan Caktiong
And three years after its initial Smashburger deal, its largest overseas play yet, Jollibee is still waiting for the U.S. burger chain to turn a profit.
Cristina Ulang, head of research at First Metro Investment, believes Jollibee could become the "world's No. 1," but it needs to turn new assets profitable. "Smashburger has been a drag on its earnings," she said.
COL Financial analyst Andy Dela Cruz said Jollibee missed its earnings forecast for Smashburger last year when it booked 339 million pesos ($6.34 million) in losses. He said Smashburger is unlikely to break even until 2019, and suggested that Jollibee could take even larger losses this year after raising its stake.
Smashburger, a "fast-casual diner," competes in the so-called better burger segment. CEO Ryan regards Five Guys and New York-listed Shake Shack as its main rivals. Demand for "better burgers" exploded in recent years as increasingly sophisticated consumers developed a taste for better quality but pricier offerings. In a sign that those burgers are extending their appeal beyond the U.S., Shake Shack plans to open its first branch in the Philippines next year, adding to its stores in Japan, South Korea and Hong Kong.
Jollibee executives say they will turn Smashburger around using the same formula that has made the company successful at home. The company installed Ryan, a co-founder of Smashburger and a veteran of McDonald's and Pizza Hut, as chief executive in 2016 and pushed for the closure of over 40 underperforming locations between 2016 and 2017. The Ryan appointment reflected the view of Jollibee's owners that a competent founder can run a company better than a professional outsider.
Jollibee Chief Financial Officer Ysmael Baysa said the company also restructured Smashburger's finances to reduce the high interest payments that have been eating into the company's bottom line. "After we acquire the business, we do not expand immediately. We first fix the basics of the business, the fundamentals," Baysa said.
But while the U.S. and China are seen as growth engines, Jollibee is not abandoning its backyard: Southeast Asia. With over 600 million people and a young, growing middle class, the region is a natural place for Jollibee to expand.
Last year, Jollibee took a majority stake in Super Foods, a Vietnamese company that operates Pho24 restaurants, the Highlands Coffee chain, and Hard Rock Cafes, mainly in Southeast Asia, Hong Kong and Macau. Jollibee plans to take the company public in Vietnam, Jollibee's fastest-growing foreign market, next year to bankroll its expansion in Asia.
It is also keen on offering its own dishes in new markets across Southeast Asia, such as its signature Chickenjoy fried chicken dish. "Indonesians love Chickenjoy, we just need to make it a little spicy," Tanmantiong said.
Encouraged by profitable U.S. operations, the company will also continue to chase the 10 million overseas Filipino workers who long for a taste of home. New Jollibee locations are planned to open everywhere from Kota Kinabalu in Malaysia to London later this year. In Canada alone, the company aims to open 100 restaurants in five years.
Japan, home to popular brands like Yoshinoya, is on its radar, too. "We are also seriously looking at Japan. We are looking at major chains there if we have the opportunity to buy or partner," Tan Caktiong told Nikkei.
An appetite for acquisitions
Tan Caktiong founded Jollibee in 1975 from twin ice cream shops in Metro Manila, and expanded their menus to include burgers, pasta, and fried chicken. After becoming the market leader, partly through franchising, Jollibee gobbled up other brands, such as the Greenwich Pizza chain, Red Ribbon bakeshop and the Burger King franchise in the Philippines, as well as foreign assets in China. That string of acquisitions helped it become the largest homegrown fast-food company in Asia by sales and market capitalization in 2013.
But completing mergers and acquisitions has proved to be tougher in the U.S. The consolidation in the fast-food industry there and the growing appetite from private equity firms like JAB Holding, Apollo Global Management and 3G Capital, which are among the active buyout groups in the sector, are making restaurant assets more expensive.
"You are competing against all of them as buyers," Tan Caktiong said. "Our only challenge is really just the valuation."
Indeed, the company had to forego its interest in Pret A Manger, the British sandwich and coffee chain, which is expanding in the U.S. Pret was sold to JAB in May for a whopping $2 billion. "It's a very good brand, but we felt we cannot afford it," Tan Caktiong said.
Tan Caktiong had wanted Pret as Jollibee's way to compete in the growing U.S. coffee sector.
Although the company is aggressive, Jollibee is choosing its battles and has no plans to join the U.S. coffee war for now, he said. But how can it compete with cash-rich private funds? If Jollibee can't beat them, it can perhaps join them. "We have to be creative," Tan Caktiong said.
In the case of Tim Ho Wan, the Hong Kong-founded chain, Jollibee partnered with the acquiring fund Titan Dining and secured the right to buy their stake when they exit in seven years. "If we buy their shares, that will be forever ours," Tan Caktiong said.
He wants a diversified portfolio for his fast-food empire. Like in the Philippines, Jollibee is looking to have six brands each in the U.S. and China through M&A deals. "Our important criteria is that the food should be really good," Tan Caktiong said.
Yet to be a truly global player, Jollibee must not only please the taste buds. The company was recently entangled in controversies unrelated to the quality of its food.
This year, the Philippine Labor Department tagged Jollibee as among the major companies involved in illegal staff contracting, an industry practice to keep labor costs low that has been blasted by President Rodrigo Duterte, the firebrand leader who has a history of pressuring tycoons. The company said its labor practices are legal.
Meanwhile, Jollibee's online food delivery platform has been shut for months after the National Privacy Commission in May said its security features were weak and could compromise customers' personal data. Jollibee said in June it was fixing the problem, but technology issues are not new for the company. In 2014, IT trouble at the company disrupted its supply chain, forcing it to temporarily close 72 branches, which hurt sales.
Last year, Jollibee publicly apologized to a transgender woman who complained on Facebook of discrimination after she was told not to come to work because of her gender. Jollibee said the case was isolated and that the company does not tolerate discrimination.
So far, however, investors are on board with Tan Caktiong's global vision, which stands out among Southeast Asian food companies. At its annual shareholder meeting in June, Jollibee displayed a series of printed panels charting the company's spectacular growth from its humble beginnings 40 years ago.
After Tan Caktiong gave a briefing on the company's efforts to go global, shareholders stood up and praised the management for an excellent job, while one called for an ovation. After the meeting, stockholders were treated to Jollibee spaghetti and fried chicken.
But perhaps Jollibee's best treat for its investors is its share price, which has climbed by 8% to 273 pesos per share this year despite the falling equities market across Southeast Asia.
In an indication of investor confidence, Nomura Securities sees Jollibee's price-earnings ratio at 36.8 times for 2019, higher than the 18.1 average for Asian food service companies.
Tan Caktiong ended his speech by giving investors an upbeat assurance about where the company is heading: "I have never been more confident in the future of Jollibee Foods Corporation."