Content Published Last Week

1. Amazon Robotics: Sparrow & Warehouse Cost Efficiencies

2. Carvana Operations: Vehicle Flow through the Network

3. Intuitive Surgical: A Buyer's Perspective

4. Litigation Funding: In-House Counsel Perspective

5. Five Below: Store Conversion ROI, Stocking & Comparable Sales

6. Overstock.com vs Wayfair: Product Flow through the Network

7. Designing, Approving, and Selling PMAs

8. XPEL: Architectural Film Opportunity

9. Yelp: From SMB to Enterprise Clients

Amazon Robotics: Sparrow & Warehouse Cost Efficiencies

Last quarter, we published research on how a parcel flows through AMZN network from inbound sorting to AMZN-owned FCs or through UPS or USPSS networks to end customers. Given AMZN is insourcing much of the middle and last mile, this helps us understand how much variable cost per parcel could be saved as volume moves from UPS to AMZN.

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This interview with a Former leader of Amazon Robotics explores the economics inside a fulfillment center and how AMZN robotics reduces variable cost per parcel:

Among all the robotic products and programs that Amazon has rolled out, Kiva has been the most significant. In a traditional Amazon warehouse, or any warehouse for that matter, around 60% to 70% of the costs are tied up in pick and pack operations. Roughly 50% to 60% of that cost is attributed to walking - the pickers moving from one shelf to another. Therefore, approximately 50% of your warehouse labor costs are consumed just by walking during the pick and pack operations. Kiva was able to eliminate the majority of that cost, providing a significant cost benefit for Amazon. - Former AMZN Robotics leader

The interview goes on to explore how Sparrow may further reduce variable cost per parcel inside the warehouse:

Currently, if you look at the costs within a warehouse, about 10% to 15% of the variable cost per unit is strictly associated with picking an item. This is the most obvious use case for Sparrow. - Former AMZN Robotics leader

Carvana Operations: Vehicle Flow through the Network

Carvana and CarMax turn their inventory 33% quicker than the average independent used car dealer. This in turn leads to lower depreciation per car, a cost that can be passed on to customers in the form of lower retail prices, while maintaining the unit economics.

Your average dealer typically likes to hold onto 60 days' worth of inventory. Most of these dealers are on a floor plan, meaning they have to make a payment on the car at 30 days, and then the car has to be paid off at 60 days. I would imagine that for many of these dealers, their cycle of days or turn rate would be even longer if they weren't, in many cases, taking their cars to auction on the 60th day to sell them. - Former Director of Inspection and Reconditioning

In this interview, a Former Director of Inspection and Reconditioning at Carvana details how a used car flows through the Carvana system.

Intuitive Surgical: A Buyer's Perspective

In this interview, we explore the perspective of a large hospital buyer running a robotic surgery program. This executive runs a program that counts 16 Da Vinci robots used in 10 different surgical specialties:

"It used to be that Intuitive would approach the surgeons, but now the surgeons are coming to us. This shift is partly due to the fact that residents are being trained on it during their fellowships. When they graduate, they look for hospitals that have the necessary equipment. The same applies to Orthopedics, specifically for the Mako robot used in knee surgeries. Surgeons will only go to a hospital that has a Mako robot because that's the technology they learned. We've had to purchase a couple of Makos to accommodate these surgeons. - Current System Robotic Surgery Director

According to the executive, the dynamic has shifted from Intuitive convincing surgeons to adopt robotic surgery to hospital buyers driving the sale. Intuitive has since built its organization to be the hospital's partner; tools like the Intuitive Hub and Intuitive's training team are significant investments that new entrants will need to match in the hopes of challenging ISRG:

They are very important. Intuitive provides us with an online portal that keeps us updated on everything happening with every robot. This is very valuable to us. They also have the Genesis team that conducts staff training at no cost. They evaluate our program to provide suggestions for improvement and assist with inventory management. They constantly organize various programs that people, especially surgeons, can attend. I'm planning to attend their 360 conference next week with a few of my executives. I believe that any other company would need to offer similar services.- Current System Robotic Surgery Director

While Medtronic and Johnson & Johnson have existing relationships with hospitals, the executive goes on to explore exactly how much competitors will need to undercut Intuitive in order to consider switching.

Litigation Funding: In-House Counsel Perspective

This interview with a leader of an in-house counsel of a Fortune 500 company explores how a corporation uses litigation finance. The company has received bids from Burford, Fortress, and explores how funders compete. The biggest challenge to GCs adopting litigation finance seems to be the framing around the cost of funding relative to the parent’s WACC:

Over the past 20 years, we have consistently generated EBIT and cash because we evaluate our defenses and claims conservatively, which results in over-provisioning. This is not a mistake, but a sign of prudence. Our claim assessments tend to be conservative, and while we don't win all of them, we often outperform our own internal assessments. This is an ideal situation for a funder and a CFO to neutralize the cost impact of a legal department. However, the challenge lies in the fact that each funder has their own personality. Our portfolio is a mix of cases, some of which are technically complex and dependent on expert determinations. Some have geographically challenging elements due to claims pending in exotic jurisdictions or courts. Some are straightforward but too small to fund individually, though they can be bundled together. Despite our 20-year documented history, I've been unable to convince a funder to take a risk that aligns with our weighted average cost of capital. If they can't get near the WACC, it's not worth it - General Counsel of Fortune 500 Company

Five Below: Store Conversion ROI, Stocking & Comparable Sales

In the last 5 years, Five Below, the US discount retailer, has doubled its store base and operating income. In an effort to grow comparable store sales further, the company is converting its footprint to the Five Beyond store in-store concept. In this interview with a former District Manager, we discuss the store conversion process and potential ROI per conversion:

The Plus Up was only in the Five Beyond area, the rest of the store remained untouched. It was a two-day process where we closed down the back of the store, removed the old fixtures, and installed new ones. We had a contractor come in to put up new signs and lights, build the fixtures, and do some painting. But it was really just beyond the two finger walls. The rest of the store didn't get remodeled. - Former District Manager, FIVE

The executive highlighted potential limitations to Five Below's ability to reach its $3m revenue per store goals arising from its inventory management strategy:

"They've been working on a new program to address this for about two years now. However, as per my conversation with another district manager last week, it's still not operational. This is particularly problematic for candy, given the number of SKUs. If the system says you have 12 of an item and you have none, the store can't adjust the inventory to zero. This prevents the replenishment team at the head office from allocating more of that candy bar or whatever the item may be. - Former District Manager, FIVE

The interview goes on to explain how FIVE may calculate SSS growth and other metrics to manage its earnings guidance rather than focusing on durable earnings growth.

Overstock vs Wayfair: Product Flow through the Network

Given the higher return rates on Overstock vs Wayfair CastleGate, suppliers end up selling their products to Overstock at a higher wholesale price than to Wayfair.

Let's assume the standard price for everyone is $1,000. We typically mark up 15% for Overstock to account returns, so it's $1,150. For Wayfair, we account for a 7% Castlegate cost, so it's $1,070. - Wayfair and Overstock Supplier

In this interview, a Wayfair and Overstock supplier sheds light on how a unit flows through the Overstock system and how it compares to Wayfair.

Designing, Approving, and Selling PMAs

This interview with a leader of PMA Shop walks through how a PMA company chooses, designs, approves, and sells PMAs in the aftermarket. PMAs fascinate us as they can effectively become an aftermarket annuity for as long as the aircraft platform is in use. For non-critical, consumable or rotable parts, OEMs typically don’t reduce prices to combat PMA adoption. The biggest challenge for non-critical PMAs is adoption by the airline; Delta requires a $10k saving per year per part:

Most airlines look for a minimum of 30% savings over their current cost, or some, like Delta, have a $10,000 threshold. If the part is not going to save them at least X dollars, they won't even bother. $10,000 a year on the part

This interview explores in more detail why PMAs are attractive, when they go wrong, and challenges driving PMA organic growth.

XPEL: Architectural Film

In the last month, XPEL has seen its share price decline 35% after a short report from Culper Research and TSLA potentially insourcing PPF. Before this news, we conducted an interview with a Sales & Marketing executive at Sun Stoppers, one of XPEL's biggest partners. The interview discussed the potential opportunity for XPEL in residential/commercial film.

"The real money in flat glass, apart from the temporary boost from security film, is in retail. In September 2022, we had $28,000 in flat glass estimates. Fast forward to the same month in 2022, we had $330,000 in estimates, with the majority being for homes. This increase is due to the shift from office work to home offices. - Sales & Marketing Executive at Sun Stoppers, XPEL Installer

The executive argues the opportunity for XPEL in architectural film is significant and the labor dynamics makes this a much more attractive business for installers.

Automotive tinting is much harder. You have to shrink the film, make it fit to the curved surface, and install it in a vehicle that you're crammed into. I can train a flat glass installer in one to two weeks, but it takes me months to train an automotive tint installer. So, when the trade is harder, you typically pay those guys more. I can pay someone a minimal pay structure on flat glass. So yes, there's absolutely more profitability in residential and commercial, even on the labor side, the film cost side, and the overhead side. - Sales & Marketing Executive at Sun Stoppers, XPEL Installer

The interview further explores how XPEL can capitalize on the opportunity in such a significant adjacent market and the potential challenges.

Yelp: From SMB to Enterprise Clients

Yelp's added value to SMBs is different than for large enterprise businesses: For SMBs, it's all about the quality of the reviews - as they attract traffic - whereas large enterprise clients see the value in the existing traffic on the platform.

Yelp could be seen as offering a more intimate personal search experience, where you can really learn about a restaurant. However, our studies have shown that national chains don't really need profile pages. The experience at a McDonald's on Main Street is likely to be the same as the one on Broad Street. We conducted a study with Walmart and found that having a profile page made no difference. If you're a national chain, you get what you get. People don't go to McDonald's for the dining experience, they go there to get food quickly. - Former Director of Enterprise Sales at Yelp

In this interview, a Former Director of Enterprise Sales at Yelp explains what drove the company to focus on large enterprise clients, how this segment uses the platform differently, and how Yelp caters to both MB and Enterprise customer segments.