Boeing vs TransDigm, Adyen, Brunello Cucinelli, AMZN, Marlowe

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Content Published Last Week

1. Boeing, TransDigm, & a History of Aftermarket Distribution

2. Brunello Cucinelli: Philosophy, Customer Profile & Growth

3. Adyen: Pricing & Competition

4. Amazon.com Structural Advantages vs Traditional Retail

5. Marlowe: M&A, Post-Acquisition Process & Management

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Boeing, TransDigm, & a History of Aftermarket Distribution

This interview with a Former Boeing and Aviall Director, who has 35+ years experience combined at the two firms, is a fascinating insight into the history of aftermarket distribution and the bargaining power dynamic between the airframer and TransDigm. Aviall is a leading aerospace parts and components distributor owned by Boeing. TransDigm is a large supplier of parts via Aviall.

TDG’s bull case is that it effectively owns mini aftermarket monopolies on older platforms. The low-cost-high-benefit nature of TDG’s parts drive high switching costs. A focused strategy and TDG's operational excellence enables it to earn supernormal profits.

This interview shares a history of internal projects at Boeing aiming to in-source various TDG parts. Boeing's 'Insourcing' initiative dates back to McNerney’s tenure in 2012:

In 2012 or 2014, Jim McNerney had a conversation with Wall Street on an earnings call. He said that TransDigm was this horrible company that was jacking up prices and creating chaos in the industry, and that began an ongoing tit-for-tat between the companies…No one at Boeing ever said this, but what I observed was that Boeing had this basically unspoken attitude that our suppliers are a necessary evil. We have to deal with them but they're always trying to leverage us, so we've got to beat them up. Every time we negotiated contracts, it always had to be a war. There will never be any common ground - Former Boeing and Aviall Director

Boeing set aside a budget to manufacture TDG parts internally:

Where the idea came from of this specific battery was Boeing had said we need to take TransDigm out of the picture. So, being an engineering company, their idea was let's reverse engineer TransDigm parts. They had this project called Insourcing, which came to be named something else later. Let's identify these egregiously priced TransDigm parts, and we will make a Boeing version that we can offer the customer at a lower price. - Former Boeing and Aviall Director

We explore examples of parts that were successfully insourced. For example, an expensive TDG battery:

It was a TransDigm battery with a unique technology that customers didn't like. The exclusive distributor of that battery was Satair, so Airbus. I went to the Boeing people and said, everything about this is wrong. It’s bad for Boeing. Let’s partner with Saft, who’s on every other Boeing airplane, and get a new battery. It will be cheaper, it will have double the life, and the customers will love it. In the two or three years since I left and it was approved – one of my last acts was getting that across the line – I think every major 777 operator has converted their fleet, and now all production aircraft come off the line with the Saft system. - Former Boeing and Aviall Director

Although various projects succeeded, the Insourcing project didn’t last. This interview explores why the initiative ultimately failed and how there are deeper cultural elements that ingrain TDG’s advantage in the aerospace aftermarket.

This interview is the first of upcoming coverage of TDG and HEI and the aerospace aftermarket over the next 6 months. We believe the operating practices of the aftermarket are fairly opaque due to consolidated reporting from OEM’s and a highly fragmented, private supplier base and component catalog.

We plan to publish various pieces of research on our Enterprise Tier unpacking the aftermarket and PMA business.

Brunello Cucinelli: Philosophy, Customer Profile & Growth

Brunello Cucinelli has consistently compounded revenue at low double-digits since 2016. The luxury brand named after its founder has a loyal ultra-high net worth customer base passionate about its Humanistic Capitalism values. This former Marketing Director at the company describes the impact of Brunello’s ethos on customer loyalty:

"I definitely think it had a positive impact on the customers’ experience with the brand. It is part of the romance of the story and creates that emotional connection. The story and concept of what Brunello has created in the headquarters of Solomeo create a desire to want to see it themselves. Many of his clients and customers interested in the area go to see it, and then they're die-hard fans. They see it is beautiful and feel so great about investing in a company treating people the way he does. - Former Marketing Director, Brunello Cucinelli

Although Brunello is a high-end luxury brand, its margins are far lower than its largest competitors. Over time, one question is whether Brunello Cucinelli could expand its current 14-15% EBIT margins. The most comparable brand to Brunello Cucinelli, Loro Piana, earned over 20% EBITDA margins prior to the 2013 LVMH acquisition. At the time, Loro Piana was also at a smaller scale to Brunello Cucinelli today. Moncler has also consistently earned 30% operating margins for years.

However, how would 30%+ operating margins align with Brunello’s philosophy? If one believes 30%+ margins are not aligned with Humanistic Capitalism, revenue growth becomes a more important driver of future returns.

On this point, Brunello has recently expanded into new categories like eyewear and fragrances. This interview explores context around how Brunello thinks about expanding product categories:

"The conversation about eyewear and perfume has been going on for 15 years. In my first year there, those were all the questions I asked. As I’m sure you’ve seen, Brunello is extremely conservative in his growth, which I think is why they’ve remained so healthy and had such consistent growth. In my seven years there, I never saw less than a double-digit quarterly growth. It was slow and steady and has always been healthy and consistent. - Former Marketing Director, Brunello Cucinelli

"I think eyewear and fragrance are things our customers have asked for repeatedly. At least that’s what I heard from them. But Brunello takes his time and waits for the right moment and opportunity. For fragrance specifically, that’s something I know he is extremely sensitive about, so I’m surprised they launched eyewear and fragrance in such a short time. - Former Marketing Director, Brunello Cucinelli

Adyen’s Advantage

The fact that Adyen is born from a single platform gives it a competitive advantage versus legacy players. A single platform enables a higher rate of innovation compared to legacy infrastructure. A Former Adyen Director explores this idea further:

If you look at Adyen, Stripe and Checkout, the fact that they are built from a single platform, they have a huge competitive advantage, versus a lot of the legacy players. It has proven to be a lot easier to either local payment methods or to jump on new trends, like network tokens. It makes their rate of innovation a lot higher than those legacy players…Adyen is winning a lot of deals from those legacy players that used to then provide ecommerce transactions to those retailers or even the instore piece. I expect the market share for Adyen to grow really heavily through those, or in favor of Adyen against those local legacy players where they can win a lot of volume from them. - Former Adyen Account Executive

Although Adyen has an advantage relative to legacy providers, it’s not so clear what the sustainable advantage is compared to new competitors such as Stripe or Checkout.com.

Amazon.com Structural Advantages vs Traditional Retail

In this audio-only analysis, we explore Amazon.com's structural advantages versus traditional retailers. This piece builds on our recent work on our Enterprise (see image below) that highlights the unit economics of Amazon.com and the potential unit cost savings over the next 5 years as it insources more units through its logistics network.

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Marlowe: M&A, Post-Acquisition Process & Management

This interview dives into Marlowe Plc's acquisition of Ellis Whittam, a former Sales Director at Ellis Whittam dives deeper into the challenges, opportunities and management of Marlowe's GRC division:

I believe a large part of Andy Gunson and Gavin Snell's new remit is to examine the council's acquisitions. For the most part, they have made good acquisitions, but there have been a few less successful ones. When you've made around 70 acquisitions, it's expected that some will not be as successful, especially when they were purchased by lads only two years out of university. To be fair, they didn't pay high multiples for them, but that's how it goes. - Former Ellis Whittam Director