Costco UK & EU Case Study, DHR & Bioprocessing, Copart Germany, Transdigm, HEICO, TSLA, B&B

Content Published Last Week

1. ENTERPRISE: Costco UK & Europe: History, Economics, and Store Opportunity

2. Danaher & Sartorius: Promising Yield

3. Copart: Dynamics of the German Market

4. TransDigm, HEICO, & the Aircraft & Parts Lifecycle

5. Tesla Energy Business Model

6. Bergman & Beving: Spin-offs, Value Chain & New Management

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Costco UK & Europe: History, Economics, and Store Opportunity

Over the last month, we’ve spent 5+ hours interviewing Former leaders at Costco who were responsible for running the UK and European business.

From 2012-22, COST’s international store base has grown at 5.8% CAGR with Japan, Taiwan, and Korea leading drivers. The UK store base has grown 2.8% per year with only 1 new store opened since 2016. In Europe, COST has only opened 7 stores since 2010.

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The population density and GDP per capita across the UK and Western Europe suggests COST has a far greater store opportunity than 36 stores.

This analysis shares our learnings from hours of interviews with COST leaders and highlights the history of Costco UK, why the UK is a unique market, and the outlook for European expansion.

Danaher & Sartorius: Promising Yield

In an earlier interview, a former Pall exec explained potential drivers of the demand slowdown in bioprocessing. This week, a former Sartorius executive explores the strengths and weaknesses of Sartorius and how customers select suppliers:

We need to work hard to get the research and development team to use our products. You give them sample stock and they try things. Once a product is included in a dossier or SOP, it's challenging to change. The purchasing department would like to make their lives easier and work closely with vendors to ensure proper stock management and prevent production stoppages. The bonus the purchasing department gets is based on an annual saving. However, the process team finds it difficult to change products due to validation and documentation requirements. (...) Once validated, change is difficult. The industry is very conservative, and change control documentation can be costly and time-consuming. - Former Head of Sales at Sartorius Stedim Biotech

Once scientists use and trust products, switching costs are high. To further raise the barriers to entry for smaller suppliers, Danaher and Sartorius may adapt their pricing model to further cement their positioning:

In Western markets, companies are focusing on making things more efficient. I can't just make 20 batches, each batch has a consumable worth of around $1.5 million to $2 million. They want to make fewer batches but be more productive. The number of consumables may drop, but profitability will still be up there. Sartorius and Cytiva will charge more per liter and have different sales models. They were already considering the idea of guaranteeing yields and charging based on the revenue generated. If you can make eight grams per liter, and I promise you eight grams, based on the cell lines, then you pay me the revenue based on what you make. - Former Head of Sales at Sartorius Stedim Biotech

This interview further explores the potential moat around scaled bioprocessing players like DHR and Sartorius and the inherent switching costs and barriers to entry within the market.

Copart: Dynamics of the German Market

In the German market, Copart operates with a slightly different model: instead of working with the insurer to salvage the vehicle, it serves the claimant. This changes the underlying dynamics, incentives, and overall economics of the business relative to the US. This interview with a Director of one of the largest auto and third-party liability insurers explains the intricacies of the German market and the core challenges for Copart’s growth:

From my perspective, there are three things. First, many companies might not see a clear differentiator between Copart and other companies, like CARTV. Are there really higher salvage values with Copart? Maybe sometimes, but not every time. So they continue with a two or three provider strategy, with Copart being one of them but as a new player and maybe they don't have a USP. Second, the whole process is very dependent on the decision of the customer and the claimant. - Director of German insurer working with CPRT

TransDigm, HEICO, & the Aircraft & Parts Lifecycle

A Former VP at TransDigm explores the options airline customers have when repairing parts and replacing components across OEM, DER, PMA, and USM parts:

USM fits into a similar space as DER repairs because it's a third party or a smaller operator that doesn't have contracts with the other supply chain. They use USM to return the unit to flight-worthy status at a lower cost than procuring all the components from other supply chain sources. PMA and OEM are interchangeable, but the pedigree of USM parts is different. USM may have a part that could fail in the next cycle. It is used serviceable material. The pedigree of that part is different. The sweet spot for PMA and OEM parts is when they are used as components or sub-assemblies in larger systems, either by airlines with their own shops, like Lufthansa or Delta, or by third parties. - Former VP at TransDigm

The interview further explores how airlines and lessors are adapting to PMA parts and how it may impact both TDG and HEI.

Tesla Energy Business Model

In the United States, Tesla has the lion's share of the home energy storage market. This is due to the quality of the products and the competitive pricing. Both advantages seem to stem from Tesla's relentless focus on optimizing their manufacturing process:

In the United States, they (Tesla) have the lion's share of the home energy storage market, with 70% to 80% of battery systems in homes being Powerwalls. This is because it's easy, more affordable, and the power and energy you get for the price is still the best in class. Powerwall 3 will only improve this further. - Former Manager at TSLA Energy

This interview dives into TSLA’s home energy business model in more detail and lays out the opportunity for Powerwall, Megapack, and strategic of TSLA Energy’s division overall.

Bergman & Beving: Spin-offs, Value Chain & New Management

We’ve covered Bergman & Beving in various other interviews and pieces of analysis.

1. B&B Enterprise Profile

2. Interview on Luna and B2B Distribution

3. IP Podcast on B&B

4. IP Analysis on B&B vs Lagercrantz

In this interview, a Former Senior Exec of of B&B. who worked closely with the Borjesson family pioneering the spins, discusses the history of the company since its spin-offs of Addtech and Lagercrantz in 2001, the difficulties the company experienced and the direction the company is heading in today:

The landscape has changed as fragmented reseller functions have consolidated in both the industrial and building construction sectors. Due to this consolidation, chains like Bauhaus, Alligo, and Ahlsell have developed their central warehouses, squeezing the wholesaler function and turning them into more of a tail supplier. - Former Senior Executive at B&B