Discount Gyms, Domino's, Pall & Bioprocessing, Universal & Warner Music, HashiCorp, Wayfair vs AMZN FBA

Content Published Last Week

1. Discount Gyms, Domino’s, & Hotelling’s Location Model

2. Pall, Cytiva & the Bioprocessing Manufacturing Process

3. Universal & Warner Music: New Artist Deals & Artist Development

4. HashiCorp: Sales & Marketing Strategy

5. Wayfair: CastleGate vs Amazon FBA Product-Market Fit

Discount Gyms, Domino’s, & Hotelling’s Location Model

This analysis is the culmination of years studying two business models: discount gyms and Domino’s.

Both of these models are explicitly ‘fortressing’ their markets. Fortressing or clustering a market is a strategy of building multiple stores within a single market. The fundamental idea is that proximity matters most to the customer; building stores closest to customers entrenches the company’s positioning and deters competitors from entering.

DPZ reports multiple benefits from fortressing:

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And Basic Fit and GYM similarly claim it's a crucial part of their strategy:

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This piqued our interest.

Why are these two models explicitly clustering stores? Why don't other retailers explicitly cluster?

When and why does clustering work?

And what are the risks?

This analysis surrounds one core question: how can we handicap the durability of long-term earning power for discount gyms / DPZ?

This question seems particularly interesting for discount gyms given GYM and BFIT are priced at <10x normalized FCF in an underpenetrated market. These valuations align with the common historical narrative that gyms are fad-like without durable earnings.

There is an old macroeconomic theory that can potentially help us understand the durability of discount gym earning power: Hotelling’s Location Model.

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Hotelling assumed two commoditised sellers operating in a linear market with stable demand along the line. By differentiating on location, all customers from A - B will visit Store 1 and customers from B - C will visit Store 2. Given all else is equal, customers care most about convenience and travel to the closest store.

This model seems to align closely with the discount gym market; a 2-player game where the price, offering, and unit cost is equal and the only differentiator is proximity. This can also be illustrated by a discount gym's customer utility function. Given all else is equal, would a customer be willing to save £2 per month but travel 20-mins longer in a round trip to and from the gym?

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In a game in which you can clearly isolate location as a differentiator, fortressing seems a logical strategy. But it clearly doesn't come without its risks. We use this spatial competition model and real-world examples of Pure Gym vs GYM to understand the nature of competition in discount gyms compared to pizza delivery and the risk to mature store economics.

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Pall, Cytiva & the Bioprocessing Manufacturing Process

This interview with a Former Pall VP with 30+ years biotech experience is the first in our series of work on DHR. We plan to explore the history of DHR’s acquisitions, DBS deployment in life sciences, and the current strategic positioning in bioprocessing. We start with the Pall acquisition.

In 2015, DHR acquired Pall for $13.6bn. In its biotech division, Pall generated ~$1bn in revenue in 2015 with ~90% recurring revenue and 30% from SUT. Before exploring Pall’s portfolio in more detail, this interview walks through the bioprocessing value chain and the shift from batch to continuous process manufacturing. We explore the barriers to adoption and the potential impact on consumable sales as manufacturing processes evolve:

In terms of consumables used in a continuous process, the filters, liquid portion, and chromatography resin remain the same. They could just be on a smaller scale because you can run for a longer amount of time. The single-use product category includes these items, as well as bag technology and plastic piping or tubing. However, these don't lend themselves to longevity in the process. Therefore, this part of the business could potentially be impacted because you would want something more durable. - Former VP at Pall

Pall is present across many steps in the biotech process. But each subprocess is not created equal; some tools and consumables are harder to replicate than others.

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For example, Cytiva has ~80% market share of chromatography resins.

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And, more impressively, it seems to have had this share for decades.

The groundwork was laid a long time ago. Cytiva has continued to maintain its market share, partly because it's ingrained in students and PhD candidates as the go-to product for success. It's not that simple, but they were first to market with a product that performed exceptionally well. Their ligands, which attach to the micro carriers, performed exceptionally well during the explosion of monoclonal antibodies, and they saturated the market due to their performance. I still remember the marketing manager from the 90s. She used to boast about how, at that time, there were maybe 40 approved biologics, and they were involved in 38 of the processes. That was her major marketing pitch. - Former VP at Pall

Why?

The beading technology is very difficult to replicate. Plus the biotech industry is pressed to meet product deadlines and is hesitant to test new solutions:

It's extremely challenging because you have to balance performance in terms of attracting the molecule to the bead, capacity - how much can you hold on a bead, and flow rate - how fast the chromatography process will be. Then, you also have to consider how many times it can be used, how easy it is to clean, etc. There are many factors involved, and no one has really nailed it. The next challenger, now part of Ecolab, is Purolite. They have a resin coming out that they believe can compete against Cytiva, but it will take decades before they gain significant market share. - Former VP at Pall

Given chromatography resins represent ~50% of a customer’s spend in the process, this seems like a moat in a significant market. We will be exploring just how durable Cytiva’s position is, Purolite’s new beading tech, and the extent of DHR’s pricing power in chromatography.

Pall’s products seem to have less of a structural advantage. Over the next month, we will be releasing more work on the different filtration systems in the process, Pall’s portfolio positioning, and Pall's synergies alongside Cytiva’s unique resins.

Universal & Warner Music: New Artist Deals & Artist Development

After publishing a breakdown of Spotify and the podcasting value chain, we're focusing back on the labels and how the relationship with artists is developing. This interview with a Former Regional CFO at Warner Music explores how signing and managing artists is evolving.

We've had to adapt to market conditions and the increased leverage artists now have. In the Latin market, there has been a shift from artists signing with traditional music labels or majors to becoming independent. To achieve this, they either sign with a distribution company or a management company that handles their distribution. Due to their increased leverage, we've had to adapt and, in most cases, reduce our share. - Former Regional CFO at Warner Music Group

Artists have benefited from increased negotiating leverage with labels:

A company's value is made up of its catalog and new releases. The fewer artists we sign, the less catalog we will have. That's why companies are now including mergers and acquisitions in their strategies. We look at an artist's catalog to see if it's profitable. It's a way to adapt to new market conditions." The question remains how this affects label bargaining power & negotiation tactics with DSPs as we have recently seen with UMG and TikTok. - Former Regional CFO at Warner Music Group

HashiCorp: Sales & Marketing Strategy

This interview with a Former Global Marketing Executive at HashiCorp explores the GTM strategy for Vault:

There's always money for security. No budget until it involves security, and suddenly, there's an extra million dollars or so. The risk is too great to ignore. This ties back to the business proposition. You can clearly demonstrate the dollar value of Vault, such as the potential cost per minute or even per second of a breach. The return on investment becomes much easier to justify compared to efficiency. - Former Global Marketing VP at HashiCorp

Wayfair: CastleGate vs Amazon FBA Product-Market Fit

One of Wayfair's main arguments to suppliers when it comes to CastleGate adoption, is that it increases sales volume for the respective SKU. However, given CastleGate's fee structure, the supplier would need to ensure a minimum volume sold on Wayfair to justify placing inventory of this same item into the CastleGate network.

We receive monthly emails from CastleGate, requesting us to send products that have sold well on Wayfair. They wouldn't suggest sending anything to CastleGate that hasn't sold or has sold very little on Wayfair. This ties back to the idea that we need to grow on the Wayfair side, so we have more options of what we can send and can send in larger quantities. - Current Wayfair Supplier

In this interview, a Wayfair supplier sheds light on what makes an item a good fit for CastleGate.