Content Published Last Week

1. IP Company Profile: Essentra PLC

2. Amazon Fresh, Whole Foods, & US Online Grocery

3. AppFolio: SMB Customer Sales Process

4. Stevanato Group: Pharmaceutical Containers & Delivery Industry Overview

5. Moncler, Hermès, & Scaling Luxury Brands

6. Naked Wines: Inventory Overstock & Turnaround

Redeye Serial Acquirer Event 2024

Redeye's 4th Serial Acquirers conference takes place on March 5-6, 2024 in Stockholm. The event includes 20 private and public serial acquirer companies presenting and is a great chance to meet 1x1 with companies and like-minded investors. This has proven to be one of our favourite events of the year and is worth the time for anyone interested in companies conducting accretive M&A as a core part of its strategy. For 2024, 20 seats are now remaining. Visit Redeye.se to see all the presenting companies and contact eddie.palmgren @ redeye.se if you’re interested in attending.

Essentra PLC: Company Learning Journey

Essentra is a UK-listed B2B component distributor and manufacturer with a complicated history. Essentra’s core subsidiaries were historically part of Bunzl and then spun out and listed under Filtrona PLC before being rebranded to Essentra PLC. Last year, Essentra sold its filters and packaging assets to focus solely on manufacturing and distributing components. Our historical interest in B2B distributors such as Fastenal, Diploma, and Watsco led us to study Essentra.

Essentra’s core products are protection and finishing plastic components for a range of industries and applications from auto engines to toasters and other electronics. The plastic products such as end caps, valve plugs, locks, or hinges enable manufacturers to transport, protect, and display their products safely throughout the production, distribution, and sales process.

For example, an automotive engine OEM will use plastic injection moulded caps and valves to plug certain end points of the engine to prevent dirt or contamination during the production and transportation process.

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The core of our primary research focused on understanding the mission criticality and stickiness of ESNT’s products to end customers.

This Company Learning Journey walks through examples of ESNT’s standard, configured, and custom products and the potential lock-in with customers. We also explore how Essentra’s sales and marketing strategy has evolved and compare the quality of the business with other distributors we’ve studied such as Diploma, Fastenal, and RS Group.

ESNT manufactures low-value, high-volume products which can be purchased elsewhere if the customer really wishes to go through the hassle. Its product mix is similar to Fastenal, more specialised than RS, and less differentiated than Diploma. However, ~70% of ESNT revenue seems fairly sticky. Essentra’s switching cost dynamics are similar to FAST rather than DPLM; its products are sticky not because there are no alternatives, but that the math of switching doesn’t work. For Essentra customers, the cost of switching out such low-priced plastic products isn’t worth the retooling and testing. For Fastenal customers, given FAST vending machines are on a customer’s site, the cost savings of ordering elsewhere isn’t worth the downtime. - IP Company Profile

ESNT trades at ~10x NTM underlying earning power excluding the one-off ERP integration costs. It's a worthwhile case study for anyone who owns or interested in B2B distributors.

Amazon Fresh, Whole Foods, & US Online Grocery

In 2021, AMZN internally planned for over 1,000 Amazon Fresh grocery stores across the US. Today, it has <50. To outsiders, AMZN’s grocery strategy can seem confusing; it owns Whole Foods, which is still predominantly offline and operates standalone within the group, and launched Amazon Fresh, its mass market online and offline grocery brand. Both entities operate standalone and offer different merchandise from separate warehouses and stores.

This interview walks through the history of Amazon Fresh pre and post-pandemic and the potential challenges the brand has faced in scaling its footprint.

The challenges were different in both cases. In both scenarios, I would say inventory was the main issue, but for different reasons. In the context of Whole Foods, inventory availability and the persistent problem of out-of-stock items were probably the most challenging aspects from a P&L perspective. The second issue was the delivery cost and the inability to scale due to various factors, such as the lack of sophistication around routing, highly variable demand which was hard to predict, and the incomplete build-out of Amazon's own fulfillment network which necessitated reliance on third parties. All these factors contributed to high delivery costs. We were primarily focused on inventory issues, or what we called "item not found" or out-of-stock issues, and delivery costs. We spent most of our time trying to reduce these two metrics. - Former Head of Launch Management at Amazon Fresh

AppFolio: SMB Customer Sales Process

We’re listening to Mark Leonard and studying AppFolio in detail this quarter. We have primary research planned on both the SMB and enterprise GTM strategy, customer references, how Yardi, Entrata, and Buildium plan to compete, and Appfolio’s Investment Management product.

This first interview covers the history of APPF’s GTM strategy onboarding 50-2000 unit property managers and how it won share mainly from Yardi.

Our strategy was to provide an easy-to-use, mobile responsive platform. We started as a mobile responsive platform, unlike others who had to convert their existing systems, which can be clunky and limiting. We aimed to be the best supported and easiest software to use, and it worked really well. Yardi was our number one competitor. Yes, I enjoyed competing against Yardi. While their accounting platform was strong, their end user experience was poor due to their antiquated system. The property managers and leasing agents found it clunky. Our system was a breath of fresh air for them, with easy navigation and fewer steps to complete tasks. - Former Sales Executive at AppFolio

Next week we will cover the enterprise GTM process and challenges for APPF moving upmarket.

Stevanato Group: Pharmaceutical Containers & Delivery Industry Overview

Stevanato is an Italian manufacturer of glass containers & delivery systems to the Pharma industry. The company listed in 2021 and is still family owned-and-operated. In this interview, a Former Product Management Executive at Stevanato explores the family leadership, industry structure and the complexities around the business.

About 10 years ago, Corning acquired the cane business from Gerresheimer. They didn't make this purchase to sell glass cane, which has little value. They wanted to sell syringes and other high-value products. However, they are still primarily selling vials and haven't gained much credibility in the syringe market. Despite being a large company with significant investments in this space and hiring many skilled individuals, they haven't been able to break up the oligopoly. - Former Executive at Stevanato

The executive explained how Stevanato managed to enter this oligopolistic market.

It's quite simple. When Stevanato entered this space, the only major player was Becton Dickinson (BD), who held an 80% market share. They were acting quite arrogantly, like a large, immovable entity. Their other competitors were SCHOTT from Switzerland and Gerresheimer from Germany. Stevanato cleverly positioned themselves as the flexible, innovative Italians. The market responded well to this because they were tired of working with BD, but had no other choice. The German and Swiss companies weren't as flexible. To be specific, even for things like batch sizes, if you approached SCHOTT or Gerresheimer, you'd have to buy a minimum of half a million syringes. This isn't feasible for a small company in Boston that only needs a few hundred syringes. - Former Executive at Stevanato

Such oligopolistic structure contributes to Stevanato ~20% EBIT margin and the interview explores how durable such earning power is for the company.

Moncler, Hermès, & Scaling Luxury Brands

Risk mitigation is at the core of Moncler's go-to-market strategy. Collections are tested in wholesale before being pushed into retail. This ensures inventory is optimally managed when collections hit the retail market.

It means that retail doesn't take risks. Retail will rely on the wholesale experience to launch its production. We're not like a Gucci that will create or sell them. Retails, when they discover the collection, it's like, how are we going to sell that? With Moncler, we always have a hard core, we have more good surprises, and it's a reassuring brand. - Former Area Manager, Moncler

In this interview, a Former Area Manager at Moncler sheds light on the company's go-to-market strategy and Moncler's philosophy relative to other luxury brands such as Hermes.

Naked Wines: Inventory Overstock & Turnaround

Naked Wines, the vertically integrated DTC wine retailer, is trading at a £40m market cap with a book value of over £100m. Given the ~2-year production lead time for wine, planning decisions during COVID are still impacting the business. H1 24 inventory was £160m with management planning ~£50m cash release from the unwinding of inventory over the next 18 months.

This interview with a Former Naked Wines Director explores the challenges in offloading inventory in today’s environment and explores whether there are structural or temporary issues with WINE’s business model:

Naked Wines' business model is credible. Customers trust the pricing, savings, and value. The company's appeal persists despite the unrealistic retail price reductions happening these days. If Naked Wines can resolve their supply inventory issues and rebase the business, I see potential for growth. In Australia, smaller players are gradually chipping away at Naked Wines' market share. However, unless Naked Wines makes a significant mistake, no one will be able to topple them. Just a week or two ago, Naked Wines held their first-ever sale in Australia, after 12 years in the business, offering 50% off. This indicates that they're finally realizing the need to convert inventory into cash, something they should have done a long time ago. I believe the UK branch still has potential. My concern lies with the US branch. I'm not close enough to that business to provide much insight, but it seems they never fully grasped the company ethos and have struggled to communicate their story effectively to customers. - Former Director, Naked Wines Australia

Whether the company can turn on sales growth after inventory unwinds is a key question that is also explored during the interview.