GYM, Danaher Cytiva Consumables, Lifco, Waters Corp, Terravest, Domino's, GoEasy, PRKS, EVO

Content Published Last Week

1. IP RESEARCH: The Gym Group: Risk from Anytime Fitness, ènergie, & Franchise Chains

2. ènergie Fitness Franchise vs UK Discount Gyms

3. Danaher: Cytiva, HyClone, & Cell Culture Sales

4. Lifco AB: Dental Division History and Org Structure

5. Waters Corp, Thermo Fisher, & Analytical Lab Instruments: A Customer's Perspective

6. TerraVest Industries: MaXfield Group Acquisition

7. Domino's Pizza Poland & the Polish Pizza Delivery Market

8. GoEasy: Subprime Lending Data Advantage

9. United Parks & Resorts: Theme Parks Hotels Opportunity

10. Evolution Gaming: Crypto Player Behaviour & Payments Flow

UK Discount Gyms vs Franchise Gyms

We've been studying discount gyms for the last few months. One conclusion from our work is that being overbuilt by a competitor is arguably the biggest risk to a box retail format that relies on customer proximity. Being overbuilt is when an entrant builds a site closer to customers of the incumbent’s existing sites. Given gym members mainly care about location, all else equal, this causes members of the existing gym to churn and join the closer gym.

The risk of being overbuilt typically comes from a new, smaller format. One that didn’t exist when the company was building out its store estate. A small coffee hatch at the bottom of the office building rather than on the high street coffee shop, for example. For UK discount gyms, such risk may stem from smaller franchise gyms like ènergie and Anytime Fitness.

Both formats have units under half the sqft of discounters to reduce the equity outlay required by franchisees. Anytime Fitness and ènergie have ~190 and ~67 UK units, respectively. ènergie closed ~14 in 2022 whereas Anytime continues to add 10-15 per year. Anytime’s average size is ~3.5k sqft compared to 6.5k at ènergie.

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We’ve interviewed franchisees and enquired about a franchise at ènergie and Anytime Fitness to understand its unit economics and threat to discounters. A positive sign for The Gym Group is the damage it inflicts on franchise chains when it opens a site nearby:

If PureGym and The Gym Group were to enter the market after us, it could have a significant impact. It could greatly damage our business. Over six months, membership could drop to 1,000. We could easily lose half of our members. For instance, I owned a gym that I sold about a year before PureGym moved in. At the time, I had 2,500 members in a gym that was just under 7,000 square feet. The landlord took over and they're currently at around 1,200 or 1,300 members. The situation was difficult because PureGym opened a facility three times the size just 300 feet away. It was more prominently located, making it a better option. - Former ènergie Fitness Director and Franchisee

But this doesn't necessarily mean discounters are not at risk from models like Anytime Fitness. This IP analysis shares our learnings around the threat of being overbuilt and the target mature gym economics of franchise competitors to the Gym Group.

Danaher: Cytiva, HyClone, & Cell Culture Sales

As part of our ongoing DHR research coverage, we move down the bioprocessing value chain to focus on upstream and chromatography media and buffer consumables:

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This interview with a Former Cytiva Sales Specialist breaks down the different consumables DHR sells throughout the bioprocessing value chain. The industry seems to interchangeably use media, buffer, and resins for bioprocessing consumables:

Essentially, everything can be considered as a buffer. A buffer is the liquid that is inside everything, akin to water in orange juice or blood. So, everything eventually comes down to being a buffer. This applies to what goes inside the chromatography, it needs to be a buffer. Even in the case of cell culture media, which is like orange juice, 90% is water and 10% are the chemicals that make that particular buffer. - Former VP of Sales at Cytiva

Cytiva’s HyClone portfolio is focused on upstream cell culture media and buffer consumables in production and purification and is a significant driver of Cytiva’s consumable sales:

HyClone is involved in the media production that goes into the bioreactor, but also in all of the buffers that are going to be used in between growing the cells and getting a final product. Because everything needs buffers. Purification, exchange, charge change, even packing, involves a buffer. - Former VP of Sales at Cytiva

This interview goes on to explore how Cytiva differentiates HyClone, the growth in dual-sourcing, and Cytiva’s cultural challenges merging with Pall.

Lifco AB: Dental Division History and Org Structure

In 1998, Carl Bennet took Lifco AB public before taking it private again in 2001. Bennet believed the public market didn’t understand the group. He then sold its commoditised healthcare business and focused on dental distribution. Lifco was reshaped and listed again in 2014. Interestingly, Lagercrantz had similar hiccups in its early days. Maybe there is a lesson here that not all great serial acquirers have such a smooth ride in the early days. It takes time to find its niche.

Lifco's dental division started with a merger between Nordenta and DAB Dental to form a leading distributor across the Nordics. Over the last 20 years, Lifco has shifted from distribution to acquire dental OEMs with proprietary technology. Its consumables mix has shifted from 30% to 70% of revenue. Since the late 1990s, Dental EBITA margins have grown from ~7% to over 20% today.

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This interview explores the history of Lifco Dental and how the group’s decentralization philosophy is deployed throughout the division.

Waters Corp, Thermo Fisher, & Analytical Lab Instruments: A Customer's Perspective

Given the similar product characteristics of analytical lab instruments from Waters and Thermo Fisher, service and customer support drive customer purchasing decisions:

As a service company, it's critical for us to offer services for many years without needing to frequently change our equipment. Hence, reliability and support are vital to us. More broadly, application and technical support are very important. In Belgium, at least, Waters leads in this aspect. We know that when we purchase equipment, we'll receive support for the installation, as well as ongoing technical and application support. The service contract they offer is also significant. Knowing that if an issue arises, someone can be onsite within 24 to 48 hours is critical for us. - R&D and Innovation Director at Quality Assistance

In this interview, an R&D and Innovation Director at Quality Assistance shares his perspective on the analytical lab instruments market and the main differences between leading players.

TerraVest

TerraVest Industries is an acquirer of companies active in heating, gas storage & transportation. The stock has compounded at 27% over the past decade, driven mainly by accretive M&A. In this interview, an executive who sold his company to TerraVest in 2018 discusses the MaXfield business and the experience of selling to TerraVest.

What they [TerraVest] brought to the table were their operations in Eastern Canada and the US, which also manufacture pressure vessels. When building pressure vessels, like we were doing, anywhere from 60% to 75% of the product cost is the material. If you have substantial funds and can leverage buying, you can save a significant amount. We used to buy our steel from Algoma in Western Canada. However, if you can purchase internationally and buy three times the amount of steel, you can save considerably. They've done a good job leveraging that. - Former President at MaXfield Group

Domino's Pizza Poland & the Polish Pizza Delivery Market

This interview with a Former Director of Domino's Pizza Poland shares the history of the brand in Poland and the challenges getting to scale.

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Although Poland seems a ripe market for Domino's, ~20% of DP Poland stores are still unprofitable after 14 years of operations:

One of the issues was the location. In the beginning, in Warsaw, the stores were opened too close to each other. We had to share delivery zones between two stores when one store could have managed it. These were the mistakes we made at the beginning. After three years, we closed or relocated four or five stores. When we reached 20 stores, we decided to close some of them. - Former Director at DP Poland

DP Poland's new management team and recent acquisition seem to be slowly driving incremental returns:

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This interview goes on to explore DP's challenges driving profitability in Poland and how the pizza market compares with US and UK.

GoEasy: Subprime Lending Data Advantage

How could AI and machine learning tools impact subprime loan underwriting? And how may this widen or narrow the moat of incumbents with years of accumulated data?

Indeed, it is largely based on historical payment information to Upstart. During some of our Databricks projects, I suggested discarding some old data due to the effort required to correct it. Despite it constituting only 5% of our data, the suggestion was not well-received. All past data is deemed crucial. - former VP of engineering at Upstart

In this interview, a former VP of engineering at Upstart sheds light on the company's AI-based operating model and explains how important past accumulated data is in predicting subprime loan performance.

United Parks & Resorts: Theme Parks Hotels Opportunity

United Parks & Resorts, formerly known as SeaWorld Entertainment, is building its first hotel in Orlando. To understand the potential revenue opportunities, a Marketing Director at Cedars Entertainment describes the incremental economics of adding hotel rooms:

From a Cedar Fair perspective, when a customer stays at my hotel and books a ticket, as opposed to just booking a ticket, that customer generates three times more revenue for the company. There is a lot of potential for additional revenue. Consider a family of five who are already buying their $90 tickets. Suddenly, they're also paying a $375 room rate, likely eating breakfast there, using the spa, and so on. - Marketing Director at Cedars Entertainment

PRKS is currently sharing the economics with affiliated hotels. By capturing this new revenue pool, it can monetize a relatively slow growing visitors number at higher rates.

Evolution Gaming: Crypto Player Behaviour & Payments Flow

Last week, we published an analysis of our work on the potential risks within Evolution Gaming's Asia business. The work focuses on understanding how GGR is generated, paid, and collected throughout the Asia iGaming value chain and highlights the importance of blockchain and crypto. Although crypto is a small % of actual bets placed, our research suggests a significant portion of Asia and unregulated GGR relies on tether and other cryptocurrency to facilitate payments. We believe this is a significant risk embedded within EVOs unregulated business that is worth exploring for long-term investors.

In this interview, a Former CEO for a popular crypto casino brand walks us through player and operator behaviour:

I predict that the GGR will be slightly lower than it currently is. This is because, during a bull run, a lot of money is generated by the player, which they reinvest to attract more players. However, when a crypto collapse occurs, they will feel the impact. I apologize for the harsh words, but they are cushioned by the influx of new players. If they had maintained the same number of players, their revenue would drop significantly. - Former CEO of Crypto Operator