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IP Research Roundup: O’Reilly & US Auto Parts Retail Market Roundup

We've long been fascinated with the history of shareholder value creation by auto parts retailers like O'Reilly and Autozone. And also why Advance Auto Parts has struggled over the last five years. The US auto parts market faces a potential challenge from electric vehicles which could reshape its $400 billion landscape. Unlike internal combustion engine vehicles, EVs require significantly fewer parts and components like spark plugs, timing belts, and oil filters.

EV vehicles have far fewer components... the rate of parts needed will be slowing - Former Regional Director at O'Reilly Auto Parts

The top 10 retailers have grown from 30% to 53% market share over the last twenty years. With EVs currently under 1% of used car sales, the impact remains minimal, but the next decade could disrupt retailers reliant on high SKU volumes and frequent repairs.

Understanding the mechanics of the auto part aftermarket, supply chain, customer priorities, and competitive dynamics is important to anticipate how O’Reilly Auto Parts, Advance Auto Parts, and AutoZone can adapt. This IP Research Roundup compiles brief learnings to date including the industry structure, store economics, and competitive positioning. It can be read alongside the following:

ServiceNow: Shelfware & Pricing Structure

This interview with a ServiceNow Systems Integrator shares a perspective on why and how customers use the service relative to competitors and challenges the company faces:

Where I think ServiceNow struggles currently is the pricing of their product. Nearly all customers I speak with find ServiceNow overpriced in terms of license costs and are looking for ways to optimize those costs. - ServiceNow System Integrator

A significant portion of products are not in use after 1 year:

As I mentioned earlier, the estimate is around 50%, but that's not permanent. About a year after purchasing licenses, 50% is shelfware. However, two, three, or four years down the line, customers might start adopting more. As a service provider, we receive requests from customers who have had ServiceNow for a year or two, asking us to review their portfolio and advise on license adoption. We often guide them on adopting more, so it might not remain shelfware permanently, but at least a year down the line, it's about 50%. - ServiceNow System Integrator

Rolls-Royce: Aftermarket Pricing & Contract Margins

This interview with a Former President of Rolls-Royce explores the bargaining power and pricing dynamics between airframers, engine OEMs, and airlines for large and narrowbody aircraft. Engine pricing has increased over the last few years to recoup prior losses:

If we exclude the last couple of years, there has been a general price decrease from an engine manufacturer perspective, and commercials have typically worsened for engine manufacturers. In the large engine space, both GE and Rolls-Royce have battled for market share. However, in recent years, there has been a correction, with prices in the engine space increasing significantly due to OE material input costs, margin expectations, and aftermarket costs. Pricing to customers has increased significantly, partly to recoup losses from previous years and to reflect a higher cost base - Former President of Rolls-Royce

The interview explores how RR accounts for long-term service agreement contracts and how recent re-pricing has driven margin improvement recently:

How Rolls-Royce accounts for costs versus contract terms is crucial for overall margin and profitability. Some contract assumptions may no longer be valid, and removing these can improve margins. Generally, we've seen better margins in renegotiated contracts, with long-term benefits for Rolls-Royce through escalations in pricing, whether by selling more spare engines or services. - Former President of Rolls-Royce

This interview can be read alongside our prior work on CFM56 and other aero engine research:

Kneat: Life Sciences Validation Software Implementation

Kneat is a life sciences validation software used to validate systems, equipment and processes to be GMP & FDA compliant. An implementation engineer describes how Kneat gets embedded in pharma quality orgs, which leads to a >140% NRR:

it's a snowball effect. The more you do within Kneat, the more likely and obvious it will seem to start absorbing more processes into Kneat. Eventually, you can have everything in one system. The more you adopt Kneat, the more straightforward it seems to absorb more processes into it because it's easier for engineers. - Former Kneat Implementation Engineer

Validation is typically managed at the site level. Kneat could be used by hundreds of employees per site. Customers like Merck with multiple sites spend $2-3m a year:

If they're using it as an approval tool, execution tool, and archive, which is common, it depends on what documents you're putting into it. If you're putting GMP documents into it, then the people who execute those documents, like your C&Q team, engineering representatives, and quality reviewers, all need to be in Kneat. The more documentation you have in Kneat, the more people need licenses. For a big site where all departments use Kneat with GMP execution documents, that's hundreds of people needing licenses for a site. - Former Kneat Implementation Engineer

Wizz Air: Pricing Models & Route Defensibility

A former Senior Network Development Manager at Wizz Air sheds light on Wizz vs Ryanair pricing strategies and how they defend their market share:

I need more capacity, seats, and flights in the market. For example, on the Budapest to Barcelona route, Wizz Air operates 14 flights a week, and Ryanair also flies. The more seats and flights I have, the better my pricing position against my competitor. If I have 14 frequencies a week and my competitor has only three, I can schedule flights at the same times or close to theirs, offering discounts to attract customers. The remaining 11 flights not covered by my competition can be sold at full fare without discounts.I'm competing on only three out of 14 flights, while my competitor competes on 100% of their capacity. This is the pricing position versus relative market share. - Former Senior Network Development Manager at Wizz Air

Fever-Tree, RTDs, & C-Store Distribution

This interview explores FEVRs US c-store opportunity under Molson-Coors. One interesting stat is how fast spirit-based RTDs such as High Noon are growing. The growth in spirit-based RTDs may also be leading to a de-premiumization trend in spirits.

Five years ago, it took 20 brands to represent 95% of the business. In the world of spirit-based RTDs, there's a lot of competition. High Noon is a dominant player, but there's significant growth in this segment too. It's the biggest growing segment within spirits, along with tequila in the US. Tequila is growing at mid-single digits, whereas spirit-based pre-made cocktails are growing 15% to 20%. This growth is becoming a significant factor, decelerating the premiumization of spirits in the US because the cost per unit is lower, and the margins are lower. There's a depremiumization trend in the US spirits market, mainly due to the mix of spirit-based RTDs, which has taken on a life of its own. - Former VP at Reyes Beer Distributor

The interview goes on to explore how FEVR could launch a RTD and potential challenges distributing to c-stores. This can be read alongside:

IP Fieldwork Podcast: The Danaher Business System (Apple / Spotify)

This free IP Fieldwork podcast discusses our learnings from the last 5 years studying DBS and the various ways Danaher deploys its business system across the organisation. The podcast discusses this research roundup and can be read alongside the following:

  1. Danaher: DBS Office Structure & Policy Deployment: how the DBS office is structured to deploy DBS tools in Danaher operating companies 
  2. Danaher: DBS Office Operational Strategy: how the DBS deploys policies around the org, incentives for subsidiaries to listen and deploy DBS policies, and barriers deploying such a strategy in other companies  
  3. Danaher Business System: Batch to One Piece Flow Manufacturing: how DHR changes a manufacturing process from batch to one-piece flow post-acquisition 
  4. Danaher Business System: Kaizen Case Study at Pall: a case study of how Danaher runs a kaizen event at Pall
  5. Danaher Business System: PSP, Kaizen, & Six Sigma: we walk through how DHR deploys various tools include PSP, different kaizen events, and six sigma vs lean tools
  6. Danaher: Implementing DBS in the Sales Process: how Danaher deploys DBS policies to drive revenue, retention, and improve gross margin 
  7. Danaher Business System: Hach Sales Team Case Study: how Hach deployed daily management, action planning, and cascading targets in sales to drive growth 
  8. The Danaher Business System Mindset: how and why the DBS fosters a unique culture that is hard to replicate elsewhere
  9. Danaher, Beckman Coulter, & The DBS Machine: how Danaher deployed DBS at Beckman Coulter post-acquisition 
  10. Danaher's Culture, Pall Industrial, & Deploying DBS: why PSP tool is so important and how Pentair and Crane's ‘DBS-light’ system compares to Danaher.