Content Published Last Week

1. Spotify Podcasting: Original Content Strategy

2. HelloFresh: US Meal Kit Market Dynamics and Growth Prospects

3. IMCD: Principal - Distributor Dynamics

4. Vitec Software: ABS Laundry Acquisition

5. AmSafe, HEICO, & Aerospace Aftermarket Distribution

6. Michelin: Tire Market, Technology & Vertical Integration

7. HashiCorp: License Change & Leadership

8. Less-Than-Truckload US Market: Agency Model

9. AvidXchange: AP Software & Payments Competition

MRO Europe in Amsterdam

As part of our work on the aerospace aftermarket, we're attending MRO Europe in Amsterdam next week. Do reply to this email if you're attending as an operator or investor - we'd love to connect. We plan on publishing multiple pieces of research unpacking the aftermarket in more detail this year.

Spotify Podcasting: Original Content Strategy

This interview with a Former Head of Podcasting at Spotify shares a history and outlook of the company’s original content strategy. Buying and incubating original content was the price to pay to win users from Apple:

The strategy was a combination of creating our own content, buying from the market, and bringing it back to us. For instance, if a popular podcast like Joe Budden's had a 70% Apple and 30% Spotify audience, and we bought it, we could rationalize that if we brought over 35% more people, and let's say we got to 70% share, the value of those users - assuming they retain and they might convert to Spotify premium users -the lifetime value of those users offsets the small delta of what we don't cover back. - Former Head of Podcasting at Spotify

Originals are effectively a marketing expense. After all, why else would users shift from Apple to SPOT. But is this a recurring marketing expense or fixed upfront? What happens to JRE when it expires in a year? JRE’s renewal price is likely not decreasing.

The interview walks through the different commercial models that SPOT uses with podcast hosts. Given SPOT is dialing back its original content expenditure, we explore how it can compete with YouTube, arguably the leading creator-focused platform:

To support fame, love, and money, they need a public record of performance, which isn't currently live. They have some engagement data built into the dashboards, but it's unclear how actionable it is. There are partner managers at other platforms who work with creators and categories. For instance, at YouTube, once you reach a certain follower count, you receive support to grow further. Spotify might need to trade production for creative services to support this kind of growth, not just financial resources. - Former Head of Podcasting at Spotify

This interview also highlights an interesting comparison between YouTube and Spotify. In return of posting on YouTube, creators give up control of monetising the inventory. YouTube determines a channel's inventory quality and matches it with advertiser demand. Given the fragmentation in audio, SPOT is yet to have a similar stranglehold on podcast inventory that it can control ad monetisation.

Spotify’s opportunity seems to lie in monetising podcasts via programmatic advertising. But there are many outstanding questions: will the likes of Rogan give up his host-read ads at $100+ CPMs for programmatic ads via SPOT? Would he even want brands marketing in such prime spots that he doesn't approve? Why is SPOT best placed to be the DSP over TTD for eg? Why are there no auctions in programmatic audio advertising today?

We plan to publish a piece of research next week on the podcasting advertising value chain exploring such questions, the state of audio programmatic, and SPOT’s positioning.

HelloFresh: US Meal Kit Market Dynamics and Growth Prospects

This interview with a Cofounder of Green Chef, a company acquired by HFG, shares multiple insights into the role of meal kit providers in the future of online grocery. Traditional Meal Kit offerings like Hello Fresh or Blue Apron are somewhat limited in its subscription meal recipe offering; customers can’t choose how many or what type of meals or ingredients they wish to buy.

On the other hand, a mature subscription provides HFG with the revenue visibility required to manage COGS and buy deep on ingredients a quarter ahead of demand. This is crucial to minimizing inventory.

In part, this interview explores how meal kit providers could increase flexibility of its offering whilst maintaining an attractive price point vs traditional grocers or takeouts. It seems a major operational supply chain challenge:

it's challenging is operational constraints that have to do with so when people order different volumes of the recipe kit, they have to be shipped in different size packages and it goes back to what you were saying cost, right? So if I'm having to set up new lines to pack things in different sizes, it is hard and it costs a lot of money. And then there's packaging cost and efficiency issues as well. - Cofounder of Green Chef, Hello Fresh

Aside from managing the supply chain, as Blue Apron discovered, the most important variable for meal kit providers is CAC. Maybe the only winners here are GOOG / Meta selling ads?

When I started at Green Chef, we paid $20 for a customer buying a $90 meal kit. Four years later, the same customer cost $100. The cost has only gone up, and the methods of customer acquisition have changed drastically. Initially, we relied heavily on Facebook, but now it's just a small component. There are many different platforms to leverage, and while the cost may have decreased slightly, it's more likely due to improved marketing strategies and the ability to invest in areas previously out of reach, such as podcasts and television. - Cofounder of Green Chef, Hello Fresh

Vitec Software: ABS Laundry Acquisition

Vitec Software is a Swedish VMS acquirer that has compounded earnings at over 25% per year in the last 5 years and its TSR rivals that of Constellation. Over the next quarter, we’re exploring the differences in Vitec’s operating model relative to Constellation Software.

This interview explores Vitec’s acquisition of ABS Laundry, one of its largest opcos. In 2021, ABS generated 20m in revenue with ~40% EBITA margins and was acquired for 100m EUR including the earn out in 2022. We dive into the sales process and Vitec’s M&A philosophy:

I was approached by my former colleague in December 2021, and things started moving in January. The entire transaction was completed in about five months, which was surprisingly quick. We had to fill a data room, which required substantial work. Vitec Software acted quickly and professionally, with a large team supporting their decisions and preparations…In my opinion, they are professional. They understand us and we understand them because we share the same values and culture. This was an advantage.

We plan to publish research on Vitec vs Constellation operating philosophy in months to come.

IMCD: Principal - Distributor Dynamics

The ongoing consolidation of specialty chemical manufacturers is impacting distributors like IMCD. The greater the consolidation, the greater the OEM bargaining power and higher the risk of OEMs switching distributors. This impacts product availability at the distributor level, directly impacting their profitability.

The stickiness only started to change when the chemical industry began consolidating. There were instances where companies got new owners and had to let go of one of their distributors. This posed a threat to the distributors but they remained sticky because of what they were offering to the principal, something that the principal increasingly couldn't do or didn't want to do. - Former Managing Director at IMCD

In this interview, a former managing director at IMCD sheds light on the principal-distributor dynamics in the specialty chemicals market.

AmSafe, HEICO, & Aerospace Aftermarket Distribution

This interview with an aerospace veteran of over 40 years of aftermarket experience explores AmSafe’s monopoly and HEICO / Wencor distribution integration challenges.

It seems AmSafe has ~95% market share in aerospace seatbelts:

But commercially, 95% of lap belts are predominantly AmSafe. AmSafe faces some competition in the flight attendant and pilot harnesses market, with companies like Schroth in Germany.

A seat belt also proves very difficult to PMA because it's certified to the seat OEM not the airframe. The different permutations across seat OEMs and difficult testing requirements mean its expensive and cumbersome to get FAA approval.

you can't replace an AmSafe seatbelt with a PMA due to the extensive testing required by the 16G guidelines. Additionally, the seatbelt is PMA to the seat manufacturer. An airline with a dozen or more different types of seat manufacturers on an aircraft would have to PMA every different seat for that seatbelt. On the other hand, if I replace a fuel filter for the 737, I could sell to anyone who owns a 737.

The interview also explores why HEI may face challenges integrating Wencor distribution and the role of Boeing and Airbus in the aftermarket.

Michelin: Tire Market, Technology & Vertical Integration

Michelin is one of the leading tire OEMs with a long history and a global brand. A Former Senior Vice President at Michelin explores its technological advantages and drivers of premium pricing relative to competitors. The executive describes how Michelin's vertically integrated supply chain gives them an advantage over competitors.

The second challenge in the 90s was to improve tire architecture, and for the last 20 years, the challenge has been the raw materials. It's through the raw materials that you can make a difference. Michelin's structure and the fact that they design and test their own products internally is a significant advantage. I recall discussions with financial analysts who pointed out that Michelin has a high capital employed. Of course, when you build a plant to make synthetic rubber in Indonesia, it costs $550 million. This is something that Continental doesn't have. - A Former Senior Vice President at Michelin

HashiCorp: License Change & Leadership

HashiCorp recently changed its license from open source to enterprise licenses. This was a controversial decision that has sparked some criticism in the developer community. This former Regional Director explains how the presence of companies offering products based on the OS code like Env0 affected the sales process.

They might propose alternatives like Env0, which might not be feasible, but just bringing it up can reduce the price. This is because most software sales reps and HashiCorp leadership are not strong negotiators. For instance, we had a Canadian bank, running Vault, needing to renew their license. The full price was a high seven-figure deal. They proposed to pay us $300,000. I insisted on the full price of eight million. - Former Regional Director, HashiCorp

Less-Than-Truckload US Market: Agency Model

LTL operators either own the assets like ODFL or run an agency model like Mainfreight US. Non-asset-based LTLs tend to maximize the volume of outbound freight handed to the carrier whereas LTLs running assets focus on optimizing the lane density:

For the 3PL, volume is more important. They're not concerned with individual lanes as they're not running the operation. The carrier cares about that. - Former VP, Yellow

In this interview, a Former VP at Yellow sheds light on the dynamics between different types of LTL models in the US, the life cycle of each model, why Yellow failed, and durable sources of competitive advantage.

AvidXchange: AP Software & Payments Competition

AvidXchange is a Accounts Payable automation company that targets the mid-market in the United States. The former SVP of Marketing at competitor Tipalti compares the strengths and weaknesses of both offerings.

I believe Tipalti falls short in supplier onboarding compared to AvidXchange. However, AvidXchange's customer service is not as good. Their features and functionalities are almost identical, with a few minor differences. The significant advantage of Tipalti is that they are a licensed money transmitter and can handle international transactions. That's where they outshine Avid. On the other hand, AvidXchange has a more user-friendly invoice upload process and a slightly better workflow.