Content Published Last Week

1. TransDigm: Managing Opcos through COVID

2. Costco Australia & China Growth

3. HEICO, PMA History, and Pricing vs OEM

4. Tempur Sealy: Mattress Firm Acquisition, Supply Chain & Cost Synergies

5. IP Podcast: Costco UK & Europe Store Opportunity

TransDigm Pricing Power

A pandemic is arguably the perfect scenario to test TDG pricing power. This interview with a Former President at TDG, who operated a BU through COVID, explores how TDG cut costs and increased pricing during such market turmoil:

I put a stop to all of that and started to draw back. I went through and restructured the business. From a TransDigm perspective, I think they were surprised at how well we did at cutting costs out of that business. You can't cut enough cost out when you have 60% EBITDA margins; there's no way you can cut costs fast enough. But we kept over 50% EBITDA that year, and I think they were really surprised at how we did it and what we did because we still maintained great on-time delivery, brought cost of our quality down, and did a bunch of other things. - Former President at TDG

Costco Australia and China

In prior IP interviews on COST International, executives estimated that Australia could reach Canada’s store count and sales volume. This interview with a Former SVP of Costco explores the history of Costco scaling Australia relative to other markets:

Firstly, Australia has 24 million people compared to Canada's 39 million. The population is concentrated in the five major cities, which makes it more efficient in terms of distribution. In Melbourne, you could have four to five buildings, and in Sydney, maybe six in the greater Sydney metro market. You could have two in South Australia, two or three on the West Coast, and in Brisbane, two or three as well. Perhaps some on the Gold Coast…The properties there are more expensive, and the planning process is more difficult, similar to the UK. Most markets there have a prohibition on selling food and apparel in the same building. You can have a bulky goods store selling furniture and electronics, but no food is allowed. Supermarkets are allowed, but it's just the idiosyncrasies of their planning laws. They are somewhat anti-big box. - Former SVP at Costco

The interview further explores the feel and opportunity of Costco China.

HEI pricing vs OEM

This interview with a Former HEI & Wencor President explores the history of PMA’s and the pricing dynamics vs OEM’s. One interesting insight is that when a PMA is approved, and successful (note: some PMA’s don’t gain traction), it produces annuity-like revenue. PMA’s can achieve ~50% market share vs OEM’s due to the 30-40% price savings.

More importantly, once airlines have shifted to the PMA part, it’s sticky. The part and price is in the airline’s system and is difficult to revert to the OEM part. Airline procurement staff are also paid upon multi-year savings which favours PMA’s over OEM parts:

Once the airline invests the time and money on engineering to approve a new part and they reset the baseline price for that part in their system, they can't just revert to the higher price next year. This is because those buyers are measured on year-over-year savings and the baseline is reset every year. That's why many of the airline contracts have decreasing pricing components. So when I sign the deal, it's at 100 million. Next year, it needs to be 97 million. You have to figure out how to achieve that. Generally, unless there's a quality escape or a supply chain issue, once you get a PMA, you keep it. - Former President HEI & Wencor President

This interview also touches on the risk to HEI and how airlines may interpret the Wencor deal.

Tempur Sealy & Mattress Firm

In an interview with the former VP of Global Sourcing of Tempur Sealy, the executive walks through the industry supply chain and how the $4B Mattress Firm acquisition could enable significant cost synergies. Tempur Sealy has announced they expect over $100m in cost savings to come from the combination of Tempur Sealy and Mattress Firm on $1.3B in pro forma “Adjusted EBITDA”:

I definitely agree with the statement that it will allow for more efficiency, and I think it comes in a couple of different places. One would be if the customer was a small customer with just a few orders per plant because you have plants all across the country. Even if it was a smaller nationwide customer, it's probably not as much of a benefit. But when you're talking about Mattress Firm, being the largest customer with 2,500 stores, the efficiencies gained by having those orders come in a predictable manner are significant. When you're the biggest customer, you tend to act like the biggest customer and make certain demands that cause the supplier - which in the current world is Tempur Sealy - to jump through a lot of hoops. - Former VP, Tempur Sealy

IP Podcast: Costco UK & Europe Store Opportunity

A short podcast explaining our research approach to Costco's international opportunity underpinning the recent Enterprise Research Report on the Costco UK and Europe. We discuss:

1. How the UK is a unique market for warehouse clubs globally

2. Planning and building consent in UK and EU vs US

3. Why COST UK margins are lower than other markets

4. Why EMEA growth for Costco is slower than expected

5. Outlook on potential store count in EU / UK for 2030

Listen to the podcast on Spotify, Apple, or add our feed to your podcast player of choice here.