Love this post and love the business model. The economics of spin studios are unbelievable. A few years ago, I looked pretty seriously at trying to open a couple of spin studios in the Boston area with a group of friends when the only option was a studio called Recycle (SoulCycle and Flywheel weren’t in Boston yet). While we didn’t ultimately see it through, it seems that an outrageous number of boutique chains have popped up since (e.g., HandleBar here in Harvard Square, Velo-City in Back Bay, B/Spoke, Pursuit Boston, etc). My understanding is that the only capital required is ~$2K per bike plus some relatively modest upgrades to a relatively small facility in which you can fit 40 or so bikes. A couple people I talked to suggested that spin studios reminded them of frozen yogurt chains — they tap into the health & wellness trend (spin more than fro-yo though..), have very low barriers to entry, and have very attractive unit economics.
Over time, I struggle to see how SoulCycle keeps their edge and manages to continue to convince customers to pay such high rates for each class. Your comments about instructor recruiting and training seem to be one key point of differentiation that may not be that easy to replicate. The real estate component seems critical too as rent expense is by far the largest expense — would be interesting to know what value Related adds there (Related is a large real estate investment & development firm that owns a stake in Equinox – so indirectly SoulCycle as well). It seems like they’ve managed alright so far — will be interesting to watch!
Had heard of MoveLoot but wasn’t familiar with the operating model. Interesting that they’ve taken the approach of owning their own trucks and building out an in-house logistics system to enable their business model and create barriers to entry. As Marco pointed out, there are some key differences vs. eBay’s model given the value they add through storage, logistics, quality inspection and facilitating higher quality product displays to buyers. While more capital intensive (and more operationally involved), I’m a big fan of the approach and value proposition.
This reminds me of a used car marketplace called Shift that was founded by a couple GSB grads a little while back that has also been growing fast. Seems that this operating model has real potential to solve the problem of selling bulkier items that are higher involvement than some other used goods that are simple to sell based on pictures or online descriptions alone.
Great post. I think Harry’s is incredibly interesting, even more so than Dollar Shave Club given what you described about vertical integration. I always thought part of the innovation here was the ability to disrupt large brands via low-cost viral marketing (in addition to direct-to-consumer sales). It would be really interesting to know how much Harry’s manufacturing costs on a unit basis differ from those of established players like Gillette given the difference in scale. Clearly there is money to be saved for the consumer by cutting out the distribution margin, but I wonder how much of this business model is about undercutting the massive markup that exists in this highly consolidated industry vs. the possibility of truly creating a lower-cost manufacturing operation.
It doesn’t fit with my argument that Chipotle has incredible business/operating model alignment, but I do think the outbreak of E. coli at a number of Chipotle restaurants is closely tied to the operating model. In order to source higher-quality, more humanely produced ingredients, Chipotle has had to go out to a much wider supplier base than traditional fast food players. My intuition tells me that given that they have a more complex supply chain (more small suppliers), Chipotle has struggled to identify the source of the problem. The larger, vertically integrated suppliers used by prominent fast food chains use more antibiotics and likely have more robust quality assurance / testing. As a result, they may be less likely to have these same issues and may be able to identify similar problems faster. Earlier this fall, Chipotle had to close 43 restaurants in the Northwest U.S. The news that this issue has now surfaced in Boston as well is alarming and has started to take a serious toll on same-store sales as well as Chipotle’s stock price.
The supply chain has also led to supply shortages at times — earlier this year, Chipotle wasn’t able to source enough pork to serve Carnitas at most restaurants on the East Coast and many locations across the country. One of Chipotle’s largest pork suppliers, Niman Ranch, was acquired by Perdue Farms, a massive vertically integrated conglomerate (with ~7% share of chickens in the U.S.) that I believe serves many fast food chains.
Thanks for the thoughtful comment. I do think the perception of Chipotle being healthier is a reality. They source their food from a range of smaller farms and farm associations that engage in much more humane farming techniques than the massive, vertically integrated farming operations that supply other fast food chains (e.g., Tyson Foods, Perdue Farms). They also source a lot of their produce locally so it is fresher. While this has clear benefits, it is a challenge operationally and Chipotle has had serious issues at times: (i) a shortage of pork that resulted in most Chipotle stores across the U.S. removing Carnitas from the menu for months and (ii) difficulty pin-pointing the recent E Coli outbreak that has been causing massive PR issues for Chipotle. Interestingly, one of Chipotle’s largest pork suppliers, Niman Ranch, was recently acquired by Perdue Farms — that trend could make the challenge even harder.
I think the question about simplicity is really interesting as well. What Chipotle has done well is marry an incredibly simple menu with a lot of room for customization, so they effectively have the operational benefits of simplicity with the value proposition associated with customization. I’m not familiar with LA restaurants you mention, but have seen a number of new, healthy food delivery concepts in San Francisco with simple, rotating menus (2-3 items/night) that aren’t customizable that have also had a great deal of success. I think there is probably room for concepts that make the process incredibly simple (1-2 choices delivered to your door in 10 minutes like Sprig, Spoonrocket, Munchery in SF) as well as fast food concepts that build customization into their operating processes – but it’s definitely very much up for debate!