European Equities
11 Oct 2017 | By Ian Ormiston

Disruptive thinking

Everywhere you look, young companies are disrupting markets long dominated by incumbency.

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Everywhere you look, young companies are disrupting markets long dominated by incumbency. Whether it’s Netflix re-defining the television experience available to consumers, Amazon undercutting and stealing market share from high street retailers, Uber rapidly making strides in the mini-cab and taxi market, or Tesla challenging the petrol-burning tradition in the auto sector, change is afoot. And while we are in an era of evolution rather than invention, such evolution is arguably starker, more radical, and more disruptive to the status quo than any new creation could be.

Such disruption is widespread in Europe, and it is the region’s smaller companies that are leading the way. These businesses benefit from being flexible, dynamic, attractive destinations for talent, and are resolutely free of the bureaucracy and entrenched mediocrity that so often hampers their larger peers. They are perfectly equipped to take advantage of their larger counterparts’ flaws, too.

Indeed, by contrast, larger companies in Europe are hamstrung by heavy and rigid regulation, incumbency (the difficulty in getting rid of employees and upgrading) and having workforces equipped with incorrect or no-longer-relevant skillsets. Furthermore, such companies struggle to be nimble enough to keep up with the technological advancements that are rife in their business segments.


In the leisure industry, we invest in a German-listed Italian restaurant chain (you don’t find Italian restaurant chains in Italy, of course!), Vapiano, that prides itself on its fast and casual dining experience. Customers don’t need to book tables, the food and restaurant décor is of a consistently high standard – all dishes are prepared individually and in front of the customer – and as a result the business is busy taking market share from both lower quality stand-alone restaurants and larger chains which have lost their customer and quality focus. Founded just 15 years ago, Vapiano now has 180 restaurants in over 30 countries across five continents.


Elsewhere in the leisure industry, the hotel sector is a particularly fertile ground for would-be disruptors. Dalata, an Irish hotel group, is one such company busy making waves. With more than 60 hotels in the UK and Ireland, half of which are in Dublin, Dalata prides itself on competing on price without compromising on quality. Run by a highly experienced and savvy management team, the business consists of standardised three and four star hotels, all in city centre locations, and priced at highly competitive (and flexible) levels.

There is a big gap in the UK and Ireland between low end family-owned and run hotels and hostels, and high end corporate hotels. This is an area embraced by Dalata.

How are they disruptive? Well, they are managed to be full, not to be fancy and exclusive. Rooms are clean, comfortable and with an emphasis on the home comforts – excellent showers, comfortable bedding and so on – being provided without compromise. At the same time, though, there is a great attention to detail on cost, whether that’s on light bulbs or flooring or door fittings. It makes a huge difference. Dalata has imported booking and load management systems from the airline industry and, unlike many of its peers, is not a slave to online room vendors. As a result, its hotels boast occupancy rates well above industry levels.

Banking on technology Disruptors are also at play in the banking sector. Norway’s Skandiabanken is a fine example: the company broke away from Swedish Skandiabanken in 2015 and is now Scandinavia’s largest internet-based bank.

Online only and free from the legacy assets and challenges that so often afflict Europe’s banks, Skandiabanken is an interesting case in that it does not disrupt on price – in fact, it is middle of the road. However, its focus on a quality banking offering, the usability of its app and the level of its online experience, coupled with market-leading innovation when it comes to financial product-creation, means that it is taking market share from big incumbents, most notably the cumbersome and inefficient savings banks.


Finally, the car rental sector is another segment of the market that has long been dominated by the same old names. But companies such as Sixt are ripping up the rule book. The German business has caught its rivals such as Avis and Hertz by surprise; with a focus on the customer (rather than on volume), no queues and the best (and often newest) cars, its footprint has grown massively across Europe in the past few years. Indeed, its fleet has grown 25% in the past two years and it now has more than 200,000 cars.

Sixt is also the biggest player in the European car-sharing market, with its DriveNow service boasting over a million members. Meanwhile, its car leasing business is taking market share in an area traditionally monopolised by car dealerships.

Across the European smaller company universe, we are seeing countless examples of disruption such as these, and the opportunities that they provide; it is a trend that is breathing fresh life into the small cap space.