Oisix (TSE: 3182), Japan’s “online Whole Foods to realize a rich dietary life in families.” – H.E.R.O. Innovators Insights from CEO Kohei Takashima | H.E.R.O. HeartWare | 3 September

Oisix (TSE: 3182), Japan’s “online Whole Foods to realize a rich dietary life in families.” – H.E.R.O. Innovators Insights from CEO Kohei Takashima | H.E.R.O. HeartWare | 3 September

What’s the toughest and the last frontier of ecommerce?

Perishable fresh food is the unconquered territory where nearly all online players are loss-making. It’s the anti-book curse for EC players. Book are where it all started for Amazon. Books never spoil and are simple to ship and handle. The Alchemist, one of the bestselling books of all time, is the same whether you buy it at your local bookstore or on Books and non-perishable products are homogeneous, easy-to-handle, and can be shipped in a box using the same scalable logistics and fulfillment infrastructure.

Different from traditional EC, fresh food EC has much higher logistics requirements both in shorter delivery time and end-to-end temperature-controlled logistics to ensure product quality. The harsh unit economics result in low margins. The equation of Amazon’s compellingness edge in providing convenience to the customer seems to break down for fresh food. Convenience and low price are not enough. Importantly, people did not understand where their fresh food was being sourced from, and without the trust equity, recurring sales and scalability are difficult. Amazon tried AmazonFresh since 2007 for 10 years before deciding to acquire Whole Foods, which had an appealing story about where their food originated, thereby transforming the convenience proposition into a credible experience for customers and giving Amazon a built-in demand it had lacked in fresh food and predictable volume for its grocery infrastructure.

Kohei Takashima’s sense of mission, perseverance and ingenuity in building possibly the world’s only profitable online business focused on fresh organic vegetables with regular home deliver service on a subscription business model generating stable recurring income is an inspiring story with unique innovation insights for investors and entrepreneurs.

Founded by CEO Takashima in 2000 and listed in 2013, Oisix ra daichi Inc (“ORD”) (TSE: 3182) is Japan’s ‘online Whole Foods’, the No. 1 online retailer with regular home delivery service “Oisix Club” of organic produce (eg organic vegetables, agricultural products), additive free processed foods & ingredients (eg salads, private-brand seasonings, mayonnaise, zero-sugar vegetable juice) and “KitOisix” meal kits (eg pre-prepared ingredients that can be ready in 20 minutes with cumulative shipments at over 11 million) supported by a subscription-based business model with 311k subscribers (111k subscribers in FY2015) under 3 merged brands: Oisix with ~180k subscribers; 43-year-history Daichi wo Mamoru Kai (“DWMK” 大地を守る会) with ~47k subscribers; and 31-year-history Radish Boya with 84k subscribers. After the acquisition of the #3 player DWMK which was completed in Oct 2017 and the #2 player Radish Boya in Feb 2018, ORD has become the clear runaway category leader with no other single large competitor in Japan. ORD commands an estimated market share of 40% and a large network of over 2,700 contracted farmers. ORD also possesses its own fulfillment platform of three temperature-controlled logistics centers, food processing/manufacturing facilities, and delivery network/facilities. ORD also operates food stores and outlets with 120 ‘shop-in-shop’ sites and a kindergarten wholesale business with 290 participating kindergartens. In addition, ORD offers support marketing platform and fulfillment platform solutions to companies (eg ISETAN DOOR, an EC site for department store giant Isetan Mitsukoshi) for repeat sales, website user interface/user experience enhancements, new online customer acquisitions, and know-how on omni-channel retailing, as well as grocery and online shopping consultancy, and B2C temperature-controlled food logistics services. ORD started the “Salad Oisix for office” in May 2014 to target the corporate demand. ORD also had a partnership with Sumitomo Life’s ‘Vitality’ health-improving insurance policy, offering up to 25% discounts of healthy food to ‘Vitality’ policyholders.

Supported by serving its growing loyal subscriber fan base, Oisix has generated a 134%, 76% and 131% absolute increase in sales, operating profit and EBITDA in the recent 3 years to US$425m, US$12.2m, US$20.5m respectively for its latest 12 months results on a ROE of 12.8%, propelling a 160% increase market value over the past three years to US$453m. On 13 August 2018, Oisix announced its 1Q (April – June) results in which sales jumped 75.5% yoy while operating profit rapidly expanded 4.3 times to 610 million yen as compared with the same period last year. The operating income margin improved from 1.5% to 3.6% in the same period last year. The Oisix business expanded profitably as profitability improved by improving the cost ratio and raising the unit price of orders, as well as the successful acquisition of the number of regular home delivery service members, contributing to a substantial increase in profit.

CEO Takashima commented on their corporate philosophy: “We want to eat delicious and healthy food without hassles. Oisix ra daichi Inc. was established to meet customers’ demands for easy access to delicious and healthy food. In June 2000, we at Oisix, launched our business featuring only 20 different types of vegetables. Then we started a search throughout the country for safe, healthy, and delicious food products. Our concept was to only supply ‘products that food producers would be comfortable giving to their own children.’ Since then, we have been delivering food products that are carefully selected in terms of safety, nutritional value, price, and taste to support our customers’ daily diets. We now sell more than 4,000 products, including meat, fish, daily food products, prepared dishes, sweets, and alcoholic beverages, as well as fresh fruit and vegetables. It was not easy to persuade farmers to sell their products to us when we first started out, but we now have partnerships with approximately 2,700 top-class producers throughout the country. There are a lot of things our Company cannot or will not do. No matter what the sales potential of a product is, we will not sell any food which the producers of that food would be reluctant to eat themselves, simply to boost our own sales. We do not keep stocks of most of our products simply to guarantee the delivery of fresh fruit and vegetables to our customers. For this reason, we deliver as soon as we receive your order. Our aim for our customers is to deliver food produced by carefully selected food producers from all over the country in optimal condition in terms of taste and safety. We also bring a smile to our customers’ dinner tables by helping them enjoy a delicious range of food at home. We are committed to making every effort to help more and more customers enjoy a happier and more varied diet.”

CEO Takashima added emphatically on the importance of a sense of mission in what they do: “Supporting a happy eating habit of people is really hard work and I realize that there are more tasks to know along the way. First of all, it is important to convince yourself. if you have something that you care about with your heart dearly, you will do it even if it is 100 times hard. If you do not care about the work with your heart, even if the market potential is very big, you will not do it well. It is very important for me that what we are is being required by society. We feel a sense of mission at will when we do it better for society. A feeling of mission that ‘I have no choice but to do our best’. Thinking about the value that something must be done. From the beginning it is very different from the feeling like ‘Where is my profit?’ Whether it is socially necessary or not is very important. Do you want to climb a mountain or are you having fun of climbing a mountain? Do you want to reach the summit and see the scenery, or do you just want to climb the slope? In the past, the summit was the purpose, the slope was a means, but I came to think that it might be the other way around. Perhaps, it may be the purpose of going up the slope (laugh). We are appreciated every day by our customers and producers, so I think that it is an environment where motivation is easy to maintain for the better or worse. I feel very rewarding about the process of creating a new service and for it to be accepted it in the world. It is paradoxical, but in order to grow, do not think about growth. Growth is a means to win. What we want is people who want to do something nice to the world. Our growth will be to make our dining table at home happier, to realize a rich dietary life in families, and to improve the living standard of farming producers who are working hard. The more obsessed with work, the better you can make the world directly. What we are most proud of is to be able to balance customers’ safety with business continuity and growth of producers.”

Oisix also devised its EC site so that customers can do shopping efficiently without stress. Compared with Amazon, the characteristics of Oisix’s customers are the high number of items purchased of about 15 to 20 items at a time and the high frequency of purchase weekly or every other week. Most EC transactions comprise two to four items, which buyers find through targeted search. But shoppers tend to browse fresh grocery, and an order can average 10 to 50 goods. To cater to this different way of shopping, even Amazon designed a separate standalone website for AmazonFresh as Amazon’s website was not well suited for how people shop for food. CEO Takashima said, “Oisix designed the ability to pre-store items that you purchase each time you visit the site. Of course, if unnecessary items are included, you can delete them, and conversely, if there is something that is missing, you can add them freely. By fully utilizing the personalization features unique to the Internet, it reduces annoyance”. When asked how they are using data analytics to gain a competitive edge, CEO Takashima said, “Utilization value changes according to how effective use of limited shopping time changes, and we boost the conversion rate to regular home delivery with high repeat rate and loyalty. We do purchasing analysis of good customers to recommend new products to another customer. My set saves you the trouble of finding what you buy every time, making it easier for you to spend your free time in the time to discover new products. A recommendation that analyzes purchasing patterns of good customers and presents recommendations to people with similar tastes also encourages customers to meet new products. If you like the items, you can expect to buy them on the next purchase. Ultimately, the goal is not data analysis, but to make customer experiences and the environment better.”

Interestingly, AmazonFresh Japan launched fresh grocery delivery in April 2017 and has built a similar offering to Oisix, playing on its strength of delivering convenience, but without the organic focus as it faced the supply bottleneck in convincing older generation Japanese organic farmers into signing contracts. Growing loyal subscribers continue to value Oisix’s focus on quality, resulting in sticky revenue. As a result, when Amazon Fresh was launched in Japan in April 2017, Oisix share price initially corrected 13.5% from 1,206 yen to 1,042 yen in September 2017 before rebounding and compounding to 3,155 yen presently as it continues to deliver good growth in subscribers and profitability.

The sale of Radish Boya by giant NTT DoCoMo to Oisix represents that having tangible resources and money is not enough to build a profitable online fresh organic produce delivery service business. NTT DoCoMo had paid 6.9 billion yen for Radish Boya in 2012 and sold it to Oisix for 1 billion yen in Feb 2018. In fiscal 2017, Radish Boya achieved 19.8 billion yen (US$177m) in revenues and 15 million yen (US$134k) in operating income, but had an accumulated negative earnings of 2.855 billion yen (US$25.6m). When NTT DoCoMo acquired Radish Boya in 2012, it was building its new “dMarket” ecosystem, a web portal where users can get a variety of things like books, clothes, and food, and DoCoMo wanted to leveraged upon its user base as a new sales channel for just about everything. It is also important to note that online meal kit company Blue Apron (NYSE: APRN) was not profitable at the operating profit or EBITDA level since the beginning. The integration of Radish Boya into Oisix is also a tipping point in the industry as Oisix becomes the single largest player in the niche industry. CEO Takashima thinks large companies like Amazon, 7-Eleven and Aeon entering the grocery home delivery business could even benefit Oisix. For example, Lawson, Japan’s 3rd largest convenience chain, carries the KitOisix products in its Natural Lawson stores and its online portal, “Lawson Fresh”. CEO Takashima added, “There are no other large companies so far in the organic field. Oisix is firmly raising the share here and I will make an environment that it is hard for Amazon and others to develop business other than by partnering with us.” Facing the supply constraints in the niche organic field, it would be far quicker and easier for Amazon to buy out Oisix like it did for Whole Foods in the US.

When asked about why he decided to focus on online retail for organic food and his early entrepreneurship days, CEO Takashima shared he was partly influenced by his childhood and also by his experiences at the University of Tokyo and McKinsey: “I was born in Kanagawa Prefecture in 1973. My father works for a major telecommunication company, my mother is a housewife, and I have four siblings. When I was a child, I fought with asthma, the pain I could not breathe was frustrating. My father, who finally became vice president, has made many relocations due to work, twice during my kindergarten, three times in elementary school. A transfer student tends to be subject to bullying. When I moved to Osaka during kindergarten, I could not understand the teacher’s Osaka dialect and could not act as instructed. In elementary school, because my body was weak, but my grades was good, I was subject to bullying. I do not mind crying because I have good grades and I do not like being defeated even if I get bullied. I was taken to the children’s hospital frequently by my mother, but rather than treating my sickness at a hospital, I thought that it would be better to exercise and train, even though I am in pain.” The childhood experience strengthened his resolve that having a healthy body through exercise and a healthy diet is important. CEO Takashima added, “I graduated from the University of Tokyo. While attending the University of Tokyo graduate school, I launched a coffee café company with friends and a company that experimented with different internet-related businesses, such as selling unsold airline tickets cheaply on the net, e-commerce of silver accessories, live broadcasting of events eg coal mine summit in Akita prefecture, an event to relay clubs of Okinawa and Tokyo via the Internet. However, I cannot do the same thing twice because there is no enthusiasm for the project.”

“After I completed my two-year master’s program at the Department of Information Engineering, I was employed by McKinsey. I was one of the core members of the e-commerce group. While proposing a new business using the internet to the client, I was thinking about what I would like to do if I were one of them. What came up was perishable vegetables, which was the most difficult. The food distribution network in Japan has long supply chain, buying vegetables from farmers need to go through agricultural cooperatives, wholesaler, secondary wholesaler, and grocery store. By using IT you can shorten such intermediate distribution. When people go to the supermarket, everyone pick up things and see the labels on the reverse side. However, it is not clear whether the vegetable is safe and good to eat. Information cannot be made transparent by making use of the characteristics of the Internet without knowing in what circumstances the foods that are ordinarily lined up in the shop are being produced by whom. The needs for foods are different depending on family composition etc. If you use the function of the Internet, you can provide products and services that better meet individual needs. While studying Amazon as a successful example of the net business, we think it is useless to pursue only the cheapness and convenience of the products. If we do it, we compete with the quality of the item. Selling food indispensable for everyday life has its own existential meaning. From the bottom of my heart, I decided to deal only with items that can be said to be ‘delicious’. That is the origin of the name of Oisix. Although I was bathed with hard words, ‘Why are you leaving McKinsey and selling fruit and vegetables, can you have more logical thinking?’ There were no EC success stories in perishable organic produce in the United States. Although I started thinking that importing a successful business model is not fun, fresh vegetable distribution is more difficult than I imagined. First of all, even if I explained to the farmers how much I would like to sell vegetables on the Internet, they could not understand it at all. In addition, even if somehow we contracted with the farmer and secured the supplier, the management of quality and delivery date was greatly different depending on the type of vegetables. Since the expiration date varies depending on how you transport and store vegetables, it is difficult to organize logistics. We have never experienced agriculture or food retail at all. Therefore, it was necessary to learn how to handle vegetables from scratch. Shortly after I started my business in June 2000, the Internet bubble collapsed. It was a serious problem with fundraising. However, if I was late by another year, my entrepreneurial spirit might have lagged behind due to the bad market conditions. If I knew, I might not have started (laugh).”

When asked what was his most difficult struggle, CEO Takashima said, “Convincing the farmers doing organic agriculture to sell to us. I thought you could buy things if you put out money. They were basically aggressive to us at the beginning. I understood that they were deceived and exploited in the past. Moreover, I went to the field with leather shoes and a suit, so it seems like ‘some funny young guy came’. How do I persuade them? After being told that the organic vegetable is special because our soil is special, I put my hands down on the soil compost in the field where the vegetable was planted. They told me, farmers know the taste of the soil, do you know the difference? I tasted the soil and it was smooth. After that, I became friends with them. I also drank sake well together with them. I would work on harvesting with farmers. Although the current number of contract farmers is over 2,000 nationwide, initially it started with only about 20 types of vegetable. The current general distribution in Japan is decided by the shape and weight of vegetables, and it is not evaluated by safety or taste. The farmer who is making a living by organic farming is serious about persisting and gradually began to agree with what we are doing in promoting and selling organic produce.”

On the biggest crisis the company has faced and overcome, CEO Takashima reflected, “At the beginning, it has been serious problems one after another. The biggest crisis occurred in our second year. The logistics center that we had been outsourcing the delivery suddenly ceased operations due to poor performance. If you cannot deliver this week, the customer goodwill will naturally disappear and customers will go away. I was forced to rebuild the whole logistics system, including searching for a new center. First I bought a large amount of sweets and everyone went to a meeting while eating sweets. It was clear in the eyes that everyone was intimately involved in the crisis of the company’s existence, so it would be better to clench his teeth and try hard, but to have fun doing it happily. I played Stevie Wonder’s motivational theme song ‘Feel the fire!’ All the employees started working on sorting, packaging and delivering in the evening and at night for one month before things returned to the normal flow. When I was exhausted, I would shout the theme song ‘Fire’. There was also a request for search from a worried family member of an employee who did not return home for more than a month as he was at the delivery center every day. I remembered that it was a month that I feel nauseous and of cold sweat. By surviving this trouble, I think that the company has become stronger. The crisis also promoted work improvement of the logistics center, and the effect of halving cost has come out. We can overcome any troubles if we work hard all night. I am grateful to my colleagues.”

We were also intrigued by the innovations introduced by Oisix in delivering the producers’ story to the consumers, as well as connecting the consumer’s voice to the farmers with the “Farmer of the Year” event. CEO Takashima said, “A lot of delicious vegetables are sold only by Oisix. We also have many unique naming in the vegetables that we offer. For instance, we have ‘Peach Kabu’, which is raised quietly in the edge of the field of a producer. It is sweet and tasty enough to surprise you. But there was a big weakness. It was easy for insects to be attracted to its sweetness, and the skin was so soft that it was not suitable for shipping. Still, it became possible to sell by the strong enthusiasm of the staff who wanted to deliver this deliciousness and ingenuity of growers’ cultivation to the customer. And it became popular products that were picked up on TV. Even from this one TV episode, you can sense the attitude of Oisix and the quality and commitment of the products being offered. Due to such precise and daily efforts, Oisix has a lot of commitment products that only we offer.” “The story nature is also an important element of taste, and in our service, we mention the producer who made it, we deliver comments and stories from producers about their feelings and on their vegetables at all times. For example, we will disseminate the information ‘This vegetable has been raised with this kind of hardship by the producers’ thought, and as a result, such a taste is born’. If you eat after knowing such interesting information, I will double that impression. We take care of such sympathy and impression very much, but this is also popular among customers, and the repeat rate has risen after incorporating this service. Another example, we will e-mail the producer’s voice on the day the item arrives. ‘Since this spinach is sweet, please try eating with salt alone without doing any processing first’. The conversation begins to rise and you can be touched as ‘Oisix is amazing!’ As we eat not only the tongue but also the brain, we thought about how to stimulate the communication of the dining table and raised the repeat rate without cost.”

CEO Takashima added: “We gradually earn trust by providing information to farmers and tried to tell the feedback of fans and customers to the farmers. Agriculture is an industry where producers and consumers are very far away. Every farmer thinks the crop I made is the best. It is a mechanism that consumer’s voice does not reach. It was very fresh to deliver customer’s voice to the farmers. By returning consumers’ live voices to producers, the farmers also feel for the first time that the vegetables they are making are required. We hold an event called ‘Farmer of the year’ that honors the most delicious vegetables produced by that ‘charismatic farmer’. We decide not from the viewpoint of management or agricultural technology, but from the evaluation criterion of the consumers’ voice. A winner is decided by annual consumer’s voice and consumer’s vote on the web. Awarded farmers can sell on special sales page. It is a measure that farmers can regain their pride and also helps in the branding of the farmers. We also hold local product exhibitions on the web. We are helping each prefecture to transmit local products to the whole country on the Internet and to tackle new sales channels. In addition, we are doing activities to discover vegetables that were loved locally but not spread throughout the country.”

CEO Takashima shared how Oisix also sold “non-standard” vegetables which became popular product groups of Oisix and also helped the producers to improve their sales: “Currently among the product groups of Oisix, there are ‘non-standard vegetables’, such as vegetables with small scratches or unevenness, which are particularly popular items. It was in 2001 that we set up this project. Originally, I faced the situation of a farmer who is in trouble because there is no sales destination of nonstandard products. I thought that it is a waste, and if I could successfully sell it, I could improve the profit structure of farmers. Prices can be sold cheaper than ordinary organic vegetables cheaply by 30%, both customers and farmers become happy.”

After the nuclear accident in March 2011, food safety awareness has risen rapidly. CEO Takashima did something that earned Oisix a great reputation in the industry, “After the nuclear accident of the Great East Japan Earthquake, I decided that we will conduct radioactive substance dose tests independently of vegetables and fruits that are damaged by rumors. Instead of ‘doing as much as possible’, ‘I do everything.’ I thought that it would be meaningless unless we had to inspect the whole amount. Radioactivity testing equipment was not circulated in Japan, so we sent employees to the US and China to procure equipment. We also released the know-how to the outside, and it became the standard inspection method after that. From that point, we came to be recognized as a food company, not only as an IT venture. Such a decision cannot be made unless it is a commitment from the top management. However, it is the field staff of the workplace that is responsible for this specific inspection method which will be improved more and more. The top defines the goal, and the worksite continues to devise ingenuity.”

A key skepticism about Oisix’s business model is the failure of online subscription meal kit company Blue Apron (NYSE: APRN) which is down 80% from its IPO price of $10 in Jun 2017 to $2 currently, or a market value of $389m with sales of $774.5m. Noteworthy is that Blue Apron had never been able to achieve positive operating profit, EBITDA or operating cashflow since the beginning and even as it scaled up. Several reasons were cited for its problems:

(1) Consumer preference has shifted from meal kits to on-demand prepared and ready-to-eat meals.
(2) Blue Apron’s supply chain, logistics and manufacturing operations are still unable to reduce unit costs to a profitable level.
(3) High customer acquisition costs (high SG&A expenses with meal discounts to get new customers), as well as low customer retention rate (high customer churn) due to orders arriving late or incomplete. Meal-kit users were also retaining their subscriptions for less than six months to try another meal-kit company. Attracted by Blue Apron’s early success, the market was being flooded with other meal kit companies. There are 150 meal kit companies operating in the US generating $2.2bn in sales. There is also little to differentiate meal kits from each other, and this is leading to fatigue among consumers.
(4) Ill-disciplined in handling growth as it scaled up. Health and safety violations at its plants reduced customer satisfaction and delivery times were not met as promised.
(5) Selling meal kits offline in grocery retailers at discounted prices, creating inconsistencies with online pricing eg Blue Apron had to reduce its prices by 30% before Costco would agree to sell the meal kits in its stores. As the retailer gains knowledge of the category, it will create a private-label meal kit with a lower price than any of the meal kits currently being offered in its stores. The meal-kit company, in order to compete, will have no choice but to lower its prices even more, further diluting the brand.
(6) Premature product diversification, eg opening Blue Apron Market, a cookware, merchandise, and cookbook store, and Blue Apron Wine, a subscription service that delivered to users six bottles of wine per month—to maximize customer acquisition cost by offering its existing base of subscribers more products to purchase.
(7) Poor data analytics. From its base of customers, Blue Apron could have learn about purchasing habits, average sales price and “basket size,” recipe choices, and average revenue per customer to help it design future products. Anticipating what your customers may want next has helped Netflix and Spotify stay ahead of churn and offensively mitigate customer defection. Blue Apron could have done the same thing, but didn’t.

In short, Blue Apron did not use its early advantage to focus its attention on retaining its current customers, reducing churn by developing a reputation for personalized, prompt, and quality service, instead was distracted into capturing new ones as quickly as possible. Blue Apron is a cautionary tale for online subscription-based businesses.

Oisix had stayed focused in delivering quality fresh organic vegetables to a growing loyal customer fan base, demonstrated pricing power with the ability to raise prices while delivering ever more value to its users, and developed competitive edge in data analytics to learn from its customer base to boost repeat rate and loyalty. After the acquisition of the #3 player Daichi wo Mamoru Kai (DWMK) which was announced in Dec 2016 and the share swap was completed in Oct 2017 and the #2 player Radish Boya in Feb 2018, Oisix has become the clear runaway category leader with no other single large competitor, unlike Blue Apron. Importantly, Oisix has been able to achieve positive operating profit and operating cashflow since Dec 2002.

Never forgetting their mission, Oisix nurtured a corporate culture where every employee go to the field once every half year to experience the hardship and passion of the producers and to tell the story to the customer, “Once every half year, all employees experience a bodily sensation. By going to the site of the producer and helping with the work together, we can experience what kind of hardships they gone through, how much passion goes into the product making, and we can then tell it to the customer properly. We think that is our mission.”

Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. Inspired by Brandon Stanton’s photo-journalistic project Humans of New York which collects and highlights the street portraits and moving stories of people on the streets around us who were doing things that changed lives and made a difference in the city but often went unnoticed, we have curated a collection of Hear the Heart of the H.E.R.O. stories on our website which we aim to update with refreshing and uplifting new stories weekly. Please check them out and give us your valuable feedback so that we can improve to make them better for you.

It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the H.E.R.O Innovators Fund, (surprisingly) the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community. Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.

Warm regards,
KB | | WhatsApp +65 9695 1860


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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