Kitanotatsujin (TSE: 2930), “Meister in the North”, Japan’s most profitable specialty ecommerce platform – H.E.R.O. Innovators Insights from CEO Katsuhisa Kinoshita | H.E.R.O. HeartWare | 22 October

When Katsuhisa Kinoshita was a young boy in elementary school, he was inspired by the cartoon “The Star of the Giants” to want to develop his own business. One day, he asked his father an innocuous and simple question, “Why cannot anyone make a company? Why many people will not do it?” His father replied, “It’s really difficult”.

Little did he know that he had to stumble three times bleeding from adversities and anxieties, surviving at one stage by doing physical labor work, before finding the enduring formula to build Kitanotatsujin Corporation (TSE: 2930) into the most profitable specialty ecommerce platform in Japan (and possibly the world) that also generates the highest positive free cashflow (FCF) margin of 18.2%, an extreme rarity when nearly all ecommerce operators globally (save Amazon) are not only loss-making but also mired in a persistently huge negative FCF situation despite the overhyped rhetoric.

So what is the enduring formula to producing high profitability and positive free cashflow in ecommerce? Why are every other ecommerce operators losing so much money?

Founded in 2000 by CEO Kinoshita, Kitanotatsujin pursued the unconventional value proposition of (1) avoiding trendy fashionable products and providing all sorts of unsustainable discounts/promotions/novelty-effect to shoppers and merchants that burned nearly all other typical ecommerce operators; and (2) not following the usual Amazon-like variety-convenience user experience which allows for logistics simplification and keeps the fatal Achilles heel of ecommerce operators in fulfillment-related capex investment/operational risks and inventory carrying risks to the minimal; and (3) instead focuses on developing and selling its own portfolio of 28 “shockingly good” and hard-to-imitate innovative niche fast-moving personal care and household products with repeatability in purchase in which over 70% of group sales are on regular subscription plan with over 170,000 members (Nov 2014: over 70,000, Feb 2017: 100,000), or “people who really need our products”, enabling the generation of EBIT margin of 27.6% and free cashflow margin of 18.2% with ROE (= EBIT/Equity) of 75.7% via its J North Farm website and smartphone app (

Using “really good natural ingredients” from Japan’s northernmost prefecture Hokkaido, Kitanotatsujin develops niche products in the category of functional health, quasi-drug, cosmetics, skin-care, personal care (e.g. penetration-specialized nail care) and household products (e.g. detergent for removal of pet hair) that solve troublesome worries as opposed to general health/purpose products. Many of Kitanotatsujin’s products have won the international Monde awards for consecutive years and 3 products are consistent winners of top sales performance in Japan in their genres; its top-selling product is “Kaiteki Oligo”, an oligosaccharide prebiotic functional health food (for constipation) which contribute 18% of sales (top 4 products account ~22.5% of sales). Kitanotatsujin’s capex-light business model, fast inventory turnover (28 days) and fast cash conversion cycle (4 days) generate strong positive FCF to support new innovative product development and a committed 30% dividend payout (0.57% dividend yield).

With the compellingness and community edge in its innovative original products in solving problems for its customers, Kitanotatsujin achieved a 221% and 395% absolute increase in sales and operating profit in the recent 3 years to 7.14bn yen (US$63.5m), operating profit of 1.97bn yen (US$17.5m) respectively for its latest 12 months results, propelling a 1,167% increase in market value over the past three years to US$748m. Kitanotatsujin’s listing was promoted to the 1st section of the Tokyo Stock Exchange in 2015. On 15 Oct 2018, Kitanotatsujin announced its cumulative 2Q results (Feb-Aug) in which sales increased 88% yoy to 3.95bn yen and operating profit jumped 2.5 times to 953m yen with operating margin improving from 13% to 24.5%. Customers’ regular purchase of 6 products out of 28 in the month of August 2018 reached its record high and Kitanotatsujin achieved its first monthly sales exceeding 700 million yen for the first time.

Interestingly, the burning treadmill of subsidy war to acquire users to chase that GMV (gross merchandise value) figure at all costs in order to justify the raising of new cash from VCs and the fulfillment capex- & operational-related risks have led to Patrick Groves, the entrepreneur who sold the loss-making iProperty in Nov 2015 at a value of A$750.8m to REA Group (ASX: REA) who subsequently wrote down A$180m in goodwill impairment losses, to exclaim unequivocally when asked in a 2018 interview the worst investment he has ever made: “E-commerce!” It’s a red sea of losses and negative FCF in Asia’s ecommerce battlefield, from SEA Ltd (NYSE: SE)/Shopee, Lazada, 11th Street,, Tokopedia, Bukalapak, Flipkart, Snapdeal to PChome Online Group,, Baozun (NASDAQ: BZUN), (NASDAQ: PDD), etc. 

The clear focus and positioning of Kitanotatsujin is refreshing amongst these ecommerce operators. CEO Kinoshita shared the company’s mission to solve troubles for her customers and the importance of clarifying the existence significance of the company: “There are still a lot of troubles in the world. Based on this experience, we began to think that it is our mission to develop and deliver products that solve it. In order to clarify the existence significance of ‘What is our company for?’, we have formulated the management philosophy of our company which has been ‘Meister in the North’ in which we continue to make new fascinating and ‘shockingly good’ products that cannot be imitated by anyone for the world one after another. From the perspective of the Japanese archipelago, Hokkaido is the northernmost island which has the richest natural resources of Japan, but for the Asian continent, it’s a central point and known as ‘Asia’s Switzerland’. We want to carry the message that we are a group of Meisters in the North giving functional products to everyone in Japan, Asia and the world. I felt possibilities for the wonderful resources that are falling asleep in Hokkaido. Our E-Commerce business adopts a sales formula specializing in small-lot items. That focus allows us to offer a more enriched follow-up service as expected of a specialty shop, and we can better implement a continuous purchasing structure. This also allows logistics simplification, resulting in direct and indirect cost cutting. As a comprehensive functional health and beauty product sales site, J North Farm supplies customers with 28 functional health and beauty products, including Kaiteki Oligo, focusing on the development and selection of goods that offer help to customers with worries to feel real results that will lead to them becoming repeat customers. We offer a subscription-style buying system for customers who wish to continue purchasing the same goods. Our development rule is simple: ‘We only sell once we’ve created something that’s shockingly good.’ J North Farm’s standard is “Feel it yourself.” Health foods and cosmetics are full of ingredients that have ‘theoretically sound results.’ However, in the end we feel that data is data, and prefer to spend enormous amounts of time on experience monitoring tests, asking ‘Can you truly feel it yourself?’ And from those results, we only commercialize what becomes ‘shockingly good.’ The business which started only by one person can now proceed with a lot of friends. We also created newsletters and communication tools to deepen communication with customers. We offered customer support by a health care manager to satisfy customers and established a customer management system to appropriately follow up with customers. We began to work with all the staff’s full power towards the satisfaction of customers. If I multiply this ‘shockingly good’ products with marketing, I think that I can create a global brand company that is representative of Japan and the world is proud of.”

CEO Kinoshita commented on the two strategies that were designed and implemented to build a stable structure that keeps growing: “Since our establishment, we have continued to grow steadily with confidence. However, it is not a coincidence, but based on two concrete strategies to build a stable structure that keeps growing. Strategy 1 is to dare to avoid trendy fashionable product group. The field of health foods and cosmetics has always been characterized by the ‘boom’ of new ingredients. Products raised on the boom may experience a rise in sales. However, we develop and sell products of genres that do not relate to the ‘boom’ genre. What I found out is that boom sales are transient. Therefore, in order to aim for continuous and stable growth in our current health foods and cosmetics, we dare to develop products focusing on the direction of ‘genre not related to boom’. Therefore, sales of our products are not influenced by ‘boom’, but consist of sales from fans who truly acknowledged the quality of the products, so sales will not rise sharply and will gradually expand our fan base to keep growing steadily. Strategy 2 is that over 70% of our sales is on regular subscription. Our products are consumed continuously, so many of our users will subscribe to repeat the purchases, accumulating sales every month to enable our company to continue to grow steadily. With these two strategies, our company has become a structure that keeps growing steadily.”

CEO Kinoshita added that the product development is free from “fashion”: “Our product development is free from ‘fashion’. In the health food and cosmetics industry, products that sell new ingredients one after another, such as ‘new ingredients discovered by scholars!’ And ‘apply technology developed by NASA! are on sale one after another. Because new ingredients are easy to sell. And, although it will become a boom in an instant, consumers will transfer to new ingredients that appear one after another. Under such circumstances, ‘good ingredients’ have no time to permeate the consumers enough, and they will disappear as ‘new ingredients products’. Although it is a very good ingredient, it takes time to feel the effect, so there are many ingredients that have become obsolete due to the appearance of the next fashionable ingredient. In other words, good ingredients that are really effective are also buried in the darkness. And new ingredients that we do not know whether they are really good are sold today as well. We are looking for ‘really good ingredients’ rather than ‘new ingredients’. It is never state-of-the-art, it may be an old-fashioned ingredient. We also receive suggestions from raw material makers who have been indebted to us from now on. We do not care whether it is new or not, we will only make products because the level of experience get better for our customers if we incorporate them. That’s why we are adopting new technologies and ingredients to improve quality. What we are making is not ‘trendy products’ but ‘practical products’ that can be used over and over with satisfaction and quality.”

CEO Kinoshita also shared how the subscription system of Kitanotatsujin brings focus to their new innovative product development: “We mainly sell under the subscription system, which ensures long-term stable sales. In order to focus on the subscription system, we are developing products with the condition of ‘high quality that you want to repeat without fail’. Although new product development is advancing dozens of products at the same time, we make a lot of prototypes, and we commercialize them only when we are convinced that something is good enough to surprise you through the monitoring survey to identify a definite ‘winning pattern’. The conditions and standards set are strict. We have a system that can deliver 5 to 10 kinds of new products in 1 or 2 years. The characteristic of the products of Meister in the North is that it is specialized in health foods and cosmetics that support solutions of body problems such as constipation, atopy, acne, nail care. Customers with troubles and concrete problems started our development. We are taking a strategy to occupy the top share in niche fields with relatively less competition and annual sales of each niche product can grow to 10 to 20 billion, but competitive costs are not involved and the profit ratio is high. I will not handle items like general green juice. Our basic stance is to develop and sell products corresponding to what consumers need when they really are in trouble. For instance, “No! No! Smell” is registered as our first quasi-drug product. ‘Rimo Savon’, released in April 2018, is our first household product, a laundry detergent designed with special coating to make it easier to remove pet’s hair, prevents hair from reattaching in the water when washing, and makes it difficult for clothing to attach hair with its special coating technology to prevent static electricity. Our Clear Nail Shot penetration-specialized gel product had achieved sales of more than 650,000 units sold since its release in July 2015, or about one in every 49 seconds. Therefore, although sales of each item are not large, it is difficult to be influenced by fashionable trends, and you can purchase it for a long time. Companies with a product sales of 10 billion yen or less are more dependent on internal factors than the economy of the world. All of our products are repeatable, the performance is extremely stable because 7 to 80% of sales are subscription. In Internet mail order sales, sales tend to decrease as soon as advertisements are reduced. Since we are subject to regular purchases, despite refraining from advertisements for a while after the Great East Japan Earthquake, sales and profits continued to increase. We will continue to develop multiple items mainly in niche markets. We aim for annual sales of around 30 billion to 50 billion with high profitability. From 1 to 2 billion per niche product × 30 to 50 multiple markets/products to generate annual sales from 30 billion to 50 billion.”

Interestingly, CEO Kinoshita shared how the new regulation on functional food display system in April 2015 in Japan to ensure quality for users created a tough hurdle for opportunistic operators which benefited the users and the company: “Once Japan has achieved high economic growth by satisfying people’s material desires, the interest of people has shifted to how to improve the quality of life. Following this trend, the market of functional food and products related to beauty and health is rapidly expanding. The functional display food system started in April 2015 also succeeded in gaining confidence in consumers.”

Like P&G who outsourced its manufacturing to focus its resources and attention on R&D and innovation, Kitanotatsujin also outsourced its manufacturing to OEM makers with advanced skill levels. CEO Kinoshita commented: “When manufacturing our products, we always contact OEM enterprises with the most advanced skill levels to make sure that our products maintain the very highest quality. Just as every product has its own special features and functions, each of our OEM makers have their own specialties. We assign manufacturers for each product only after determining each one’s special abilities so that we can guarantee each product’s quality and customer satisfaction. We are constantly auditing. To deal with the rapidly changing industry, we continue to use our cutting-edge in-house know-how and experience as we make every effort to avoid outsourcing vital functions such as: order receiving, website development, planning of sales promotion tools, system development, advertising operations, and customer contact points like customer and client support. By offering such high-quality products with a high level of service, and also allowing a subscription-style business model to allow continuous purchasing, we have constructed a stable-growth structured-profit business.”

When asked about their competitive strength in analytics, CEO Kinoshita commented that it is the combination of internet marketing power, data analytical power and creative product development power that gives them the exponential edge: “Strengthening analytical power is our strength. For example, the power to data analysis on how much CPO (cost per order), how much repeat rate, how profit will be. I think that there are few Internet companies that can see it finely up to the 1 yen unit like ours. There are not many companies that can balance well the skills of internet marketing power, creative product development power, and data analytical power. We believe that our model can be applied worldwide.” CEO Kinoshita added that they have switched from in-house agency to in-house operation for their internet marketing capabilities in Feb 2018: “We used around 17-18% of sales as advertisement expenses, mainly in the form of internet advertisements. We increased it to 22% and 30% in Feb 2017 and Feb 2018 respectively, and at the same time switched from in-house agency consignment to in-house operation. We were taken up by Facebook as a success case example of extensive advertisement utilization that led to new sales. I am introduced by the vice president of the US headquarters as a ‘professional who uses the most Facebook advertisements in Japan’. As a result of this experience, we also ran as the speaker for Facebook’s advertiser event for the first time in Japan.”

When asked about how his growing up years have shaped his entrepreneurial journey and how he came to start Kitanotatsujin, especially the three stumbles that he experienced, CEO Kinoshita shared reflectively the inspiring story: “Our company is headquartered in Hokkaido but I was born in 1968 in Kobe where I stayed until I was 18 years old. Since I was a child, I had a dream to independently develop my own business. The trigger was a cartoon called ‘The Star of the Giants’. One day, I asked my father, ‘Why cannot anyone make a company, why many people will not do it?’ My father replied, ‘It’s really difficult’. Still, the feeling started to bud inside me. In high school, I studied books on marketing. I joined a ‘student company’ when I was majored in economics at Kansai university. I learned the pleasure of creating a little movement, to be useful for customers, to be pleased to become part of a small movement. After graduation, I worked at Recruit Holdings (TSE: 6098) which is known for producing a large number of entrepreneurs. As a Recruit employee, I was preparing for independence while acquiring business experience through job hiring, education and organizational activities of companies in all industries. After working for 5 years, I became independent in the daily goods selling business. One year immediately after independence was smooth sailing. However, at that time, I did not focus on customer satisfaction, which is the starting point of business, because my mistake due to youth took my eye on sales in the near future. As we enter the second year, sales gradually decline. I tried and tried desperately to rebuild sales, but it is already late. And finally one day, my wallet has become 50 yen. On that day, I abandoned the continuation of the business that lasted about two years. I am already older than 30 years old and I was broke and aimless. I survived my life by working part-time doing physical labor jobs. In the depths of disappointment, it is not once or twice that anxiety has gripped me ‘I will end like this.’”

“Eventually, when such a life continued for a year, I thought that I am not a person who ends up in such a place, I will stand up once again and start a business, and I made up my mind to start a business again. In order not to repeat the last mistake, I thought that next time I absolutely need to conduct a stable business. So I thought about why I failed the last time, how I should have done it. The first lesson is ‘Business cannot be done without repeat customers, and repeat purchases will not happen unless there is customer’s satisfaction.’ During my last business, I did not mind whether the customer was satisfied. So at first sales will rise, but you cannot have a continuous order. So I thought, ‘Ok, we will make customer satisfaction the top priority in the next business’. The second lesson is to ‘sell only products and services that are really recommended.’ A strong ‘thought’ or ‘mindshare’ is necessary to continue the business. And I learned from the experience that the source of that thought is to say ‘I would like you to know that product / service by all means’. Even for people who can persuade, there are limits to selling goods that they do not think are good. Therefore, I decided that I will only sell products and services that I really recommend. I was considering projects that match these two policies from various angles. And, as I looked at the Internet that began to spread explosively in those days, I thought that if I can use the Internet technology, is it not possible to create a mechanism that allows Honshu people to easily enjoy delicious items in Hokkaido? I love Hokkaido because of the influence of the TV drama ‘From the Northern Kingdom’. The point that convinced me it was best was the fact that Hokkaido has the richest natural resources in Japan, yet they aren’t fully utilized. In Hokkaido, you have crab, sea urchin, salmon roe, melons, corn, ramen, Genghis Khan Mutton, potatoes, scallops, cod roe, asparagus, cheese, milk, ham, chocolate cream, soba, lavender, sun flowers and more specialty products that the whole of the other 46 prefectures can’t match, meaning it’s overflowing with ingredients. The nature and scenery are beautiful as well, and it’s so popular overseas it’s known as ‘Asia’s Switzerland.’ The rents are also cheap, and the people are quite diligent. But sadly, since the natural resources aren’t fully utilized, Hokkaido’s economy remains sluggish.  I was convinced that delicious Hokkaido special product will bring satisfaction to our customers. After deciding to do Internet mail order for Hokkaido special products, after a short preparation period, I moved to the northernmost earth of Hokkaido with just two PCs.”

“Although I have visited Hokkaido many times on a trip, I do not have any acquaintances. So, we had to pioneer the search for suppliers from scratch. I called various companies and said, ‘I am starting a business from now, can you let me stock the product?’ Most companies refuse since we have no achievement record. Even so, while calling 100 companies, 3 to 4 companies finally responded and agreed to support us, so we decided to wholesale their products. I declared to the company that I will surely succeed, because I will never quit till I succeed. Then I bought a textbook and made a website myself and started mail ordering of Hokkaido special products such as ‘crab’, ‘melon’, ‘Genghis Khan mutton’. But at first it was miserable. The sales of the first month is about 20,000 yen. It took half a year for sales of the month to exceed 100,000 yen. Of course we cannot live as a business with 100,000 yen monthly sales. As usual, daytime is part-time job of manual labor. At that time, Internet mail order was still not popular in general yet. Does Internet marketing really spread? Can we really move on in this direction? There was always anxiety and back again.”

“And, about a year later, when the project managed to start on track, I was cheated by a business partner and I was deprived of all my wealth. But I promised the suppliers that I will not quit till I succeed. Although my money was steadily taken away, not any villain can take away hope, knowledge and experience from me. I devoted myself to my work. There were many other difficult events, but it was a song called ‘YELL’ by Kobukuro that encouraged me. ‘Now you are standing at the beginning. Do go a far way. A Way like a proud hero. I’m looking for you somewhere on that road. Nobody’s waiting for you. Someone who imagines a dream pattern one day. Every time this song flowed from the radio, I superimposed myself onto the main characters of the lyrics. Even now I still remember this difficult period by listening to this song.”

“Since it was a micro enterprise that had no money, no brand recognition or experience at that time, I pursued fine politeness. I enclosed handwritten notes to teach the most delicious way of eating each product, as well as in the parcel delivery service announcement e-mail. We sought to devise thorough thinking about the satisfaction of customers and accumulated a lot of know-how and know-how. Thanks to that, our Hokkaido special product site has been getting popular all the time, sales has gone up. And then, with the recognition of its achievement, we finally came to win the ‘Japan Online Shopping Award’” which is said to be the Academy Award of Internet mail-order industry. With the increase in name recognition within the Internet mail-order sales industry, the number of people who desire to join our company increased, and excellent talent began to gather. I thought, ‘Finally, we got on track! Let’s get bigger and bigger from now!’ The delight was fleeting. Along with the explosive popularization of the Internet shopping, more than 500 new mail order sites handling specialty products in Hokkaido emerged like a bamboo shoot after the rain. And there were a lot of sites that imitated our site which had high profile publicity. Even the design of the site, the message card enclosing the contents of the follow mail and the products offered are the same. For customers who saw it for the first time, I do not know which one is our company. Our sales gradually descended. From there we undertook various new businesses, including selling cheap gourmet foods such as Hokkaido crabs with broken legs, rice crackers cracked in the manufacturing process and we started a gourmet specialty site in 2007. Combined with the backdrop of the ‘Lehman shock’ recession at that time, we attracted the media’s attention as a representative of ‘smart consumption techniques’. And it took up on all kinds of TV programs from fine documentary to variety which caused a nationwide ‘dangerous gourmet boom’. At that time, TV interviewers were coming in every week, so there was a television photographer inside the company like it was an everyday situation. It was an unusual situation. It was fleeting that I thought, ‘Okay, this time I can go on with this!’ After all, as we became famous, this business model was imitated, and before being introduced to television, we were the only gourmet specialty site, but after a year, we had dozens of gourmet sites. It was a muddy situation. As a result, growth soon ceased again and gradually descended.”

“In short we were somewhat making sales because we made short-term products and services quicker than other companies. When similar companies imitating the products appear, customers will flow there. I thought, ‘You must make genuine products, let’s develop and offer genuine products and services that no one can imitate, and absolutely make sure that customers do not want to leave us.’ And then at that time, similar oligosaccharide prebiotic health food products to ours, which was extracted from sugar bean, a special product of Hokkaido, were coming out. ‘Well, let’s improve the product of this oligosaccharide to a level that can not be imitated by anyone!’ Oligosaccharide is a nutrient source for bifidobacteria which is a good bacterium in the intestine. As a result of oligosaccharide, bifidobacteria, which decreases with age, will be activated, and will be adjusted to the environment of favorable bacteria dominance, supporting health maintenance from within the body. In order to raise the actual value even more than the conventional oligosaccharide products, we cooperated with the university professors and researchers of raw material manufacturers based on the philosophy of making the ultimate oligosaccharide products. Focusing on the compatibility of each kind of fungus, we drawn the recipe EOS. We released oligosaccharide products made by this manufacturing method under the trade name of ‘Kaiteki Oligo’. It was a big hit. We received positive feedback from the customers such as ‘This is the first health food with realistic value’, ‘Natural feeling is very good unlike medicine’, ‘My twenty years trouble ceased’, ‘Thank you so much for making such a good product.’ I was so happy that tears came out. This time, I thought, ‘Customers are not buying goods but buying real effects and satisfaction, so do not leave unsold sales’. We will follow up thoroughly until you are satisfied. We created professional customer support forces centered on health care professionals to ensure after-sales consultation support. We created professional customer support forces centered on health care professionals to ensure after-sales consultation support. As a result, we have been able to satisfy even more customers, make repeat orders over and over again, and be able to grow steadily.”

“As a result, we have been able to satisfy even more customers, make repeat orders over and over again, and be able to grow steadily. Products with similar packaging have appeared afterwards, but since the manufacturing method is still different, there is a difference in the contents, and there is also a difference in the aftersales follow-up system. Finally, ‘Kaiteki Oligo’ became ‘the best selling oligosaccharide in Japan’. I thought, ‘Well, at last, we were able to create products and services that cannot be imitated by anyone, and we were able to be really appreciated by our customers.”

We are impressed by CEO Kinoshita’s focus on prioritizing customer satisfaction and profitability in an era that aimed at “more sales” regardless of the costs involved. We are also intrigued and skeptical about Kitanotatsujin’s high profitability. CEO Kinoshita commented: “Our company is characterized by high profitability compared to general companies. Of course, this does not mean we are using cheap commodity ingredients or omit customer service. As we do not compromise on product quality at all, the cost of goods is relatively high compared with those of the same industry, and for customer service, we have a policy of prioritizing customer satisfaction with respect to profitability. In other words, in product quality and customer satisfaction, we do not control or reduce necessary costs at all. So, I will tell you why the rate of return is high. We have already said that we started with the sale of Hokkaido special products such as crabs and melons at our founding. Because it was a very competitive market, price battle became fiercer each time round, and it was going in the direction such as ‘we will promote more sales promotion activities to sell to more people’ and ‘prepare more kinds of products to meet the needs of more people’, in an effort to have a superior advantage over other companies. However, advertising expenses and personnel expenses (due to an increase in workload) are increasing year after year, and they have fallen into a vicious circle that profits will not come out even if sales are up and we are busy. As long as it does not yield profits, we are still wondering whether customer’s satisfaction has been rising in proportion to the increasing workload every year and the cost increasing year by year? I knew that the answer was NO. Because the amount of work that increases year by year and the cost that increases year by year are not for customers but for sales to rise over rival companies. We felt that there is no durability in the company doing this way. We made a certain decision in a big turning point. I decided to abandon the idea of selling to more people and raise more sales in price and promotion battle over others. I decided to steer a direction to spend the extra cost and power all on raising customer satisfaction.”

“Specifically, we did the following things:

  • The conventional approach is such that in order to have more people buy the products, we advertise to many people. Our current business model: Raising sales means that the amount of work will increase accordingly. However, we want to turn all of that work volume to ‘people who really need our products.’ We focused on more accurate target segments, Internet advertisements that can analyze customers, and sell them to only those who really need our products.
  • The conventional approach is that in order to have more people buy the products, we sell many kinds of goods to meet many needs. Our current business model: We will sell only a small number of items, within the scope we can follow customer responsibly. By doing this, we reduced the backend load such as product development, production line management, order receipt and logistics, so that more manpower is available for customer satisfaction. I abandoned that ‘we will raise more sales’ and changed the direction towards a management policy of satisfying customers in front of our eyes.

“As a result of this change, these happened: Sales promotion costs have decreased dramatically for each order; Personnel expenses for each order has drastically decreased; by stopping to sell to many people and instead selling only to the people who need it, management became very efficient and wasteful costs drastically decreased. Meanwhile, as we aimed the cost and power towards customer satisfaction, sales have risen sharply as repeat rate has improved, reviews expanded, and new customers increased. In this way, a positive spiral that ‘sales will rise by saving wasteful costs and trouble’ began to occur. Therefore, as a result of thorough customer satisfaction, the company became a high profitable corporate constitution that wasteful costs are not involved in the selling and administrative expenses.”

CEO Kinoshita summed up the essence of Kitanotatsujin’s management philosophy and OS (“operating system”) of “selling only to people who really need it” to last more than 100 years as a company: “I understand later that the European luxury brand that lasts more than 100 years like Louis Vuitton is also operating in the same way of thinking. ‘By selling only to people who really need it’ rather than selling it to many people. By focusing on customer satisfaction with the person who bought me for the rest of my life, thereby operating with a policy of high profitability. We are building a permanent company. Although we do not deal with luxury goods, we are feeling something very close with our management policy and we are deepening our confidence that it can be a permanent company. With the faith and belief that ‘thorough customer satisfaction is the secret of high profitability’, we will continue to strive to improve profitability by pursuing customer satisfaction. We hope that investors will be able to understand our company’s basic strategy and watch over our stable growth business.”

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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 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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