Do You Have a Quiet H.E.R.O. In Your Portfolio Protecting & Fighting For You? [Japan’s Largest B2B E-Commerce Platform in MRO (Maintenance, Repair & Operations) Items]
"What the world needs now is a quieter breed of hero, one actively fighting for a world in which rescues are no longer required." - Dan Heath
In his insightful book Upstream: How to Solve Problems Before They Happen that drew on insights from hundreds of interviews with unconventional problem solvers, Dan Heath shared that so often in life, we get stuck in a cycle of response. We put out fires. We deal with emergencies. We stay downstream, handling one problem after another, but we never make our way upstream to fix the systems that caused the problems. The police solve crimes, doctors treat patients with chronic illnesses, shelter is provided for the homeless. But we would all rather live in a world where crimes are not committed, diseases do not develop, and people do not lose their homes. So why do our efforts skew so heavily toward reaction rather than prevention? The need to prevent problems is perennial in our professional and daily lives, and we have the capacity to solve some of our thorniest issues - if only we start to think about the system rather than the symptoms. If only we start to think upstream.
Heath illuminated the vision that the world needs a quieter breed of UPSTREAM hero. UPSTREAM business models and strategies have also forged the enduring and exponential growth trajectory of our quiet H.E.R.O. innovators.
Case Story: Japan's Largest B2B E-Commerce Platform in MRO (Maintenance, Repair & Operations) Items
[Week (21-25 Sep): +9.4%]
Another uplifting story in our portfolio companies in the Fund is Japan's largest B2B e-commerce platform in MRO (maintenance, repair & operations) items, which is up 25.8% since the inception of the Fund on 28 August 2020, versus MSCI ACWI World index/NASDAQ -5.1%/-6.7% over the same period. The rising dividend-yielding company has also compounded 282% in capital gains in the recent 5 years vs MSCI ACWI World index +42.9%. On 24 September 2020, the company announced the acquisition of the e-commerce business of an Indian company which will become its consolidated subsidiary, and aims to efficiently expand its business in India.
Before the company entered into the business in 2000, SME customers are not treated well by conventional MRO suppliers who provide unclear prices, limited product availability, uncertain time delivery of much-needed items. Customers must spend a lot of time selecting products, comparing estimated prices, placing orders. The inspiring UPSTREAM story started when the founding team at the company wanted to solve the high-value problem by moving upstream in empowering the SMEs with search technology to serve under-served customers who are not treated well by conventional retailers and dealers. Today, the e-commerce platform leader handles over 15 million MRO items and is used by over 2.8 million cost and time-conscious loyal members making regular purchases who are mostly SMEs in the manufacturing, automobile maintenance and construction industries. Private label products contribute over 20% of sales. The company still has a large fragmented domestic total addressable market in indirect materials purchase of 5 to 10 trillion yen to keep serving and growing.
CEO Mr. S shared: "Our logo is like the Momotaro in Japanese folk tale. Like Momotaro, we fight against unfair – the old distribution system. Our Purpose is to help under-served customers who are not treated well by conventional retailers and dealers. [Momotarō (桃太郎, "Peach Boy") is a popular hero of Japanese folklore and one of the most famous characters in Japan as an ideal model for young kids for his kind-heartedness, bravery, power, and care for his parents.]
“The essence of the Internet is ‘search’. Searching is an act of finding information. Direct materials such as materials mainly dealt with by trading companies are the raw materials such as plastics used for frames and the glass of lenses, taking the manufacture of eyeglasses as an example. As mass production begins, these materials will be purchased in large quantities from a small number of suppliers. As a result, knowledge about direct materials is accumulated quickly enough, and search becomes unnecessary. On the other hand, examples of indirect materials of glasses manufacturing are glass abrasives, tools used in factories and safety supplies, stationery used in offices, and so on. Although it is indispensable for continuing the business, the purchase frequency is irregular, and annual purchase volume is limited. However, people who work in the field must spend a lot of time selecting products, comparing estimated prices, placing orders, and so on. Therefore, the thought of the utilization of the Internet. We felt that there would be a big need for a system that could enhance the search function and efficiently purchase indirect materials. And in order to realize this idea, we started the company in Osaka in October 2000."
“In the case of B2B, the business contents and requirements of each customer, or the material required depending on the work, is different, and unlike B2C, the variation of the necessary materials and their quantity amount is very large. The number of items is large in proportion to the small amount, and the suppliers are different for each product classification, so purchasing is troublesome. Also, it is cheaper for large companies who are bulk buyers, and relatively higher for small businesses. Delivery to SMEs is often postponed and takes days. We took notice here. Price is one price regardless of order size. You can order easily with net or fax, and deliver it quickly from 1 screw Normally, in order to find out the requirements, the salesman confirmed the customer's needs and made individual estimates, but if it takes time to negotiate one dollar or two dollar price for a single item, the opportunity will be gone. If it is the Internet, it can be sold more efficiently with a one stop shop.”
CEO Mr. S also shared the interesting insight about how they get stronger over time, particularly in "longtail products": “As the number of customers increased, a phenomenon was born. Longtail products that we rarely sold till now can be sold little by little. If it is found that it can sell at a certain frequency, it will be prepared as inventory next time. It takes a few days for orders, but you can ship immediately if it is an inventory item. The lead time will change from 3 days later to the same day. And sales of that product will typically increase by 50% within two months. For customers, delivery is an important factor more than anything else. Because online prices are easy to compare, the ‘lowest price’ is likely to attract attention. However, we are not necessarily aimed at the lowest price. We will never make a profit if we aim only at the low price. It is our company's way of appealing to the sense of security that the goods will arrive the next day with abundant inventory than just a cheap price.“
The company's exponential edge is in its expertise in using sophisticated data analytics to understand customer buying behaviors which help drive its growth. After a customer has identified a product for purchase, data analytics can introduce a private label or lower priced option. Eventually, repeat customers are offered complementary products based on aggregated purchase behaviors. CEO Mr. S commented: “There is a reason for continued good performance so far. Database marketing is one of the biggest factors supporting strong performance. Through data mining from the user's purchase history and browsing history and analyzing them, the analysis result is reflected in the search algorithm which enhances the search accuracy so that the product can be presented effectively from the range of over 15 million items. We are also doing effective recommendation such as ‘The person who bought the item A is also likely to buy item B. Analysis results are reflected not only in search algorithms, but also in mail magazine distribution and catalog layout, customer listing to ship, increasing the purchase rate.”
“We are trying to personalize the site by personalizing the behavior of each user and by incorporating it into the program. We build a one-to-one relationship with the customer so that each product desired by the customer is appropriately shown. Because our business is B2B, your first priority is a more precise time than price. You can search for what you want in a short time, you can purchase immediately, and your ‘one stop’ purchase arrives quickly. This allows customers to spend time on their original work. This is the reason why it is supported by over 2.8 million customers. Functional development and data analysis are extremely important for that, so I can buy things I am looking for. For our advanced one-to-one marketing, we look into Network-Detection Technologies to find customer communities that share common purchasing patterns and to detect self-forming product sets to market to those communities. We use predictive modeling to assign new customers to communities. We accelerate customer growth by promoting products that more mature customers in their respective communities have bought. For our campaign management, we report effectiveness of each campaign against control groups to allow finer and effective promotions.”