Thinking Points
- Oisix Daichi (TYO: 3182) holds a 30% share in a highly niche-y organic vegetable delivery industry in Japan.
- The company is the result of a recent merger between Oisix and Daichi, the #2 and #3 players in the organic vegetable delivery industry.
- With large companies entering the market, competitive pressures are on the rise. The CEO, however, thinks this is a good thing.
Overview
Oisix Daichi is a newly formed vegetable delivery business (effective October 1, 2017). This comes about through the merger of Oisix (founded 2000) and Daichi Wo Mamoru (founded 1975), the #2 and #3 players in Japan’s organic vegetable delivery industry. Combined, Oisix Daichi maintains approximately 183,000 members and a 30% share in organic vegetable delivery.
Oisix generally targets working couples living in major cities, aged 20 ~ 40 years old. The company has approximately 137,000 customer members, who mostly place orders over the internet. In contrast, Daichi targets the 40+ year old population, mainly outside of major cities. Physical catalogs still play an important role for Daichi’s approximately 46,000 members. The largest organic vegetable delivery business prior to the Oisix-Daichi merger is Radish-Boya (subsidiary of NTT Docomo [TYO: 9437]) with 160,000 members. Other existing competitors in the industry are incredibly tiny compared to the 3 mentioned so far.
Oisix and Daichi’s strategies differ almost as much as their target demographics. Oisix is generally known for bringing fun to the table. One of Oisix’s signature items is the KitOisix, which is a wholesome meal kit that the user can cook in under 20 minutes to feed the family.
On the other hand, Daichi is on a relentless pursuit for quality in organic vegetables. 88% of Daichi’s vegetables are organic. The remaining 12% uses small amounts of pesticides derived from natural ingredients (which is apparently still considered organic. Confusing, I know).
Big players entering the market
Large companies like Amazon Japan, 7-Eleven (TYO: 3382), and Aeon (TYO: 8267) have recently entered the grocery delivery business. Additionally, there are legacy businesses like Yoshikei and Co-op with strongholds in grocery delivery.
Kohei Takashima, founder of Oisix and CEO of newly formed Oisix Daichi, does not appear to be phased by the big entrants. In fact, he commented that competitors like Amazon Japan are welcomed. Frankly, Oisix Daichi competes in a premium, organic market. Purchasing groceries online is not commonplace in Japan yet and Mr. Takashima believes that big players entering the market may even help Oisix Daichi.
It’s not like Oisix Daichi is helpless either. Oisix Daichi recently partnered with Japan’s 3rd largest convenience chain: Lawson (TYO: 2651). Initially, Lawson will carry the KitOisix products (mentioned above) in 5 Natural Lawson stores as well as its online portal, “Lawson Fresh”. Lawson has been a Daichi partner (owned 33% of Daichi pre-merger) and now owns 8.52% of Oisix Daichi.
As an aside, if Amazon Japan were to make an acquisition targeting the health-conscious grocery market like it did with Whole Foods in the US, it would probably be easier to acquire Oisix Daichi. While speculative, I believe the CEO would at least entertain this, given his McKinsey & Co background (which is like having the word “Business” tattooed on your forehead).
Financials, no valuation, and conclusion
Admittedly, it’s a difficult time to assess the health of Oisix Daichi. It appears the acquisition/merger of Daichi was a stock merger, using appx. 260,000 Oisix treasury shares as well as ~1.8 million newly issued shares. Total outstanding shares after the merger, according to the 2017/3 Yuho (10-K equivalent), is ~7.94 million shares. As of 8/14/2017, there were a little over 8 million shares outstanding. The financials below are for pre-merger Oisix:
As a reference, Daichi generated 13,572 million yen in sales for 2016/3. For Q1 2018, the Oisix delivery segment produced 11% gross margins while the Daichi delivery segment produced 16% gross margins.
What caught my eye, particularly with the pre-merger Oisix financials is the strong historical ROIC performance, regularly in the mid 40%s. Joel Greenblatt’s ROIC calculation would put Oisix’ performance north of 100%.
To be frank, regularly and wildly fluctuating outstanding shares is simply out of my wheelhouse. Nevertheless, Oisix certainly has a compelling story in a niche market. I personally would not invest in Oisix because I’m not nearly educated enough in the industry, but I’d certainly follow the company just because of its astronomical ROIC performance and interesting story.
