Thinking Points

  • Monotaro (TSE: 3064) is a W. W. Grainger (NYSE: GWW) subsidiary, selling maintenance, repair, and operations (MRO) products online in Japan.
  • With a 10 year revenue CAGR of 20%, Monotaro is the #2 e-commerce player with less than 2% market share in a not yet digitized Japanese MRO market.
  • Amazon Japan’s (NASDAQ: AMZN) entrance into MRO, along with other emerging competitors, has made the industry increasingly competitive, though there is considerable room for all online parties to grow.

Overview

Monotaro (TSE: 3064) is an online retailer of maintenance, repair, and operations (or “MRO”) products. Its customers are mainly small and mid size businesses, mostly in the manufacturing, construction, and automotive industries. The company may sound familiar to some as it was ranked #6 on the Forbes “Most Innovative Growth Companies” list in 2017.

In addition to operating its online platform “Monotaro.com”, the company has developed three of its own private label brands. The Monotaro brand competes with national brands. Otokomae-Monotaro (“Manly” Monotaro) is the company’s premium brand. Osaka Tamashi (Osaka Spirit) is the low cost brand.

Monotaro Private Label Brand

Source: Monotaro

The company started out as a joint venture between Sumitomo Corporation (TSE: 8053) and W. W. Grainger (NYSE: GWW) in 2000. W. W. Grainger currently owns 49.92% of issued shares through Grainger International and Grainger Japan.

For the fiscal 2017 reporting period (ending December 31, 2017), Monotaro reported 88,347 million yen ($839 million USD) in revenues and 11,837 million yen ($112 million USD) in operating income. Over the past 10 fiscal years, the company grew revenues at 20.2% CAGR and operating income at 26.1% CAGR. Today, the company trades at 40x EV/EBIT with an equity to asset ratio of 0.53.

More recently, the company has focused on data science based marketing, customer acquisition, streamlining supply chain, and international expansion.

The “Mini Amazon” taking on MRO

Monotaro estimates the Japanese MRO market related to its business to be between 5 trillion yen and 10 trillion yen ($47.5 billion USD to $95 billion USD). According to this market size estimate, the company would have less than 1% market share. According to Grainger’s 2017 Factbook, the MRO market size for Monotaro is $41 billion USD and Monotaro has 2% market share.

Some of Monotaro’s competitors include:

wpDataTable with provided ID not found!

Source: Various

The revenues listed above are company totals and not necessarily MRO-related. Misumi Group and Trusco Nakayama are both highly focused in the MRO market. Trusco Nakayama in particular, is a formidable threat to Monotaro as the company has partnered with B2B office supply e-commerce powerhouse Askul to offer MRO products in overlapping industries. Additionally, Amazon Japan announced its entrance into the B2B market in September 2017.Source: Various

About 76% of Monotaro’s customers have less than 100 employees:

Monotaro customers by number of employees

Source: Monotaro 2017 Earnings Presentation

Monotaro’s small business heavy customer profile is not a coincidence. Many of Japan’s large corporations partner with trading companies in order to get volume discounts on indirect materials. Meanwhile, small businesses are left to deal with vendors that are less inclined to provide discounts because of the small orders. At the same time, the same small businesses have not been too keen on the cost of indirect materials because it is typically a small part of the business’ expenses.

This can be observed by looking at the number of accounts Monotaro has and comparing it against sales figures. At the end of 2017, Monotaro had about 450,000 customer accounts for a total of 88,347 million yen ($839 million USD) in revenues. This equates to 196,000 yen ($1,862 USD) in revenues per account per year, or 16,000 yen ($152 USD) in revenues per account per month. We are talking about things like nuts, bolts, gloves, tape, etc – things that would never be a core offering, but would be noticed when inventory runs out.

Monotaro expanded rapidly by serving the underserved, small business MRO market. That said, the environment is getting increasingly competitive. According to a Nikkei article published in October 2017, Amazon Business offers about 1,000,000 products that compete with Monotaro’s products. As a reference, Monotaro offers about 13,000,000 total products, 302,000 of which are kept in stock.

Nichiryu Newspaper ranked Monotaro #4 among B2B online/mail-order businesses in terms of online revenues. Askul came in #1, but its primary business is in office supplies. Misumi Group (#2) is the only direct competitor ahead of Monotaro, generating 164,884 million yen ($1.6 million USD) in online revenues for 2017. In comparison, Monotaro had 67,105 million yen ($637.5 million USD) in online revenues.

Given the above revenue figures, it goes without saying that the MRO business is still a largely non-internet business in Japan. Because of this, I believe Monotaro, along with Amazon, Misumi, and Nakayama Trusco, all have room to grow revenues. With that said, the next 10 years of Monotaro’s growth in the Japanese market ought to be considerably more challenging and competitive than the last 10 years.

Monotaro’s focus

At the end of the overview, I mentioned that the company has focused on data science based marketing, customer acquisition, streamlining supply chain, and international expansion.

Interestingly, all of the above four areas are things Amazon is known for. Data science based marketing basically means analyzing user behavior/history and tying this into targeted promotions and inventory strategy. As for customer acquisition, Monotaro notes that it is increasing focus on listing advertisements, improving landing page, and continuing its TV commercial ads. The streamlining of supply chain mainly revolves around shortening lead times and improving inventory availability (i.e., more stocked products).

In a 2013 interview with Equity Story, Monotaro IR noted that when it increased stocked items from 60,000 to 80,000, same day shipping increased considerably. This is likely a strong indicator that small businesses value same-day availability, something Amazon is known for. Today, Monotaro has a larger product selection and probably better service, but the future looks increasingly competitive.

International expansion is probably the most interesting part of Monotaro. The company’s key markets are Korea, Indonesia, and China, none of which are Amazon strongholds. In Korea, Monotaro marked two profitable months in 2017 (July & November). The plan is full-year profitability for 2018. Indonesia and China are both just getting started. The company expects to 250 million yen ($2.4 million USD) and 170 million yen ($1.6 million USD) in 2018, respectively.

The bottom line

Monotaro’s future still looks bright despite the increased competition in the industry. Though the company’s continued rapid growth is nearly certain over the foreseeable future, the 40x EV/EBIT price tag is a little intimidating. Some may be more comfortable with a slower growing, consistently free cash flow positive Misumi Group, which has grown revenues at 7.4% CAGR and operating income at 5.2% over the last 10 years. The company currently trades at 23x EV/EBIT with a 0.79 equity to asset ratio.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.