Thinking Points

  • As of February 2018, Oisix Daichi has Radish-boya under its umbrella, making it the largest player (by far) in organic vegetable delivery.
  • While not specifically focused on organic items, Amazon Fresh continues to expand its service area, delivering meal kits, farm-fresh foods, and frozen foods, among other products.
  • Operating in a growing niche industry, Oisix Daichi, along with Radish-boya ought to do well over the next few years, thanks to its substantial supply base of contract farmers.

Amazon Japan launched Amazon Fresh, a fresh food delivery service, in April 2017. The service initially covered 6 districts in the Tokyo area. Today, one year after launching, Amazon Fresh delivers to 18 districts and 2 cities in Tokyo, 17 districts within 2 cities in neighboring Kanagawa Prefecture, and 2 cities in Chiba Prefecture.

Since Amazon Fresh first launched, Oisix Daichi has had a spot on the front page:

Source: Tsuhan Shinbun


It seems Amazon Fresh has several variations of front pages, some of which do not include Oisix:

Source: Amazon Japan

Typically, however, customers can get to Oisix products through Amazon Fresh after a couple of clicks. The variation provides some interesting consequences, like a page presenting both Amazon Fresh and Oisix contract farmers. If you wildly guessed that customers have to scroll down a little bit to get to Oisix farmers, you are correct. At the very least, this is true for the page I visited. Amazon may have several variations of these pages as well.

The launch of Amazon Fresh in Japan is particularly interesting because many brick and mortar retailers looked to food for Amazon-proofing. Both fresh and frozen foods have become core products in Japan’s convenience stores. Even drug stores started offering food products.

What is Oisix?

With an estimated 30% market share, Oisix Daichi (TSE: 3182) is the largest organic vegetable delivery business in Japan. I first wrote about the company in August 2017. The article can be found here.

The company was formed as a result of the #2 and #3 industry players Oisix and Daichi merging. Oisix is the growing frontrunner in vegetable e-commerce, catering to women in their 20s and 30s. Daichi’s key strength is in its large supply network of contracted farmers and delivery network. Daichi mainly caters to women in their 50s and 60s through catalog orders.

Essentially, the two companies operate in the same industry without competing head to head. Both founder-CEOs are passionate about organic vegetables, have known each other since 2000, and decided that combining the two companies would be beneficial for all stakeholders.

Recently, several readers have emailed me about Oisix Daichi, mainly because the pre-Oisix/Daichi merger #1 player Radish-boya  (NTT Docomo [TSE: 9437]) subsidiary joined the Oisix Daichi party. Frankly, I hadn’t paid close attention to Oisix Daichi since my last article. I figured now would be a good time to take another look.

Radish-boya and the NTT Docomo mess

Radish-boya is a hybrid of Oisix and Daichi. The company has both online and catalog sales channels, mainly catering to women in their 30s to 50s. Radish-boya became a NTT Docomo subsidiary in 2012 as a result of a tender offer. The company had a little over 22 billion yen ($207 million USD) in revenues and 299 million yen ($2.8 million USD) in operating income in fiscal 2012.

At the time, NTT Docomo was focused on building its new “dMarket” ecosystem, a web portal where users can get a variety of things like books, clothes, and of course, food. The great big idea was to leverage Docomo’s massive user base as a new sales channel for just about everything. The idea of integrating Radish-boya into Docomo’s ecosystem seems like a sensible one. Judging by the fiscal 2017 financials, however, it seems to have been a rough few years.

In fiscal 2017, Radish-boya pulled in 19.8 billion yen ($186 million USD) in revenues and 15 million yen ($141 thousand USD) in operating income. More interestingly, the accumulated earnings was negative 2,855 million yen ($26.8 million USD). For fiscal 2012, Radish-boya had 583 million yen ($5.5 million USD) in accumulated earnings. This explains why NTT Docomo paid 6.9 billion yen ($65 million USD) for Radish-boya in 2012, only to let it go for 1 billion yen ($9.4 million USD) in February of this year.

Fierce competition in a growing industry?

Thus far, we’ve only really discussed the organic vegetable delivery market. If we change our viewing angle to food delivery, the competitive landscape changes quite a bit. Large companies like Amazon (NASDAQ: AMZN), Seven & i Holdings (TSE: 3382), and Aeon (TSE: 8267) joined the food delivery business, just to name a few. Additionally, Yoshikei (private) and Co-op are both established in the grocery delivery business.

So far, it doesn’t seem like any of the big companies are targeting the organic vegetable market specifically. I am setting aside #3 convenience store chain Lawson (TSE: 2651) as the company is a partner (and shareholder) of Oisix Daichi.

According to Organic World’s The World of Organic Agriculture 2018, only 0.2% of total agricultural land in Japan is organic. This is the lowest percentage among developed countries. As a reference, the US is at 0.6%, Korea is at 1.2%, and many of Europe’s developed nations are at 3+%. Though the report doesn’t show exact growth figures, it mentions that Japan’s organic market is showing stable growth.

The Amazon problem

So far, it seems like Amazon Fresh and Oisix peacefully coexist. That said, I can’t help but think they are on a collision path. From what I can tell through Amazon Fresh’s Japanese site, it seems like Amazon has built an offering similar to Oisix Daichi & Radish, but without the organic focus.

Assessing the competitive threats of any company going up against Amazon is hairy. It seems the only companies that stand a chance are ones that refuse to play Amazon’s game, which generally involves the words cheaper, better, and faster.

Oisix, Daichi, and Radish have all built a supply network of contract farmers. The companies have also bulit a subscription-based business model. Oisix’s core offering, for example, is one where customers sign up to get a box from Oisix each week. Customers can choose from 3 options: Oisix-selected fresh foods, foods tailored for pregnant women and new mothers, and Oisix meal kits. All organic, of course.

If customers do not want to receive certain items, they must remove items from the online shopping cart before the shipping deadline. To the extent that Oisix’s offering requires some “activation energy” to stop a purchase, Oisix’s revenues ought to be relatively sticky as long as the company continues delivering valuable boxes.

With that said, I think it would be entirely unrealistic to think that Amazon couldn’t make a carbon copy business model, or worse, a cheaper, better, and faster one. In fact, Amazon already has a small network of contract farmers. At the same time, I think it is fairly realistic to think that Amazon would not bother to focus on a highly niche area like organic vegetables.

The real question is likely more about what problem Oisix/Daichi/Radish is solving. In other words, if customers value high quality, farm fresh, organic veggies, then Oisix/Daichi/Radish would probably thrive in its own organic niche. However, if customers place more value on the convenience of the products and services, then this spells trouble for Oisix, Daichi, and Radish.

Another view

If Amazon really wants the organic vegetable delivery business quickly, they don’t need to kill Oisix-Daichi-Radish. It would be quicker, and probably considerably easier, to simply buyout the company.

It goes without saying that Amazon has an incredibly strong sales channel and distribution network. The key bottleneck for Amazon Fresh’s growth, at least as far as farm fresh foods go, is on the supply side. How will Amazon talk a large group of generally older generation Japanese farmers (who are presumably set in their own ways) into signing supply contracts? This has been a bottleneck to Oisix, Daichi, and Radish’s early growth as well. So far, Amazon seems to have done okay, but supply scale matters here.

The bottom line

Despite the Amazon threat, I don’t think Oisix-Daichi-Radish going under is a realistic scenario. If anything, operating in a growing niche industry with substantial supply scale, Oisix-Daichi-Radish ought to do well over the next few years at the very least. Whether that is worth today’s multiples is a separate question.

Kenkyo Investing
Kenkyo Investing

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