On November 17th, Base Food Co., Ltd. (hereafter, Base Food) was listed on the stock exchange.
Base Food is a startup that develops complete nutritional foods (* 1) such as bread, pasta, and cookies at EC and convenience stores.
The public offering price was 800 yen, whereas the initial price was 710 yen, so-called “public offering crack”, but the market capitalization exceeds 35 billion yen. The median market capitalization at the time of listing on the growth market was around 8 billion yen (*2), so we can see that the market capitalization of base food this time is quite large.
Why is the market capitalization of base food so highly valued? What is the secret behind the company’s business model that makes it possible? In the first and second part, let’s consider it from the perspective of accounting and finance.
Completely nutritious “staple food” that was unlikely
First, let’s figure out the outline of the base food.
BASE FOOD was established in April 2016, and in February 2017, it started selling the complete nutritional pasta “BASE PASTA” on its own EC.
After that, in March 2019, the completely nutritious bread “BASE BREAD” was launched. Until now, it was sold only on EC, but from November 2020, it will be sold over the counter, and in March 2021, it will be available at convenience stores in the Kanto region. Many of you may have seen base food bread and cookies at convenience stores.
Mr. Shun Hashimoto, the founder of Base Food, joined DeNA as a new graduate and has experience as a game producer and launching new businesses. At that time, he was so absorbed in his work that he often ate at izakaya or fast food.
When you are busy, you tend to rely on eating out and convenience stores. When this happens, nutrition and health are a concern, but it is not easy for amateurs to try to get a well-balanced diet. Therefore, Mr. Hashimoto wondered, “Isn’t it possible for anyone to easily achieve a healthy diet?”
At the time Mr. Hashimoto started thinking about starting a business, there already existed so-called “completely nutritious foods,” but most of these were aimed at efficient diets and did not necessarily take into consideration healthy life expectancy. It wasn’t. Therefore, Mr. Hashimoto came up with the concept of “completely nutritious ‘staple food'”, which led to the birth of the current base food (*3).
Sales are growing, but still in the red
In analyzing such base foods, let’s first check the sales and profits in chronological order (Chart 2).
In the two years from 2020 to 2022, the sales have increased more than 13 times, and it is growing rapidly like a startup.On the other hand, in terms of profits, we have been in the red since our founding..
In order to identify the factors behind the deficit, let’s take a look at the profit structure of base foods (Chart 3).
Base Food outsources the manufacturing of its products to external vendors. As a result, costs account for 41% of sales. In addition, 18% of sales are spent on packing freight, as sales are mainly through e-commerce. Assuming that these “costs” and “shipping charges” are the actual costs, the actual gross profit can be calculated as follows.
Effective gross profit = 1 – (41% + 18%) = 41%
In addition to this, if advertising expenses equivalent to 29% of sales, salaries (4%) and other SG&A expenses (16%) are subtracted, the operating loss will be negative, and the operating loss will be -8 to sales. 450 million yen.
Sales are centered on EC subscriptions
As of February 2022, Base Food has 69.2% of its sales coming from e-commerce subscriptions. Therefore, as long as the subscription is not canceled, most of the sales can be secured stably.
Sales other than subscriptions include sales on other EC platforms such as Amazon, Rakuten Ichiba and Yahoo! Shopping, and sales at convenience stores, drug stores, sports gyms, etc. via wholesalers.
In addition, as we saw in Figure 3, although base food is certainly in the red, many of the factors are due to advertising expenses. If advertising expenses were cut in half to 800 million yen, that alone would secure a profit of 400 million yen.The reason why they spend nearly 30% of their sales on advertising instead is because they want to earn future profits by acquiring customers.is.
In addition, Nissin Foods, Morinaga and other major companies have recently entered the complete nutrition food market, so it is possible that there is a need for rapid growth in terms of first-mover advantage.
In the following, we will examine how much “earning power” the base food business model has.
At Base Food, we also regard “LTV” and “CPA”, which are widely used among companies doing SaaS business, as important indicators.
I would like to remind readers of this series that LTV stands for Life Time Value. Say something. For example, if you use a monthly subscription service of 1000 yen for one year, the LTV is 1000 yen x 12 = 12,000 yen.
Another indicator, CPA, is Cost per Action (or Acquisition). It is also called CAC (Costumer Acquisition Cost) (*4). For example, if you spend 10,000 yen on advertising to acquire 10 customers, your CPA will be 10,000 yen ÷ 10 people = 1,000 yen. In other words, it cost 1,000 yen to acquire each customer.
Generally, in the subscription model, achieving “LTV > CPA” is said to be a winning formula.. If you can get an LTV that exceeds the cost of customer acquisition (CPA), you can expect business continuity.
Let’s see what the LTV and CPA of the base food are. According to the company’s securities report, the fiscal year ending February 2022 is as follows.
- LTV: 20,012 yen
- CPAs: 10,253 yen
LTV > CPA has been achieved. However, if you are familiar with the SaaS business, you may stop here for a moment. becauseIdeally, LTV should be at least 3x CPA for SaaS businessesIt is from (*5). By this standard, the base hood case is about twice as large, which is a little unsatisfactory.
Therefore, if you carefully check the definition of LTV in base food, the securities report says the following.
LTV= Regular order average unit price × Marginal profit ratio of regular order / Cancellation rate
*Regular Order Marginal Profit Ratio= (recurring order sales – recurring order cost) / recurring order sales
The marginal profit ratio is a figure obtained by subtracting the cost of manufacturing a product and delivering it to the customer from sales, and then dividing that amount by sales. Practically synonymous with “gross profit”.
In other words, the LTV listed in the securities report of Base Food is multiplied by the “marginal profit rate of regular orders” (=gross profit rate after deducting cost and transportation costs).
Let’s hypothetically calculate how much the LTV will be when viewed on a selling price basis instead of a marginal profit basis. According to the securities report, Base Food’s marginal profit ratio for the fiscal year ending February 2022 is 40.3%.
Selling price-based LTV= 20,212 yen ÷ 40.3% = 49,658 yen
becomes. In this way, when looking at the sales price basis, it can be seen that the standard “Ideal for LTV to be at least 3 times higher than CPA” is also met. Gross profit-based LTV is 20,000 yen, and selling price-based LTV is about 50,000 yen. In other words, we get an LTV of about 50,000 yen from customers, and about 60% of that, or about 30,000 yen. It means that about 20,000 yen will be used for the cost and transportation costs, and the remaining 20,000 yen will remain in the hands of the base food.
What is the unit price per customer and average usage period?
Based on this number, let’s also calculate how many months customers of Base Food have been using the service (*6).
Of the sales of 5.55 billion yen in the fiscal year ending February 2022, subscription sales account for 69% as mentioned above, so subscription sales will be 3.8 billion yen. Dividing this by the number of purchasers at the same time, about 100,000,
3.8 billion yen ÷ 100,000 people = 38,000 yen
If we correct this per month,
38,000 yen ÷ 12 months = about 3,100 yen
Approximately 3,100 yen calculated in this way is the monthly purchase amount per person (ARPU: Average Revenue Per User).. By the way, if you look at the base food site, the monthly subscription starter set “Bread 16 bag set” is about 3200 yen for the first time. This is a figure that does not feel out of place even when compared with the ARPU calculated above.
As we calculated earlier, the CPA (customer acquisition cost) was 10,253 yen, so if we divide this by the ARPU of 3,100 yen, the payback period will be a little over 3 months.
So far we have calculated the following two
- Selling price-based LTV: 49,658 yen
- ARPU: 3100 yen
you can also calculate the average tenure of your customers.
average customer tenure= 49,658 yen ÷ 3,100 yen = 16 months
Although not mentioned in the text, ARPU (net) = ARPU (gross) x marginal profit ratio (40.3%), CPA recovery period (net) = CPA ÷ ARPU (net).
Relatedly, according to the company’s securities report, it is also worth noting that the customer retention rate is a high value of 93.2% as of August 2022 (*7).
Summarizing the considerations so far, the situation of the base food is as follows.
“About 70% of our sales come from e-commerce subscriptions, and the number of purchasers is just over 100,000. 50,000 yen), and the retention rate is over 93%.On the other hand, Base Food spends over 10,000 yen to acquire each customer, and it takes 3.3 months to recover the advertising expenses required to acquire a customer. ”
Considering this, although the base food is certainly in the red at the moment,We have been able to achieve a high sales growth rate by investing in advertising expenses, and the subscription business is operating effectively.(Chart 6).Going forward, the key will be how to increase ARPU and extend the usage period.
In the second part, we will take a closer look at Base Food’s cash flow situation and how it plans to use the funds raised from the stock market for this listing.
*The second part will be released on Wednesday, November 30th.
*1 A complete nutritional diet generally refers to a food that contains more than the required amount of all the nutrients necessary for one meal based on the dietary intake standards established by public institutions. BASE FOOD See “What kind of food is a ‘completely nutritious food (complete food)’?”
*2 See Hitotsubashi University Professor Kenji Suzuki and Growth Capital Co., Ltd. “Joint Research Report on Growth Valley after Listing”.
*3 The content here is based on the interview below. “‘BASE FOOD’ development secret story ‘Isn’t it impossible to have a healthy diet while working?'” type, November 25, 2019. “‘What we are aiming for is infrastructure for health.’ Interview with Shun Hashimoto, CEO of BASE FOOD,” TABI LABO, March 31, 2021.
※Four In some cases, CAC and CPA are defined separately. For example, CAC mainly refers to the customer acquisition cost of the entire company’s services, so it may be calculated using the figures for sales and marketing costs. On the other hand, CPA may mean the cost per click (cost per click) required to obtain a conversion, mainly when advertising on the web. See: “What is Customer Acquisition Cost? | Introducing the difference between CAC and CPA and how to improve them,” NEXLINK, January 25, 2022.
※Five The reason why it is generally said that LTV should be 3 times higher than CPA is as follows.
Generally, research and development expenses, selling, general and administrative expenses, and cost of sales each represent 30% of sales. Under these circumstances, we believe that the return of subscription business is required to be 30%, so LTV is said to be 3 times CPA. Otherwise, investors will look to other startups and businesses that traditionally generate 14-18% returns. The discussion here is based on the following references: BSAIKRISHNA, “The importance of LTV to CAC Ratio and why should it atleast be 3X?,” Brandalyzer, March 18, 2019. Anupam Rastogi, “Focus on Sales Efficiency as you plan strategy and budget for your growth-stage SaaS company,” Medium, December 2, 2016.
*6 The LTV and CPA disclosed by Basefood are as of August 2022, but for simplicity, the calculations are based on P/L figures as of February 2022.
*7 If the usage period is 16 months, you can see that the churn rate is 1 / 16 months = 6.3%. From here, 1−6.3% = 93.7% can be calculated as the retention rate. This figure is close to the continuation rate of 93.2% disclosed by Base Food.
(Writing cooperation: Tatsuya Ito, series logo design: Mio Hoshino, editing: Ayuko Tokiwa)
Shigehisa Murakami: CEO of Fine Deals Co., Ltd., CFO of GOB Incubation Partners Co., Ltd. Visiting professor at iU Information Management Innovation College. After completing the graduate school (master’s course) of the Graduate School of Economics, engaged in securitization, real estate investment, non-performing loan investment, project finance, fund investment business, etc., mainly in structured finance business at a financial institution. Since September 2018, as CFO of GOB Incubation Partners Co., Ltd., he has been developing new businesses and supporting entrepreneurship. In addition, he also provides financial and legal support for several start-up companies. Founded Fine Deals Co., Ltd., which provides financial consulting, etc. in January 2021. In his book “Financial Statement Mystery Training](PHP Institute).
Source: BusinessInsider
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