Bill Hortz's picture

"Innovation is the engine that pushes companies forward, and an innovative corporate culture is one of the primary drivers of long-term value for companies." Matthew Blume, Appleseed Fund

[The Institute for Innovation Development interview series seeks to learn from innovative business leaders, uncover innovation best practices, and discover how to apply these insights into the financial services industry.

We recently sat down with Matthew Blume, CFA, portfolio manager and manager of shareholder activism at Pekin Singer Strauss Asset Management -- an independent wealth management firm and advisor to the  Appleseed Fund (APPLX, APPIX) – to learn about their views on business innovation and how they apply them to their socially responsible investment process in their mutual fund.]

Hortz: Why is business innovation so important for today’s business leaders?

Blume: The importance of innovation for most companies should be obvious to even the most casual of observers.  For some, innovation is quite literally a matter of life or death.  Companies that do not innovate can find themselves failing to deliver products that keep up with changing consumer demands, falling behind the regulatory curve, or losing market share to competitors that place greater emphasis on process improvement. Each of these represents a major barrier to long-term profitability and possibly even viability.  Innovation is the engine that pushes companies forward, and an innovative corporate culture is one of the primary drivers of long-term value for companies.

Hortz: As a portfolio manager, how do you apply business innovation as part of your evaluation and buy strategy on individual companies?

Blume: As long-term investors, our goal at Appleseed Capital is to identify undervalued investments in the universe of publicly-traded companies.  As part of this process, we search for companies that pursue the creation of innovative products or services or that employ innovative business practices in such a way as to enhance the long-term value of the companies. While the standard definition of innovation tends to be somewhat narrow, as investors, we believe that corporate innovation can take many different, and often unexpected, forms. Innovation can generate incremental firm value by increasing sales, reducing costs, improving competitive positioning, and/or enhancing profitability. Instead of inventing new products or developing new processes, certain companies innovate simply by applying new business models to existing industries. Such innovations can sometimes revolutionize entire industries by changing the way that businesses are structured or managed.  

Hortz: Can you give us an example?

Blume: One company that has successfully employed this kind of revolutionary innovation is The Joint (NASDAQ:  JYNT). The Joint is a franchisor of chiropractic clinics that offer quick, inexpensive spinal adjustments at an attractive price point, offering adjustment services at a cost that is roughly 50% below that of industry averages.  The fundamental business model is about creating healthier lives through the usage of chiropractic services, which has material benefits for society at large.  With 370 clinics currently open and an aggressive plan to fill out its white space (uncharted territory of industry) in the years ahead, The Joint has plenty of growth afforded to it.  Currently, same-store sales are growing at a 20%+ rate, and, with high returns on capital, it only takes a new franchise 11 months to reach breakeven.  EBITDA margins on mature stores could reach as high as 40%+. 

The defining business model for The Joint is truly innovative.  It is set up more like a retail business than a typical medical practice, and its locations reflect that retail orientation.  The highly fragmented chiropractic care industry has over 60,000 chiropractors, most of whom are sole practitioners.  Patients of The Joint benefit from clinics being open 6-7 days per week (including evening hours with no appointment required), minimal wait times of less than 10 minutes, and multiple locations available to members, and fetching treatment costs.   From the chiropractors’ perspective, they benefit by not having to build a practice from scratch, less time spent on administrative tasks, extensive software support, local marketing benefits, no need to spend time on insurance reimbursement, and higher income potential with more throughput. 

As The Joint adds more franchises, continues to build out its infrastructure, and matures its existing stores, revenues should continue to grow at a double-digit pace.  Margins should continue to expand as this innovative concept continues to develop.  Importantly, this is one retail concept that cannot be outsourced to the Internet.  In short, The Joint has the possibility to revolutionize the way that consumers use chiropractic care, and future growth potential is very substantial.

Hortz: Innovation is not always then just about technology. By changing the traditional business model that every practitioner has been running with, you can, in essence, change the direction of the whole industry?

Blume: As this example clearly demonstrates, business innovation is not simply a matter of building a better mousetrap.  It might be developing a more efficient way to build the same mousetrap, identifying more effective bait for the trap, or even coming up with new ways to dispose of mousetraps that have served their purpose.  Chiropractic care has existed for more than a century, and The Joint is not fundamentally changing the way that chiropractic medicine is being practiced.  But the company most certainly is changing the way that chiropractic care is being provided, as well as how chiropractic businesses are being structured and managed. 

Hortz: So, as a portfolio manager and business valuation expert, you see companies and business managers that understand and successfully apply business innovation thinking and strategies as better investments for the long run?

Blume: As stewards of our clients’ capital, we are tasked with finding sustainable value where others may have missed it.  It is our job to identify companies, such as The Joint, that are creating value for shareholders, customers, and other stakeholders in new and creative ways.  No matter how the concept is applied, business innovation will continue to be one of the most important factors that separate a flash-in-the-pan business from one that creates and enhances long-term value to the benefit of its shareholders, the environment, and society as a whole.

This article was originally posted on Financial Advisor Online.

 

Appleseed Capital is the institutional arm of Pekin Singer Strauss Asset Management, a Chicago based asset manager founded in 1990. Appleseed Capital strategies employ a go-anywhere value approach that integrates Environmental, Social and Corporate Governance (ESG) criteria into its investment decision making. The views expressed are those of the authors as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. Pekin Singer cannot assure that the type of investments discussed herein will outperform any other investment strategy in the future. Although information has been obtained from and is based upon sources Pekin Singer believes to be reliable, we do not guarantee its accuracy.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.

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