Soapbox interview: Technogym

In a world where people are becoming increasingly conscious of their health, diet and fitness, they also seem to be ever more willing to pay top dollar for the equipment they use to keep in shape. And as technology advances the desire to have the best equipment grows. One of the leaders within this premium equipment space is Technogym, so while I was over in Italy I thought why not visit the Technogym Village in Cesena and grab a quick coffee with the founder.

Below you can read the Q+A with Nerio Alessandri, Founder of Technogym (pictured).

What are you most proud of in terms of what the business has achieved from a positive impact perspective?

Alongside our business we have been promoting wellness lifestyle for over 25 years and every day 50 million people train with Technogym products and digital solutions in 100 countries around the world. In a global scenario in which health issues related with sedentary and other bad lifestyles are seriously threating economic and social sustainability, we are really proud to give a contribution in making society more active and healthier.

Do you think a sustainability mind-set has ever had a role in helping to build a competitive advantage?

Definitely yes! In the Technogym case, we have always promoted health and wellness, so sustainability mindset and corporate social responsibility are naturally part of our business strategy.

Some might say your equipment is quite expensive- are there any plans to increase access and the ‘inclusiveness’ of your products?

Technogym is a premium brand with a full range of innovative solutions to improve end-users lifestyle not only through equipment. Beside our home offering, with an exclusive positioning, today Technogym is available in over 80.000 wellness and sport centres offering different programs and services for different people with different needs and different economic clusters: from public hospitals and community centres to exclusive clubs or resorts.

Technogym has historically been an early adopter in the fitness space. With the increasing use of fitness ‘wearables and trackers’, how does Technogym plan to maintain its relevance?

On this respect we have a precise strategy: Technogym is a Total Wellness Solution Provider. We are not only interested in developing new and more innovative smart equipments but we have been able to develop dedicated services, digital solutions and more recently contents to offer consumers a personalized training experience and operators a complete solution for the different market segments (fitness clubs, hotels, corporate, medical centres, schools, condos, private homes). That’s why we have created our unique Technogym Ecosystem – made of connected smart equipment, our Mywellness cloud platform, apps and digital training contents) – to offer our unique experience anywhere and anytime, also leveraging on the already available technologies such as the wearables and trackers you mentioned above. Our platform is in fact already automatically connectable with all the major outdoor tracking devices or Apps. Moreover with the launch of the Technogym Live platform we will make professional training contents accessible at home by the end users, thus supporting a further increase in people interested in training at home and not only in public venues.

Do you care what ESG ratings (MSCI, Sustainalytics, ISS or others) agencies say about Technogym? And do they consult with you before they rate you?

We respect these agencies but we believe that their ratings give no justice to our sustainability level. Unfortunately they never consulted with us to give us the opportunity to explain and provide material elements to their analysts; we definitely hope this will change in the near future.

What are your most material sustainability risks & opportunities with regard to how you operate the business day to day?

In a scenario in which non-communicable diseases, exclusively caused by unhealthy lifestyle, represent the first cause of premature death we have a great opportunity of spreading awareness on the benefit of regular physical exercise and of helping people in being active every day. This represent an incredible social opportunity for Government, businesses and citizens. In terms of risks, our industrial footprint is pretty low compared to other sectors, and we believe our potential sustainability risks are pretty low both in terms of environmental and social sustainability.

What sort of environmental impact does the business have? And what typically happens to a Technogym machine when its useful life ends? Can it be recycled or reused?

Despite a usual lifecycle inside a Club can be estimated in c. 5 years all our products have a second life and we have a specific second hand program called Still Novo. Most of our sales contracts include a buyback option which allows the customer to keep the location updated with the last models and resell to Technogym the equipment after a specific period of time pre-defined at the signature of the contract. Once back, those equipment are completely reconditioned and sold to customers willing to accede to more affordable options.

What is the philosophy around talent acquisition (e.g. staff education and engagement) to maximise quality and minimise turnover?

Human resources is very high positioned in our priority list. Since years we are running a project called “Working 4 Wellness” which includes a very strong training component and a corporate wellness program ranging from medical check-ups and nutrition programs to sport activities and educational seminars. We strongly believe that a trained and motivated staff do represent a strong asset for the company and for the business in terms of innovation and productivity.

Pay and incentives are an important part of the governance process. How do you feel as a public CEO being interrogated over how much you and your leadership team are paid?

We have no problems with this, this is part of a listed company transparency. Our pay and incentives are in line with industry standards and company sustainability.

Has the change in media changed the risk / reward dynamic with regard to being sustainable?

Reaching and gathering around our products, services and brand, different communities – united by passions, for sport, fitness or health – is a key element of our marketing strategy, that’s why social media represent a very important opportunity for us.

Have you ever taken a cost in the short-term purely for social or environmental reasons?

We do not have an example on this respect. We tend to invest / focus in mid-long term strategies.

Can you see ways to profit from providing solutions or being relatively proactive on certain issues vs competition?

Yes. A good example is our “Let’s Move for a Better World Campaign” our global campaign which leverages our digital ecosystem to involve fitness clubs in a social project to tackle child obesity. People, inside fitness clubs, can track their movement on Technogym equipment and contribute to a donation of Technogym equipment to schools or community centres running sport educations projects for the young generations. This campaign on one side generate a concrete impact in local communities and on the other side promotes Technogym’s digital services business.

What is your biggest ambition for the company from a sustainability perspective…. And will this make shareholders money?

We strongly believe that wellness is an opportunity for all stakeholders – Governments, Companies and Citizens – both under the social and economic standpoint. Today, thanks to Technogym, 50 million people train every day all over the world. The more people we will be able to involve in regular physical activity in the future, the more we will contribute to a more sustainable future for the entire society. Technogym is one of the few companies that can really support the world in becoming a better place and in improving the quality of life of millions of inhabitants: Healthy people, healthy planet. Our 2021 goal, which we shared with the entire team in our global convention few months ago, is to be able to double our user’s community and to reach 100 million people.

 

Kames Capital invests in Technogym in its fund range.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience (as at 30 April 2019).

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The Soapbox Summer Reading List

The holidays are upon us and if you have school-aged kids like us (except Euan who goes when it’s cheap) you will be travelling soon – at peak cost.  But this might cheer you up!

We know that you are all sustainable investing geeks like ourselves, so we have compiled a list of our favourite books from the last year together with a personally selected teaser quote (I know… we’re too good to you).

The first (discovered by Ryan) will get you back in touch with the world outside the office walls. The second (discovered by Jon) is a deep and fascinating history of environmentalism and how it intersects with economic growth. It features two profoundly important men that I had never heard of. The third is probably my personal favourite as it blends two of my main interests; disruptive innovation and sustainability (specifically economic development). The fourth is probably the best pure investing book I have read in the last five years (hopefully you view that as a good thing)! Lastly – and by no means least… well maybe actually least – but very close to our hearts, is a tour de force of sustainable investing philosophy and practice.

 

1) The Nature Fix: Why Nature Makes Us Happier, Healthier, and More Creative by Florence Williams
Quote: “Distilling what I learned, I came up with a kind of ultrasimple coda: Go outside, often, sometimes in wild places. Bring friends or not. Breathe.”

2) The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World by Charles Mann
Quote:“A prerequisite for a successful scientific career is an enthusiastic willingness to pore through the minutiae of subjects that 99.9 percent of Earth’s population find screamingly dull.”

3) The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty by Clayton M. Christensen, Efosa Ojomo, & Karen Dillon
Quote: “When innovators create a new market, targeted at a large population that has historically been unable to afford the product—non-consumers—the innovator must hire many more people not only to make the product or service, but also to get it to the new customers.”

4) 7 Powers: The Foundations of Business Strategy by Hamilton Helmer
Quote: “it crystal clear to me that the ascent of great companies is not linear but more a step function. There are critical moments when decisions are made that inexorably shape the company’s future trajectory. To get these crux moves right, you must flexibly adapt your strategy to emerging circumstances. The goal of this book is ambitious: to enable such flexibility by making the discipline of Strategy relevant to you in those high-flux formative moments.”

5) Kames Global Sustainable Equity Impact Report  by us.
Quote: “I believe we are at the intersection of two very powerful supply and demand curves.  Technology led deflation (supply) is converging with the greatest sustainability challenges the human race has ever faced (demand). Capital markets (particularly publically listed companies) can be the bridge between that supply and demand. The demand is unfortunately inevitable, but so is the supply. I am optimistic. It is evident to me that this intersection is driving a wave of positive change in global markets.”

 

Sorry I couldn’t resist the last one …. On the plus side, unlike the others it’s completely free and downloadable on your iPad. We’d be very interested in both your feedback on the books and / or any suggestions that you may have for us?

Have a great holiday when it comes.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience (as at 30 April 2019).

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Soapbox Speaks: Hotel Chocolat podcast

This first in a series of podcasts gives us the opportunity to talk to Angus Thirwell the Co-Founder and Chief Executive of Hotel Chocolat. He discusses the importance of sustainability in their business, and how it is put into practice from the picking of cocoa beans to the attributes they look for in their high street employees.


About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.

*As at 30 April 2019.

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Who cares wins?

“Most commonly, new positions open up because of change… new needs emerge as societies evolve…..When such changes happen, new entrants, unencumbered by a long history in the industry, can often more easily perceive the potential for a new way of competing. Unlike incumbents, newcomers can be more flexible because they face no trade-offs with their existing activities.” Michael E. Porter; What is Strategy? Harvard Business Review (Oct-Nov 1996)

Is excluding a company from investment based on what it sells, an arbitrary judgement based on values? Is it purely a principled act separate from investment returns? We think not.

The long-term negative externalities of unsustainable products (such as cancer or deforestation for example) create market frictions that eventually flow back to those that promote or facilitate them.  Where such market frictions exist and incumbents do little to resolve them, innovators and entrepreneurs eventually appear with solutions that remove them.

In resolving a meaningful societal or environmental friction (such as plastic waste for example), entrepreneurs create value for their shareholders. Furthermore, in doing so, these innovators create disruptive frictions for the incumbents. The more unsustainable a product is, the riper it is for disruption and the more aggressive the innovators are likely to be.

Extend this further. Is it time that “traditional” business school-trained investors started giving those who care about these things a bit more credit?  We are used to hearing about the “opportunity costs” of excluding certain sectors; but what about the opportunity cost of investing in these unsustainable areas instead of elsewhere? Like somewhere that is resolving damaging frictions rather than creating them?

Source:factset

For us, the sustainability of a company’s product is directly linked to its strategic positioning.  When we think sustainably, the long-term strategic positioning of a company comes into focus. Companies that sell unsustainable products will inevitably face strategic dilemmas.  As Michael Porter recognised and other leading thinkers have observed, incumbents find it very difficult to reposition or ‘pivot’ themselves strategically.  So as sustainable growth investors, why would we not focus all of our energy searching for the best and most impactful disruptive challengers to invest in?

Clients and regular readers will be familiar with our three dimensions of sustainability framework below. What if we replaced the words sustainable product with ‘strategic positioning’ and the words sustainable practices with ‘operational effectiveness’? To be clear, ‘operational effectiveness’ as described by Porter also directly links to our definition of sustainable practices (i.e. how well a company is run day-to-day). We believe it is a fallacy that you can get one without the other over the long-term.

Being strategically positioned away from areas that sustainable investors typically seek to avoid has provided a performance benefit over the last three and five years. Meanwhile daring disruptive innovators who are mission-driven (i.e. care) are inventing new business models and leveraging the declining costs of technology to deliver positive impact, many creating economic value as they do.  Perhaps caring is the way to win in the long-term?

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.  *As at 30 April 2019.

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Can technology disrupt and democratise drug development?

Pharmaceutical research and development is critical and offers health and hope to millions…. but it’s very expensive. A Deloitte study from 2018 reported that the cost to develop a new drug from discovery to launch ranges from $1bn to $4bn (average about $2.2bn) and this has been rising ahead of inflation for decades.  It also takes between 5 and 10 years to bring a drug to market (average 6.7 years).  This trend of stubborn inflation (or friction) is in sharp contrast to most technological disruption we see today.  Given these high and rising costs, it is easy to understand why pharmaceutical companies are predominantly focussed on generating a return on these investments. It is the economics (i.e. potential number of patients multiplied by the achievable price) and not societal benefit, which are the ultimate determining factor. It’s all about size, scale and pushing prices up. Furthermore, cultural frictions and conflicts of interest clearly arise within the system, thus delaying the development of promising new discoveries.


Source: Deloitte 2018: Measuring the Return from Pharmaceutical Innovation

In short, the barriers to drug development are very high and research and development productivity is low. Navigating your way to and through a phase III trial is a monumental undertaking for any scientist or entrepreneur, so success is highly unpredictable.  It’s a hero or zero binary outcome that even the experts have difficulty predicting.  Factor all this into the context of treating rare diseases (i.e. developing ‘orphan drugs’) and it is also obvious why they receive relatively limited resource. This is probably fair in an economic context, but that’s not much comfort to those who might have been cured.


Source: Deloitte 2018: Measuring the Return from Pharmaceutical Innovation

The appropriate mechanism(s) for encouraging new drug development – whilst also ensuring safety, efficacy and keeping prices low – is fraught with politics, but there are some things that everyone can agree would be good…..

  1. Increase the efficiency of the drug discovery / screening process
  2. Improve data quality & quantity throughout the process to maximise R&D resource allocation
  3. Increase the efficiency of human trials to minimise suffering, reduce time and reduce costs
  4. Improve drug efficacy and reduce side effects via more personalised medicine (without an associated decrease in the returns on investment)

We do not directly invest in any pharma or biotech companies within our representative global sustainable equity strategy, but we do invest in companies that are focussing their efforts on solving at least one of the above problems within the R&D process.

Company Country Kames Sustainability Area of focus Brief description and examples of positive disruptive potential
PeptiDream Japan Improver Drug discovery platform A proprietary drug discovery platform which contains trillions of peptides and allows researchers to screen for new drugs hyper efficiently versus traditional methods. Peptides have relatively high potency, high selectivity and low toxicity versus traditional antibodies. This means a much higher chance of finding efficacious drugs which have less side effects. As a result, peptide drugs have the potential to vastly expand the number of addressable and ‘drugable’ targets, including rare diseases.
Medidata US Leader Drug R&D data analytics platform A software as a services (SAAS) platform specifically developed for the drug R&D process. This mission-driven business was formed specifically to help bio-tech & pharma companies do detailed and dispassionate data analytics on nearly all aspects of a clinical drug trial. This improves resource allocation, increases success rates and drives cost efficiencies. Medidata are also pioneering the concept of “synthetic” trials which could dramatically reduce the required number of human participants needed.
Illumina US Leader Genomics Illumina are the global leader in gene sequencing or ‘genomics’, a rapidly evolving industry at the intersection of biology and technology. Illumina enables researchers to better understand genetic variations and thus unlock potential new treatments. Illumina has driven down the cost (per genome) which we believe has led to an inflection in research activity across a range of unsolved disease classes and under-researched rare diseases.
Icon Ireland (US listed) Improver Drug trial management A clinical research organisation (CRO) used by pharma & biotech industry to accelerate and improve their drug trial process. CRO’s add value by leveraging their experience and data in large scale late stage trials. CRO’s also provide small biotechs with access to this scale, thus meaning small players can hold on to and commercialise their own IP rather than selling out to big Pharma.

Technology-led innovations typically drive up the chances of success whilst also taking cost out of the system but such trends have been very slow to manifest within pharmaceutical R&D. We believe some technologies are now reaching tipping points that could provide a step change in productivity across multiple areas in this R&D process. This would be a win / win for everyone, including – we believe – the shareholders of companies who enable such positive advances.

Source: Illumina, JP Morgan healthcare conference presentation, January 2019

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas. He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience. (As at 30 April 2019).

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