Business and Other Risks

The Group conducts business in Japan and globally. This is why many factors may impact its performance and financial standing, including changes in political, economic, and social trends, fluctuations in consumer spending habits, and supply chain instability due to economic and exchange rate fluctuations, policy changes in certain countries, changes to the international order, and the outbreak of war and conflict. The Group does not have sites in Russia or Ukraine and is also not involved in business with these regions. However, if the disruption to the global economy and the rise in costs for raw materials, fuel, transportation, and other areas continues for longer or becomes more severe than expected following Russia’s invasion of Ukraine, it may affect the Group’s performance and financial standing.

The Group is managing risks arising from external changes in political, economic, or social trends, as well as trends in related industries, with the Long-Term Management Planning Committee playing a central role and relevant divisions, departments, and committees cooperating with each other, as it works to develop a system to minimize the impact of these changes. It is also pursuing countermeasures in the event that supply chain adjustments are needed, such as the decentralization of manufacturers and logistics contractors and the exploration of local production.

Japanese tea beverages account for a high percentage of the Group's total beverage product sales volume, with a share of 63% in the consolidated fiscal year under review.

The green tea beverages market is expected to continue growing in the future and the Group forecasts that its green tea beverages led by the Oi Ocha brand will also grow alongside market expansion. The expansion of the overseas market has been set as a particularly important growth opportunity, and the Group is concentrating its management resources on making the Oi Ocha brand a global one.

However, beverage manufacturers continue to compete fiercely with each other due to digital marketing and the expansion of the D2C market due to changes in sales channels, in addition to ongoing price competition and stagnating sales caused by intensified competition. Moreover, because of the fierce competition for market share among product categories and changes in consumer preferences, product lifecycle tends to be short. 

In this market environment, the Group strives to provide products which meet customer needs, with emphasis on green tea beverages, and strives to serve customers, with a focus on route sales.

The Group will continue implementing such measures going forward and will also deploy measures to beat the competition based on market trend forecasts; however, if such measures fail to adequately address the changes in the market environment, the Group's performance and financial standing could be affected.

The Group is managing risks arising from external changes in domestic and global economic trends, as well as trends in related industries, with the Long-Term Management Planning Committee playing a central role and relevant divisions, departments, and committees cooperating with each other, as it works to develop a system to minimize the impact of these changes. In addition to strengthening its framework for market research and analysis, the Group is also pursuing countermeasures aimed at anticipating market trends and providing new value aligned with customer needs, including health-related research, sharing of the findings, developing products that reflect shifts in consumer preferences, enhancing both internal and external collaboration to promote open innovation, and strengthening its D2C business and EC teams.

The Group's main business is beverages, mainly tea-based beverages; however, growing demand for tea leaves used in beverages in addition to decline in the farming population and decreased tea production due to decline in the tea planting area could prevent the Group from procuring the tea leaves it requires, leading to deterioration in the supply-demand balance, and rising prices for imported raw materials (grains, vegetables, etc.), petroleum used as a raw material for plastic containers, and unfavorable exchange rates could push up procurement costs, increasing the cost of goods sold.

There is an additional risk of increased costs due to plastic taxes, product delisting, or suspension of transactions for plastic-containing products, as global regulations on the export and sale of plastic products continue to tighten.

If the Group fails to adapt to such changes in the market environment in the future, its performance and financial standing could be affected.

Risk Management Framework and Countermeasures

Through the establishment of the ITO EN Group Procurement Policy, the Group engages in sensible and fair procurement activities in consideration of social/environmental issues in cooperation with our supply chain partners to provide safe and reliable products to our customers. It is working to ensure a stable supply of tea leaves, essential to the Group’s core business, by developing production methods that are not reliant on human labor and through initiatives under the Tea-Producing Region Development Project. At the same time, the Group is reviewing its product designs and materials while establishing countermeasures in response to rising material costs and stricter regulations on plastic-containing products.

The Group produces most of its tea products and the raw materials for its beverage products at its own factories. Meanwhile, most of its beverage products and some of its tea products are manufactured outside of the Group by contract manufacturers. The Group also divides Japan into five blocks for an efficient production and logistics system.

The Group strives to establish a production and logistics system to sustainably provide safe and reliable products. However, it makes no guarantee that it can completely eliminate the impact of events such as natural disasters or the worsening of the 2024 logistics problem on production and, in the event of unforeseen circumstances, the Group's performance and financial standing could be affected.

The Group regularly carries out equipment inspections at its own factories to prevent any unexpected production line stoppages. The Group also has contract manufacturing facilities across Japan in case of unforeseen circumstances. In addition, to ensure a stable supply of products, it strives to establish an efficient production and logistics system by dividing Japan into five blocks and by ensuring logistics volume through investigating potential cooperation with other industries. Moving forward, the Group will continue to pursue initiatives aimed at realizing a socially and environmentally friendly, sustainable production and logistics system.

The Group engages in marketing communications as a Health Creation Company, through advertising and promotional activities including via digital media, both in Japan and internationally, as well as through sales and promotional efforts such as route sales and mail-order sales. It follows international standards in its activities and product labeling, striving for communication based on scientific evidence using expressions which are easy for anyone to understand.

However, the Group’s performance and financial standing may be impacted if it cannot develop advertising, promotional, or sales activities that meet needs, expectations, or requirements due to changes in consumer behavior or revisions to relevant laws and regulations.

The Group has established the ITO EN Group Policy on Responsible Marketing based on the standards set by the International Chamber of Commerce (ICC), and is working to develop responsible marketing communications and ensure that product labeling is appropriate, easy to understand, and unlikely to cause misunderstanding. It also thoroughly verifies and monitors the appropriateness of advertising, promotional, and sales activities both before and after their implementation.

Recognizing that food safety, hygiene management, and quality control are top management priorities, the Group ensures thorough quality control and traceability from the procurement of raw materials through to the delivery of products.

However, in the event of product contamination, distribution of products without proper allergen labelling, use of banned additives coming from raw materials, pesticide residues (including damage caused by rumors), food poisoning or other hygiene problems despite the initiatives for this type of strict quality control, the Group's performance and financial standing could be affected. A situation that the Group's initiatives are powerless to address such as a quality issue across the whole industry or the whole of society could also affect the Group's performance and financial standing.

The Group has established the ITO EN Group Quality Policy as well as the Quality Control and Quality Assurance Departments to ensure compliance with this policy and guarantee food safety, hygiene management, and quality control. The two departments have established voluntary standards and conduct quality inspections to check product safety. They also carry out checks to prevent contamination from raw materials and the use of prohibited additives, manage and maintain a traceability system (for tracing the provenance of raw materials and tracking products throughout processing, distribution, etc.) and provide guidance on quality control to contract manufacturers and audit their operations. They also relay audit results and various other quality information to those in charge of manufacturing within the Group and those in charge of contract manufacturing facilities at regular quality meetings. Through such activities, the Group seeks to raise awareness of food product safety, hygiene management, and quality control throughout the supply chain, further strengthen related systems, and minimize risks.

Some of the business operations conducted at directly managed stores in Japan are regulated by the Food Sanitation Act. Such business operations are conducted in compliance with laws and regulations and are also subject to thoroughgoing hygiene management based on hygiene standards of the facilities in which stores operate and ITO EN's manual.

The Group has also established a permanent Product Risk Response Measures Committee to advance the creation of response protocols and conduct response simulations in the unlikely event of a quality issue or incident, with the Customer Service Office taking a central role.

Climate change due to global warming is wreaking havoc across the globe, with abnormal weather such as torrential rain leading to floods and sediment-related disasters, extreme heat and heat waves leading to drought, changes in water resources, and infection diseases. Since the raw materials used to make the Group's main products are crops such as tea, barley, coffee, vegetables and fruit, poor harvests due to changes in the climate of production areas in Japan and overseas are likely to lead to higher raw material costs and raw material shortages, resulting in lost sales opportunities and other negative repercussions.

In the event of adverse impacts of climate change, the spread of infectious diseases, or natural disasters such as earthquakes which are worse than anticipated, the Group's head office functions and its production and logistics systems could be disrupted and the Group's performance and financial standing could be affected.

At the same time, if the Group’s business activities are deemed insufficiently environmentally conscious or lacking in ethical considerations such as ethical consumption, it could impact consumer trust and lower brand value.

The Group's Risk Management Committee (chaired by the Representative Director and President), manages climate risks, which are recognized as one of the Group's material risks, by integrating them into the Group-wide risk management system. The Group is addressing climate change and other environmental risks as Group-wide environmental issues by regularly identifying risks through climate change scenario analysis based on TCFD recommendations, and through management approaches within its environmental management system.

The Group is focusing on a range of issues to reduce the environmental impact of its activities, including reduction of greenhouse gas emissions, sustainable use of water resources, reduction of waste, recycling of resources, and biodiversity. It is also working to diversify the production sites of agricultural raw materials, develop crops that are resilient to climate change, and utilize fertilizers and cultivation methods that support climate resilience to address the risk of poor harvest of raw materials due to climate change. Moving forward, the Group will continue to monitor the impact of climate change on its business and establish systems to respond appropriately. Additionally, in preparation for natural disasters, infectious disease outbreaks, and other critical situations, the Disaster Prevention Committee is working to ensure awareness of response measures, review the BCP (business continuity plan), and promote the decentralization of production plants and transport methods. The Company has organized a system to minimize damages when a critical situation occurs by establishing a task force headed by the President to prevent the expansion of damages by taking prompt measures.

The Group has developed an overseas business presence primarily in North America, China, Southeast Asia and Australia, as well as business in Japan. It also entered the European market in 2024, expanding its production and sales of Oi Ocha-branded beverage products. Meanwhile, while overseas activities are becoming more and more important along with the globalization of corporate activities, significant changes may arise due to unforeseen political, economic, and legal developments such as escalating international conflicts, the outbreak of war or disputes, acts of terrorism, political instability, protectionist policies, intensifying competition in various countries, or revisions to international legal regulations. Any of these significant changes could impact the Group's performance and financial standing through boycotts, increased tariffs, or the suspension of local production and supply operations.

Additionally, more and more countries across Europe and the rest of the world are enacting legal regulations mandating environmental and human rights due diligence. If the Group fails to establish an appropriate assessment and risk management framework, including throughout its supply chains, as it expands its overseas business, environmental or human rights issues that may arise could result in legal action or fines in the relevant country, as well as a decline in brand value, affecting the Group’s performance and financial standing.

The Group’s International Business Headquarters is working to establish a management framework to further strengthen its responses to risks with overseas business activities, in line with its long-term vision of becoming a Global Tea Company and achieving the milestone of making Oi Ocha a global brand. While there are a range of risks present in the overseas business, the Group is considering appropriate measures to reduce the potential impacts of these risks, such as increasing production bases in anticipation of escalating conflicts between countries, establishing criteria for business withdrawal, and creating local systems to verify changes in legal regulations in each country.

When executing business, the Group is subject to various laws and regulations, including the Food Sanitation Act, the Product Liability Act (PL Act), labeling legislation, labor legislation, competition legislation, personal data protection regulations, and environmental legislation.

If the Group breaches any of these laws and regulations or otherwise engages in conduct which is at odds with the demands of society, the Group could be penalized in accordance with laws and regulations, have legal action taken against or be subjected to social sanctions or it could lose the trust of its customers. 

If it became very difficult for the Group to comply with laws and regulations in the future due to the enactment of new laws, changes to laws or changes to their interpretation, or if tighter climate change countermeasures and other regulations led to an increase in costs borne by the Group, the Group's performance and financial standing could be affected. 

The Group also enhances the effectiveness of its governance by managing Group-wide risks in an integrated and strategic manner. However, with the establishment of new Group companies and mergers, the number of legal regulations to be addressed may increase, and the scope and granularity of risks to be managed may change. Expanding efforts to address risks related to Group governance may delay the progress of other Group initiatives, which could affect the Group's performance and financial standing.

To fully enforce compliance based on the ITO EN Group Code of Conduct, the Group implements Group-wide compliance education with the Legal Department playing a central role. Additionally, the Group is promoting its internal control system through the Internal Control Promotion Committee to ensure proper and efficient business operations, and is working to strengthen its internal auditing system.

Through the Group Management Promotion Department, the Group is also working to improve the effectiveness of its governance by supporting the promotion of risk management activities at each Group company, analyzing trends in legal regulations and compliance to be followed and enforced across the Group, and managing risk situations related to these matters.

Additionally, respect for human rights forms the foundation of the Group’s management principle, “Always Putting the Customer First,” and is regarded as central to all its business activities. The Group has established the ITO EN Group Human Rights Policy based on advice from external human rights experts. Through this policy, the Group has built and is implementing a human rights due diligence framework to identify, prevent, correct, and address human rights risks.

The Group uses an information system to effectively engage in production, sales, and other business activities. However, if a cyberattack targeting the Company or one of its Group companies causes a system failure, it could result in operational disruptions or shutdowns, financial losses, and a decline in public trust.

The Group also holds a considerable amount of customer information obtained through sales transactions, including route sales and mail order sales, and through consumer campaigns and other sales promotions and it also holds information about potential customers gained through entries to its Shinhaiku Contest. Such personal information about customers is managed within the Group and the management of some personal data is outsourced to a data management company.

However, if unforeseen circumstances such as power outage, disaster, software or equipment fault, computer virus or hacking lead to an incident involving such information in the future such as its loss or leakage, the public could lose confidence in the Group and the Group's performance and financial standing could be affected.

Risk Management Framework and Countermeasures

The Group is working to implement appropriate information security measures to ensure safe, effective, and accurate operations in response to the growing diversity and complexity of cyberattacks. As a measure against cyberattacks targeting the Company or one of its Group companies, the Group has established a system that can automatically detect and remove unauthorized access and malware. If it is unable to remove the malware, the system issues an alert and responds in collaboration with the Company's DX Security Promotion Department and information security companies.

The Group also takes appropriate security measures for information management, including information systems, to prevent incidents such as the loss of important information that contains personal information, its misuse, or falsification. The Group has established a privacy policy to ensure the protection of personal information and is promoting appropriate information security measures aimed at thoroughly managing such information, preventing leaks, and maintaining and raising awareness of compliance with information management rules. It is also working to strengthen information protection by monitoring how personal information is handled within the Group and ensuring internal rules are well understood in operations.

Human capital forms the foundation of the Group’s management strategy for sustainable growth in response to changes in the business environment. However, if the Group faces difficulties in securing, retaining, and training the necessary management personnel and employees due to intensifying competition, rising demand driven by accelerating digital transformation and globalization, and the increasing complexity and evolution of required skills, it could result in stagnation of business activities and prohibit the execution of management strategies, which could in turn affect the Group’s performance and financial standing.

The Group has established the ITO EN Group Human Resources Policy, regarding people as the most important assets. To secure and train the human resources necessary to implement management strategies, it aims to revitalize the Group as a whole and improve employee productivity by creating an environment where a diverse workforce can flexibly work and where all employees can work enthusiastically. The Group has also established its own self-development and career support systems, carries out strategic human resource training plans, and implements human resource management measures that align human resource strategy with overall management strategy.

The Group holds various fixed assets including commercial real estate and goodwill. Such assets may be subject to impairment accounting due to reduced profitability from declining market value or failure to generate expected cash flows. In addition, with the globalization of corporate activities, the Group is subject to the tax systems of the countries in which it operates, and it may face unforeseen tax reforms or reassessments by local authorities in the future. If any of these significant events arise leading to impairment losses, the Group’s performance and financial standing could be affected.

The Group strives to ensure thorough credit management and debt collection in accordance with its credit management standards, aiming to prevent bad debt losses due to client bankruptcies as part of its asset preservation efforts. The Group also works to develop a system to prevent the occurrence of dead stock by making efforts for the management of inventories such as products, raw materials and materials. At the same time, the Group has established a Director-led review system to prevent the deterioration or loss of asset value, including that of acquired subsidiaries, real estate, and securities.

The Group has established the ITO EN Group Tax Policy in response to tax-related risks, establishing an appropriate management framework to ensure transparency and fulfill its tax obligations appropriately. This, in turn, reduces the likelihood of significant tax-related risks.