Business and Other Risks
Risks that may have a significant impact on the Group's situation, including its performance and financial standing, are as follows.
Forward-looking statements in the text are judgments of the Group as of the end of the consolidated fiscal year under review (April 30, 2022), and these are not the only business and other risks.
Domestic economy, consumption trends
The Group operates mainly in Japan. Consequently, changes in economic trends in Japan due to economic and monetary policies, natural disasters, and the COVID-19 pandemic and changes in personal consumption stemming from such developments could affect the Group's performance and financial standing.
On the market for beverages, which is the Group's main business, slow growth in sales by value is becoming more noticeable as retail prices continue to fall; at the same time, beverage manufacturers continue to compete fiercely with each other through sales promotion activities such as sales campaigns. Moreover, because of the fierce competition for market share among product categories and changes in consumer preferences, product lifecycle is also short on the beverages market.
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.
Raw material procurement
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.) could push up procurement costs, increasing the cost of goods sold.
Moreover, soaring prices for oil, which is the raw material of the PET bottle containers the Group uses for its beverage products, could increase the cost of goods sold.
If the Group fails to adapt to such changes in the market environment in the future, its performance and financial standing could be affected.
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 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.
However, the Group makes no guarantee that it can completely eliminate the impact of events such as natural disasters on production and, in the event of unforeseen circumstances, the Group's performance and financial standing could be affected.
Climate change and natural disasters
Climate change due to global warming is wreaking havoc, with abnormal weather such as torrential rain leading to floods and sediment-related disasters, extreme heat, and changes in water resources. 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 are likely to lead to higher raw material costs and raw material shortages, resulting in lost sales opportunities and other negative repercussions. The Group conducts regular risk assessments and develops BCP measures; however, in the event of adverse impacts of climate change 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.
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, and reduction of waste. To address climate change, the Group has established FY2030 CO₂ emission reduction targets (base year: FY2018) of a 50% reduction in total for Scope 1 and Scope 2 emissions and a 20% reduction in total for Scope 3 emissions, and has set an FY2050 target of carbon neutrality. With respect to the sustainable use of water resources, the Group formulated and published "Medium- to long-term environmental targets for water resources" in April 2021. In addition, the Group conducted scenario analysis for green tea, which is its main raw material. Going forward, the Group will continue assessing the impact of climate change on its business and develop systems that enable it to properly address the issue.
Dependence on Japanese tea beverages
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 Oi Ocha brand will also grow alongside market expansion; however, if the Group loses market share amid the intense competition on the green tea beverages market or the growth of the green tea beverages market slows due to the emergence of alternative products, and if the Group fails to adapt to such changes in the market environment, then the Group's performance and financial standing could be affected.
Exchange rate trends
Foreign subsidiaries' financial statements are prepared in the local currency of the country they operate in and must therefore be converted into yen for preparation of the consolidated financial statements. Swings in exchange rates can cause fluctuation in the rate used for conversion into yen, which could affect the Group's performance and financial standing.
The Group has developed an overseas business presence primarily in North America, China, Southeast Asia and Australia.
With the globalization of corporate activities, overseas activities are becoming more and more important and, since business activities and transactions conducted overseas depend on political, economic and legal factors in the countries in which the Group operates, any significant change in such factors could affect the Group's performance and financial standing.
Legal regulations and others
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.
Furthermore, 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 regulation led to an increase in costs borne by the Group, the Group's performance and financial standing could be affected.
The Group 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 New Haiku 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.
The Group 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. 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.
Food safety and hygiene management
Recognizing that food safety and hygiene management are management priorities, the Group has established the ITO EN Group Quality Policy and has also established the Quality Control Department within ITO EN to ensure food safety and hygiene management in compliance with the policy. The Quality Control Department has established voluntary standards and conducts quality inspections to check product safety. It also carries out checks to prevent contamination from raw materials and the use of prohibited additives, manages and maintains a traceability system (for tracing the provenance of raw materials and tracking products throughout processing, distribution, etc.) and provides guidance on quality control to contract manufacturers and audits their operations. The Quality Control Department also relays 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 safety and hygiene management 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.
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 described above, 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 holds various fixed assets including commercial real estate and goodwill. If the market value of such assets falls, or they do not generate the expected cash flows, or their profitability otherwise declines, impairment accounting may be applied, resulting in impairment losses, and the Group’s performance and financial standing could be affected.
The Impact of the COVID-19 Coronavirus Pandemic
In response to the COVID-19 pandemic, the Group put the safety of its customers (consumers, shareholders, retailers, suppliers, financial institutions and local communities) and its employees first and is still taking action to prevent the spread of infections in accordance with the instructions of ITO EN's Virus Control Office. More specifically, the Group has instituted a range of control measures including monitoring employees' health, insisting on hand hygiene and mask-wearing, offering workplace vaccinations to those wishing to have them, and using online tools such as web conferencing.
However, if the impact of the COVID-19 pandemic lasts longer and is more serious than the Group anticipates, this could lead to a slowdown in personal consumption, disruption to global supply chains, stagnation in the Group's business activities and other unfavorable conditions, and the Group's performance and financial standing could be affected.
Impact of the Russia-Ukraine conflict
The Group does not have sites in Russia or Ukraine and is also not involved in business with these regions. However, Russia's invasion of Ukraine has caused disruption to the global economy and pushed up prices for raw materials, fuel and transportation costs. If such impacts last longer and are more serious than the Group anticipates, the Group's performance and financial standing could be affected.