(ⅰ)Risks related to responsibility for our customers
1) Domestic market trends
Because domestic sales make up more than 80% of net sales of the Group, there is a risk that domestic economic trends and a fall in the population will lead to sluggish consumption, market shrinkage and intensified sales competition over the long term. In the Spice/Seasoning/Processed Food Business of the core businesses of the Group, products for cooking, such as curry roux, make up most of net sales, and there is a risk that the market will shrink in the medium to long term due to the advancement of the growing tendency for people to eat out or buy food to eat at home. In addition, regarding the Ukon No Chikara series, the main brand of the Health Food Business, there is a risk that the market will shrink due to changes in consumer lifestyles. There is also a risk that the value we provide will be damaged by delayed response to these changes.
The Group is working on the reinforcement of its earnings strength through improved productivity in existing mature business areas and the focused allocation of management resources to growth business areas in Japan and overseas.
- Enhancement of products and services and strengthening of the ability to make proposals in response to lifestyle changes, such as cooking in shorter periods
- Expansion of areas to develop value chains from the conventional area centered on B to C to a wider range covering upstream to downstream, with spices as the axis
- Acceleration of overseas business development with the United States, China and ASEAN as the key areas
- Creation of new businesses using the Group’s unique technologies and outside co-creation with CVC and others
2) Business expansion
Since shifting to a holding company system in 2013, the Group has promoted the expansion of value chains by including Ichibanya Co., Ltd. and Gaban Co., Ltd. in the Group in 2015 and 2016, respectively, among other measures. In the Sixth Medium-Term Business Plan, the Group promotes business and capital alliances in Japan and overseas by setting an investment quota to create new businesses.
As a result, the Group has posted a substantial amount of goodwill and intangible assets associated with corporate acquisition, but there is a risk that the Group’s performance and financial position will be affected by impairment losses if these assets are unable to generate the expected cash flows or create the initially assumed synergies due to a shortfall in the business plan and changes in the market environment.
- Examination of investment plans at the Management Committee (including reasonability from a financial perspective as well as profitability and growth potential risk from a business strategy perspective)
- Strengthening of competitiveness and improvement in the ability to provide value through sharing and greater efficiency of value chains by promoting Group-wide efforts (key areas: procurement, production and B to B) to achieve synergy from a Group optimization perspective
- Monitoring of the medium-term plans of business companies through the Group PDCA meeting and other measures
3) Delay in response to technological innovation
In the mature food industry, the competitive environment is diversified due to entries from other industries and the rise of new technologies, in addition to existing business competition. While the Group is working to strengthen its R&D functions that will lead to the resolution of issues facing customers and society and to respond to digitalization, there is a risk that existing businesses and value provided will become obsolete as a result of the declining competitive advantage of the Group if its response to these developments is delayed.
- Setting of key R&D areas and themes as well as the concentrated investment of management resources
- Awareness-raising and creation of a climate to improve the ability to create and achieve new innovations
- Enhancement of collaboration among value chains with the aim of creating businesses, in addition to solving technological issues among the Group companies
- Promotion of co-creation strategies through open innovation
- Creation of new value by constructing a digital value network
4) Overseas business development
While the Group develops curry products, tofu products, functional drink and other businesses in countries where the Group has advanced, there is a risk that a delay in the business plan and the generation of impairment losses will impact the Group’s performance and financial position if the penetration and embedding of products and services provided by the Group into the food culture of the countries fall short of expectations, because food is essentially conservative. There is also a risk that the Group’s performance and financial position will be affected by a decline in the ability to generate profit and incompetent governance if the construction and development of the management base commensurate with brands and business size do not progress, or if a country risk emerges.
- Concentration of management resources on three key areas of the United States, China and ASEAN, where the Group aims to instill Japanese food culture early
- Strengthening of the business base by securing global human resources and increasing local employment, as well as by enhancing the production and supply systems and strengthening collaboration with joint venture partners in areas where the Group has advanced
- Construction and development of a risk management system according to business size based on cooperation between House Foods Group and its overseas business companies
5) Safety and security of food
There is a risk that the Group’s corporate brand will be damaged and its social credibility will be lost due to the occurrence of quality issues in its products and services, and costs to address these issues will increase.
- Strengthening and promotion of a quality assurance system as an overall Group centered on the Group Quality Assurance Committee and the Group Quality Assurance Executives Committee
- Acquisition of international certifications for quality and food safety management systems, such as ISO 9001 and FSSC 22000, according to the characteristics of the Group companies
- Management of quality risk information related to legal regulations and matters of concern from customers regarding food safety
- Cultivation of human resources and the creation of an organizational climate through study meetings on the subject of safety and security of food
- Improvement in quality assurance in each process, from product design to sales, through activities that reflect customers’ comments
- Full enforcement of easy-to-understand information disclosure through product packages and the web
(ⅱ) Risks related to responsibility for our employees and their families
1) Securing and cultivation of diverse human resources
For the medium- to long-term growth of the Group, the active participation of each employee with diverse values and expertise is essential. There is a risk that the ability to innovate will be damaged, business opportunities will be lost, and excellent human resources will leave the Group if human resources cannot be appropriately secured and trained according to the characteristics and growth stage of each Group company or if an organizational climate that respects diversity in terms of culture and values cannot be fostered.
- Development of a personnel system and change in workstyle for all employees with diverse individuality to be able to showcase their expertise (introduction of new workstyles)
- Creation of an organizational climate in which diverse human resources are able to actively participate, regardless of gender, nationality, career or disability
- Promotion of personnel exchanges inside and outside the Group and strengthening of the process to cultivate human resources
- Development of a workplace environment that observes compliance without discrimination and harassment
(ⅲ)Risks related to responsibility for society
1) Sustainable procurement of raw materials
The Group procures a variety of raw materials including spices from countries around the world. In the procurement of these raw materials, there is a risk that intensified competition in the procurement of food resources and changes in supply and demand associated with growing international demand, climate change, geopolitical risk and a delay in response to social and environmental issues in each stage of the value chain will lead to incompetence in stable procurement, higher costs and loss of social credibility.
- Execution of a variety of measures to strengthen efforts in upstream areas (stable procurement through the diversification of production regions, the promotion of efforts to collaborate with procurement places in areas such as technological development and quality improvement, and the strengthened monitoring of suppliers)
- Promotion of procurement of raw materials in consideration of the environment, human rights and the economy in production regions (efforts begin with palm oil and paper)
2) Climate change
Recognizing that climate change is an issue that could have an impact on a global scale and is important for the Group, which has created value chains in Japan and overseas, the Group takes measures against it. However, there is a risk that incomplete procurement of raw materials, rising costs and the division of business activities, such as a halt in production, will occur due to a rise in temperature, abnormal weather and natural disasters. There is also a risk that higher production costs, restrictions on business activities and damage to corporate value will occur due to deficiency or delay in response to decarbonization.
- Promotion of investments to reduce environmental burdens by formulating judgment criteria for environmental investments
- Grasping of environmental burdens in the overall supply chains (response to Scope 3)
- Promotion of resource circulation and recycling through efforts to reduce food waste and process loss (conversion of feedstuff to fertilizer, food banks, disposal control and the establishment of technology to use up raw materials) and develop containers and packages in consideration of the environment
- Shift to renewable energy
3) Weather-related factors, large-scale natural disasters and widespread outbreak of serious diseases
Weather-related factors, such as relatively cold summers, heat waves and relatively mild winters, the occurrence of a large-scale natural disaster, or the widespread outbreak of serious infectious disease have the potential to become risks for the Group’s businesses and could affect the Group’s performance and financial position.
- Construction of a crisis management system including the development of production and supply systems to fulfill our responsibility for supplying products while securing the safety of human lives as the mission of a food company when a large-scale disaster or the widespread outbreak of a serious infectious disease has occurred
- Formulation of a business continuity plan (BCP) according to the characteristics and size of business and implementation of a review through regular trainings and other means at the Group companies in Japan and overseas.
Impact of the spread of COVID-19
Regarding the impact of the spread of COVID-19, there is concern about a significant economic slowdown mainly due to supply chain dysfunction and falling consumption. House Foods Group contributes to limiting the spread of infection by ensuring employees’ safety, encouraging working from home and promoting online conferences and conference calls. It also continuously offers products and services in Japan and overseas as a corporate group that provides food that supports customers’ lifelines. We anticipate an impact from COVID-19 in all business segments of House Foods Group in Japan and overseas, and rising demand for eating meals at home. However, changes in consumer behavior are likely to have widespread effects, including fewer sales opportunities for professional products and functional beverages, and declines in sales in the restaurant business, associated with self-restraint in going out.
(ⅳ)Other common risks
1) Legal regulations and soft law
The Group is subject to a number of laws and regulations, including the Food Sanitation Act, the Product Liability Act, the Act against Unjustifiable Premiums and Misleading Representations, and local laws and regulations overseas. Each division in the Group collaborates with the legal division to take all possible measures to comply with relevant laws and regulations. However, if we are sanctioned or are subject to restrictions on our business activities for violation of the law or anti-social behavior, there is a risk that our corporate value will be damaged by an increase in costs to address these issues as well as the loss of social credibility, in addition to the possibility that our business activities will be restricted by the unexpected tightening of legal regulations or new regulations.
- Compliance with laws, regulations and international rules in the countries of each officer and employee and the maintenance and promotion of friendly relationships by respecting human rights and local cultures, traditions and customs based on the House Way, which contains values common to the Group, as well as the House Foods Group CSR Policy and the House Foods Group Action Guidelines, which outline the code of conduct for the Group.
- Implementation of monitoring and review of the status of efforts for important CSR-related subjects for the entire Group through the Group CSR Committee, which consists of directors, etc. in House Foods Group, and, with respect to compliance, which is regarded as an important CSR issue, the promotion of solving issues in each company by establishing the Compliance Promotion Committee
- Development and publication of the House Foods Group General Compliance Helpline to discover and solve compliance issues at an early stage
2) Exchange rate fluctuations
There is a possibility that raw materials procured overseas by the Group will be affected by exchange rate fluctuations in the medium to long term. In addition, while the overseas business makes up less than 20% of net sales in the Group on a consolidated basis, we expect that the overseas business will become increasingly important in the future, because we are working to accelerate its development by regarding it as a growth area. Because we convert local currencies in each area into yen to prepare the consolidated financial statements, the medium- to long-term fluctuations in exchange rates could impact the Group’s performance and financial position.
3) Information security
The Group manages data in computerized form about development, production, logistics, sales and other aspects, and the personal information of many customers associated with sales promotion campaigns and mail-order marketing. The Group prepares for unlikely events such as system failures by taking all possible maintenance and security measures, while developing a comprehensive data management system and fully enforcing data management rules. Nonetheless, systems could become inoperative, or sensitive information could be lost if software or equipment were to be damaged in a disaster. The potential for system failures, unauthorized disclosure, or falsification of data does exist, for instance from unauthorized access involving new technologies and the infection of computers with unknown viruses. In those cases, the Group’s performance, financial position, and social trust could be influenced.
- Development and continuous strengthening of a system to comprehensively manage the information security of the Group
- Implementation of system security measures using software and equipment as well as employee trainings and exercises