Regarding business risks
Of the matters pertaining to the business and accounting conditions stated in the annual securities report, the major risks that management recognize as having a significant impact on the financial position, operating results, and cash flow of consolidated companies, are set out below.
Any forward-looking statements stated below are judgments of the Yakult Group as of the end of the current consolidated fiscal year.
1. Risks related to reliance on Yakult products and the competitive environment, etc.
The Group's core products are the Yakult products containing Lactobacillus casei strain Shirota, the sales of which make up the majority of the sales of the Group. We strive to boost sales of Yakult products to contribute to the health and happiness of people around the world. As we expand overseas businesses, which rely heavily on the sales of Yakult products, the Group's reliance on Yakult products is likely to increase.
While we implement R&D investment to develop high-value-added products, there is uncertainty as to whether the Group's new products will attract customers and whether we can gain and maintain significant advantages over our competitors' products. Amid intensified competition in the food and beverages industry, including drinks containing probiotics, if events occur that might adversely affect the sales of Yakult products, including even greater competition caused by the appearance of competitive products that are assumed to have superior health effects or are sold at lower prices than the Group's dairy products, or a change in consumer awareness and preference for the safety and effects of probiotics, our reliance on Yakult products could have a significant adverse impact on the Group's business results and financial condition.
2. Risks accompanying global business operations
The Group conducts business operations worldwide, and is involved in production and sales activities overseas.
Abroad, the cultural and competitive environment differs from country to country. In certain countries and regions where the Group develops business (including countries and regions where the Group will develop business in the future), political or economic changes may have significant impacts on the Group's business environment. Despite our utmost efforts, we might be unable to seize the opportunity for growth and achieve the expected return on investment due to changes in such external environments. Furthermore, in overseas countries with different social backgrounds or laws and regulations, it may be more difficult to enforce contractual rights or protect intellectual property rights than in Japan. Or the Group may experience problems in its business activities due to unexpected legislation or regulations being enacted, revised, or abolished. For example, we are not allowed to indicate the health effects of probiotics in Europe, which restricts our ability to advertise the Group's products in that region. But there is also no guarantee that such regulations won’t be introduced in other countries too. An occurrence of such issues could adversely impact our business results and financial condition.
The Group plans to expand its business to overseas markets, including China, and make a major capital investment in new plants and sales sites as well as upgrading existing facilities. However, there is a possibility that factors including the abovementioned issues could prevent the Group from achieving the expected growth and generating earnings sufficient to recover the investment, which could have a significant adverse impact on our business results and financial condition.
3. Risks related to product safety
Amid growing concerns regarding food safety and quality assurance among consumers, companies in Japan and overseas are under intense pressure to provide reliable and safe food products. The Group recognizes that this trend demands greater levels of safety and quality assurance for the products it handles, which are subject to Japan's Food Sanitation Act, Pharmaceuticals and Medical Devices Act, and other laws and regulations in Japan and overseas. As a Group, we also strive to strengthen our quality assurance system, with the provision of safe products as our highest priority.
However, in the event of unexpected circumstances associated with product safety and other factors, we could be forced to suspend manufacturing and sales, or to recall such products. Costs resulting from the occurrence of such issues and the damage to the reputation and brand image of the Group's products could have a significant adverse impact on our business results and financial condition. Moreover, regardless of whether it is a factual problem or a rumor with no grounds, or whether it is about the Group's product or a competitor’s product, the occurrence of incidents that could weaken the safety of and consumer confidence in the health effects of products containing probiotics could have an adverse impact on the sales of the Group's products, resulting in a significant adverse impact on the Group's business results and financial condition.
4. Risks related to the Group's sales structure
The sales channels of the Group's food and beverages business are divided into the Group's unique Yakult Lady home delivery channels and retail store channels. Given the importance of home delivery channels in promoting probiotics, we put high priority on improving the work environment of Yakult Ladies and enhancing their network, as well as offering them well-developed training programs for conducting the Group's sales activities in Japan and overseas.
Most sales activities in the Domestic Food and Beverages business, both through the home delivery channel and the retail store channel, are conducted by sales companies throughout Japan, from which each Yakult Lady is entrusted with sales activities. Approximately half of sales in Japan are from marketing companies that are neither our subsidiaries nor affiliate companies and have no capital relationship with the Company. Failure to maintain good relationships between the Company and the sales companies, and between the sales companies and the Yakult Ladies, or to secure appropriate human resources, including Yakult Ladies, may significantly hinder the sale of the Group's products and have a material impact on the Group's business results and financial condition.
In addition, in the event that sales companies stop selling or are unable to sell the Group's products, it could pose a serious problem to the sales of the Group’s products and a significant amount of expenses and losses incurred related to the support of sales companies and system improvements could have a significant adverse impact on the Group's business results and financial condition.
In principle, our subsidiaries conduct all the operations from manufacturing to sales in the Overseas Food and Beverages business, except in certain countries and regions where our affiliate companies conduct business. While the importance of home delivery channels depends on countries and regions, the Group's business in countries, such as Thailand, South Korea, Indonesia, and Mexico, depends largely on the Yakult Lady home delivery system. In the event that the Group is unable to manage local affiliate companies properly, maintain good relationships with Yakult Ladies, or secure appropriate human resources, including Yakult Ladies, needed for the cultivation and expansion of overseas businesses, such trends could have a significant adverse impact on the Group's business results and financial condition.
In retail store channels, competition with other companies' products, including retailers’ own brand products, and competition with new sales methods, such as e-commerce, may have an adverse effect on the Group's sales of products.
5. Risks related to increases in raw material prices and labor costs
Should there be sharp increases in procurement prices for raw materials for the Group's products, especially for the Group’s mainstay lactobacillus-based drinks, or surges due to market supply-demand conditions or exchange rate fluctuations, or should there be sharp price increases in the crude oil market, especially those sustained over extended periods, then manufacturing costs including costs for containers and other packaging, as well as transportation costs, will also be affected. In Japan, labor costs and other costs are likely to increase due to the decline in the working population and moves to improve the working environment. And overseas, labor costs, which are currently relatively low at present, are likely to rise along with economic growth, especially in emerging markets. Furthermore, in the event that we have to pay additional fees for Yakult Ladies because of a hike in labor costs, the Group's cost burden could grow or have an adverse impact on the product sale prices we offer to sales companies. In the event that our cost reduction efforts are unable to cover the direct or indirect effects of heightened raw material prices and labor costs, or we are prevented from enacting price revisions due to market conditions, these trends could have a significant adverse impact on the Group's business results and financial condition.
6. Risks related to the pharmaceutical business
Our pharmaceutical business is largely dependent on sales of the anti-cancer drug Elplat, but sales of this drug have fallen after the launch of a generic drug. Drug prices also, under the National Health Insurance System, have been periodically lowered, causing prices of our pharmaceutical products to continuously fall. As a result, sales in the Group's pharmaceutical business have been decreasing in recent years, and the trend could continue into the future.
7. Risks associated with damage to the Yakult brand
The Group places high priority on maintaining its brand image. “Yakult” is the name of the brand, common to the name of the Company and the name of our core products, and therefore, a problem related to Yakult products and other products bearing the name “Yakult”, especially regarding quality and safety, could have a significant adverse impact on the brand image of the Group and its products. In addition, a scandal involving domestic sales companies or Yakult Ladies such as those involved with the “Yakult” name, could also have a significant adverse impact on the Group's brand image.
8. Risks associated with intellectual property rights
Each of the Group's products and technologies is protected for a certain period by patents and other intellectual property rights, but an infringement of the intellectual property rights by a third party may reduce the Group's expected revenue. Moreover, trademarks of product containers similar to the Group's products have already been registered by competitors in certain countries, and this could adversely affect sales of our products in such countries. In addition, if the Group were to infringe the intellectual property rights of a third party, it may be required to recall, terminate manufacturing and sales of relevant products, or pay compensation for damages, or royalties.
9. Risks related to litigation and legal compliance
The Group is subject to a wide range of laws and regulations both in Japan and overseas where it operates. Changes in laws and regulations that apply to the Group may adversely affect economic conditions and consumer behavior, or may require additional costs or capital investment for the Group. While the Group is fully committed to complying with these laws and regulations, there is a possibility that the Group may be subject to administrative punishment or be forced to respond to claims for damages or other lawsuits as a result of the violation of laws and regulations by the Group.
10. Risks related to business alliances, M&A, and joint ventures
The Group always seeks opportunities, including those of large scale and high importance, for business alliances, mergers and acquisitions, and joint ventures. In fact, our overseas affiliate companies include a company jointly established with our local partner. However, it is impossible to guarantee that the Group will acquire such opportunities, reach agreement with counterparties, or raise the necessary capital. Even if the Group were able to carry through on a deal, it could fail to obtain the expected profits or results.
11. Risks related to exchange rate fluctuations
The Group's consolidated financial statements are expressed in Japanese yen. Accordingly, financial conditions and earnings of overseas consolidated subsidiaries and companies accounted for by the equity method are subject to exchange rate fluctuations when they are converted into yen for consolidation purposes. In particular, fluctuations in the Chinese yuan, Indonesian rupiah, Mexican peso, and Brazilian real could have a significant adverse impact on the Group's performance and financial condition.
12. Risk related to investment securities
The Group holds investment securities, including specified equity securities, mainly for forming cooperative relationships in business. Fluctuations in market prices of marketable listed stocks, and so forth, of the aforementioned securities could have an adverse impact on the Group's financial condition. Moreover, a significant decline in book values of the investment securities we hold could have a significant adverse impact on the Group's business results due to the recording of impairment losses, etc.
13. Risks related to interest-bearing debt
The Group partly finances its business via bank borrowings. Deterioration of market conditions, such as an interest rate hike, could increase the interest burden or prevent the Group from obtaining financing in a timely manner with preferable terms, causing a significant adverse impact on the Group's business results and financial condition. It could also be argued that the Group lacks diversity in terms of its financing as it relies on borrowings from specific banks.
14. Risks associated with information systems and information security
Since the Group's business operations rely on information systems, the failure of information devices, software, or networks could disrupt or interrupt operations, causing a significant adverse impact on the Group's business results and financial condition. The Group has implemented security measures through systems management and employee training to prevent leakage of customer information and other confidential information. However, breaches of such information caused by unexpected events including theft and cyber-attacks by an external party could damage the Group's credibility and result in a significant amount of compensation for damages, resulting in a significant adverse impact on the Group's business results and financial condition.
15. Risks related to disasters and geopolitical factors
The Group extends its business to various countries and regions throughout the world. The occurrence of large-scale natural disasters, such as earthquakes, or a terrorist attack and conflict could restrict the Group's business activities directly or indirectly, having a significant adverse impact on the Group's business results and financial condition.
16. Risks related to infectious disease epidemics
The Group operates in countries and regions around the world. If a large-scale infectious domestic and overseas supply chains may be disrupted and consumption negatively affected. To better respond to a crisis, the Group has established a company-wide response system based on the Crisis Management Regulations and is working to improve its production and supply systems. However, if the Group is forced to stop manufacturing or selling its products due to the effects of infectious disease, the Group's business results and financial condition may be significantly affected.
17. Risks related to environmental issues
The Group operates globally, and its supply chain for raw material procurement also extends worldwide. Nonetheless, according to the United Nations Intergovernmental Panel on Climate Change (IPCC) and other organizations, there is no doubt that global warming is progressing. For the Group, as global warming progresses, there is a risk that the adverse effects on dairy cattle and agricultural products will worsen, making it difficult to procure important raw materials. As for water, which is extremely important for the Group’s business activities, various risks may arise due to the occurrence of water disasters related to global warming, restrictions on the amount of water that can be extracted because of uncontrolled water use, and water pollution. Accordingly, the Group has formulated its Environmental Vision 2050, the ideal vision for 2050, and has identified three material themes related to the environment: climate change, plastic containers and packaging, and water. In its Environmental Vision, the Group aims to achieve a value chain with zero environmental impact that seeks to unite “People and Planet as One.” However, failure to implement the action plan at a global standard or an increase in response costs could lead to difficulties in sustaining the business and a loss of confidence in the Group, which could have a significant impact on the Group's financial results and position.
18. Risks related to the problem of marine plastic
Plastic containers are used for many products, including the Group's mainstay Yakult products. In addition, to create healthy and enjoyable lives for people around the world, we aim to expand sales of the Yakult series and other products in the years ahead. However, due to growing international concern about marine pollution caused by microplastics, the problem of plastic containers and packaging has gained attention. The Group aims to establish basic technologies for eco-friendly containers and packaging by switching to materials that are easy to recycle, reducing the amount of plastic used in containers and packaging, and reusing plastic packaging materials employed in the production process. If the problems are not addressed appropriately, however, sales of the Yakult series and other products, could be constrained, and legal compliance costs could be incurred, and this may have a significant, adverse impact on the Group’s business results.
19. Risks associated with human rights
The Group is aware of the potential for direct and indirect violations of the human rights of various stakeholders in the course of its business and value chain. Therefore, to fulfill its responsibility to respect human rights, the Group will establish and implement a human rights due diligence system based on the Yakult Group Human Rights Policy. However, if risks related to human rights materialize due to forced labor or child labor in the supply chain, or health damage caused by environmental pollution, or the transmission of incorrect information regarding health to customers, the occurrence of such issues could have a significant, adverse impact on the Group’s businesses, including lawsuits, suspension of operations, and boycotts of products.
20. Risks related to management strategy and business plan
The Group established its long-term vision, Yakult Group Global Vision 2030 in June 2021 in an effort to promote its business with the aim of increasing corporate value. However, risk factors including those stated in these Business Risks, changes in the Group's policy, and changes in the economic situation and business environment, it is possible that the Group may not be able to implement these measures or achieve the targets set out in the plan.
Please note that there may be various other risks not mentioned above that may affect the business. Recognizing that such risks exist, the Group will endeavor to prevent them from materializing and to respond promptly should they do so.