Business Risks

Business Risks

Updated on May 26, 2022

Factors that could affect the operating results, financial standing, and stock price of the Group are described below. Acknowledging the probability, timing and impacts of the materialization of the risks of such factors, the Group sets out its policy to make efforts to avoid the materialization of such risks and prepare responses for when such risks are materialized. The statements below related to the future are determined by the Group as of the end of the consolidated fiscal year (i.e., February 28, 2022), which, however, do not necessarily cover all risks and could be affected in the future by risks not covered herein or by any other risks that are considered to be of lower priority.

(1) Risks related to COVID-19

Following the global pandemic of COVID-19, the economic shrinkage arising due to, for example, voluntary restraint of economic activities for preventing the expansion of COVID-19 infection has caused the stagnation of economic activities on a worldwide scale. In this connection, there are still unclear prospects for the environment surrounding the Group’s businesses.
By placing the primary importance on the safety and health of its customers and employees, the Group operates stores in consideration of temporary closure and shorter open hours of stores, social distancing, and thorough hygiene control, and makes efforts at the headquarters departments to prevent the expansion of COVID-19 infection by promoting working from home and flexible working hours, in compliance with the directions and guidelines of governments and administrative authorities of relevant countries. Nevertheless, if the COVID-19 pandemic further expands and is prolonged, thereby causing stagnation in private consumption or restriction on the sourcing of specific raw materials, the Group’s business performance and financial standing could be significantly affected.

(2) Risks related to the sourcing of raw materials

Since the Group uses a wide range of foodstuffs, it will continue to strive to hedge risks by seeking new and more diverse sources of raw materials. Nevertheless, the stable supply of the necessary quantities of raw materials could become difficult due to infectious diseases, bad weather, natural disasters, import and export suspension resulting from a conflict, or the expansion of COVID-19 infection. Also, if the cost of sales rises because of increase in purchase prices associated with changes in market prices and exchange rates, the Group’s business performance could be affected.

(3) Dependence on the Yoshinoya business

In the consolidated fiscal year, the sales at Yoshinoya stores account for 69.7% of the sales of the Group. The Group will continue opening up, renovating, etc., of Yoshinoya stores as its core segments and focus on cultivating other core businesses to reduce its reliance on a single business. However, as the Group’s reliance on the Yoshinoya business continues to be high, poor performance of Yoshinoya, changes in consumer tastes, or worsening of situations of beef sourcing may have significant impacts on the business performance of Yoshinoya.

(4) Competitive risk

With the sluggish growth due to the impact of COVID-19, the food service market has experienced increasingly intense competition based on the change in its major customer segments due to the diversification of sales channels (e.g., dramatic expansion of food delivery business) intended to meet consumer needs in the new normal, as well as to market entry from other industries (e.g., home-meal replacement industry and convenience stores) through the sales of boxed lunches and prepared foods. To bolster its sales, the Group will continue its efforts to spur the growth of its consolidated companies and will build its overseas operations with the development of new business categories, changes in its product planning and responses to the increasing demand for take-away food. Notwithstanding these efforts, if competition intensifies further, the Group’s business performance could be affected.

(5) Climate Change

Global movement to contain climate change has been gaining momentum, as exemplified by streamlining of use of energy and laws and regulations for measures to tackle global warming. The Group also recognizes the significance of climate change and the Group’s business performance may be affected by transition risks (such as the risk of rise in procurement and energy costs due to environmental regulations, etc. for addressing global warming and the risk of decline in customers as a result of the Company being considered not environmentally conscious) and physical risks (such as the acute risk of stoppage of operation of factories and logistics facilities, closing of restaurants, etc. due to a typhoon, and the chronic risk of deterioration of quality of food materials or a surge in prices thereof, etc. due to an increase in average temperatures and a change in climate patterns) associated with climate change.
In response to those risks, the Group has formulated a basic policy for sustainability and will follow a sustainability promotion system based on the same policy and deliberate on and review responsive measures for the risks going forward. In addition, the details thereof are planned to be reported to the Board of Directors on an as-needed basis.

(6) Risks associated with natural disasters and pandemics

If major earthquakes, storms, floods, or fires cause damage to facilities, including restaurants and plants, or to information systems, or damage to customers and employees, or interfere with sales activities, purchases, or distribution, the Group’s business performance could be adversely affected. The Group has developed its emergency response manual through the formulation of a business continuity plan, the implementation of disaster prevention training, the introduction of the employee safety confirmation system, and others. If any of the aforementioned natural disasters occurs, a certain amount of time could be required until normal business activities are restored. In addition, if it becomes difficult for the Group to continue sales activities due to inability of ensuring the safety of customers and employees caused by the spread, etc., of infectious diseases (including COVID-19), the operating results, etc., of the Group could be affected.

(7) Legal regulations

The Group is subject to restrictions under general laws (e.g., the Companies Act, Financial Instruments and Exchange Act, Corporation Tax Act), and laws and regulations relating to food hygiene, restaurant equipment, labor, and the environment, which are related to the operation of restaurants. The Group has established a risk management committee in accordance with the risk management rules, and shared and implemented measures corresponding to the enactment/revision of laws that affect the Group; however, if the risk management of the Group results in inadequacy in connection with, or breach of, enacted/revised laws, such inadequacy or breach could affect the credibility, operating results, etc., of the Group. Also, the Group has developed business activities through franchise agreements in and outside Japan; therefore, even such inadequacy or breach caused by a franchisee could result in the loss of the Group’s credibility. In addition, if legal regulations are tightened, additional costs could be incurred in order to respond thereto, thereby affecting the Group’s business performance.

(8) Employment of part-time workers

The Group employs a large number of part-time workers and in part depends on foreign workers. The Group may not be able to secure adequate manpower, including full-time workers, due to demographics changes, and any revision, etc., of labor laws or the Immigration Control Act, or revision of laws relating to the treatment of part-time workers (e.g., employees’ pension insurance) could increase personnel expenses and therefore could affect the Group’s business performance.

(9) Food safe control

The Group has established the Group Quality Assurance Office, a special division, thereby performing consistent hygiene control thoroughly from sourcing and production to cooking in restaurants, in order to provide safe food to customers under the supervision of the Office. Also, the Group is well prepared and able to make appropriate information disclosure such as updates to allergen information or production place information according to the improvement and removal of products. However, in the event of hygiene problems such as food poisoning, or product accidents caused for example by errors in labeling, the Group’s business performance could be significantly affected due to damage to the Group’s corporate image, payment of damages, etc.

(10) Risk of impairment loss

The Group posted an impairment loss of 2,840 million yen in the fiscal year ended February 2022. If additional impairment losses are posted in the future because of trends in land prices or earnings at subsidiaries (including impacts of COVID-19), the Group’s business performance could be affected.

(11) Dependence on leased properties

The Group leases its offices and most of the land and buildings for its restaurants. Although the leases can be renewed through agreements with the lessors, in the case of a fixed-term building lease agreement, its renewal may be rejected upon expiration of its term, or, even in the case of a normal lease agreement, such lease agreement may be cancelled by the lessors, or such lessor may be offered an increase in rent-fee. Also, the Group may have to vacate properties under lease due to deterioration, expropriation, etc., of the buildings under lease, which could affect the Group’s operating results. In addition, the Group deposited guarantee money of 11,269 million yen to the lessors at the end of February 2022, which poses a risk that such guarantee money may become partially irrecoverable due to a lessor’s bankruptcy or any other circumstances.

(12) Risks relating to information system

The Group has backed up data in its information system to prevent any loss of data and is striving to prevent leaks through encryption, the setting of access authority, and password management. However, should the system go down or should there be unauthorized access, business efficiency could be reduced, leading to a loss of confidence in the Group, which could affect the Group’s business performance.

(13) Protection of personal data

The responsible department of each Group company discloses their privacy policies, thereby properly managing the personal information of their customers, employees and shareholders and striving to prevent leakage of such personal information. However, any leakage of personal information could lead to the loss of credibility of the Group, the payment of damages, etc., which could affect the Group’s business performance.

(14) Reputation Damage via the Internet

If harmful rumors are spread due to posting of inappropriate comments, public disclosure of images, etc. on the Internet in connection with the Group and its related parties, such rumors may affect the businesses, business performance, brand image and social reputation of the Group, regardless of whether the rumors are true or false.
Furthermore, even if harmful rumors concern competitor companies, etc. of the Group, if such rumors degrade the social reputation or credibility of the entire food service industry, those rumors may affect the businesses, business performance, brand image and social reputation of the Group.
In relation to those risks, the Group has endeavored to detect warning signs at an early phase and, if inappropriate postings are found, promptly take appropriate measures.

(15) Country risk associated with overseas operations

The Group is actively advancing expansion of its overseas business operations and has established local supervisory companies in China and ASEAN countries. The country risks (e.g., the political situation, economy, legal regulations, and business practices) specific to such countries in which the Group operates, or restrictions on business activities due to revisions of the laws of such countries could affect the business performance of the Group. Infringements of rights by similar trademarks could reduce the Group’s brand image.