Business Risks

The following information, which concerns the statuses of our business and accounting as well as other matters, is included in our Annual Securities Report and may have a significant impact on investor judgement.

The sections below contain information related to the future. This information is based on judgements made as of the end of the fiscal year under review (March 31, 2019).

(1) Economic Conditions and Business Environment

In Japan, the rising need for decreases in working hours caused by changes in family composition and lifestyles, as well as diversified consumer spending patterns and other factors, has led to forecasts of new demand. However, full-scale population decline has also given rise to concerns of a long-term decrease in total demand. Additionally, in pursuit of a sustainable society, expectations and demands placed on companies are becoming more diverse and sophisticated.
In response to these environmental changes, Nichirei Group is promoting innovation through its wide-ranging businesses, which provide support in the fields of food and health, and creating new value that offers solutions to issues facing its customers and society at large. Through these efforts, we are contributing to good dietary habits and health for all people.
However, several factors could affect Nichirei Group’s results. A major downturn in the Japanese economic climate due to international trade friction; falling selling prices caused by intensified competition and a higher-than-expected reluctance to purchase foodstuffs related to a consumption tax hike scheduled for autumn 2019; or reduced demand for storage, transportation and delivery could all have a serious impact on the Group’s results.

(2) Food Hygiene Issues, etc.

Nichirei Group is a manufacturer and seller of food products. Hygienic risks and food quality issues, including agricultural chemical and animal drug residue that exceeds standards, contamination from foreign substances and specified domestic animal infectious diseases (BSE, foot-and-mouth disease, avian influenza, etc.), carry the possibility of reducing our social credibility. These issues could also create barriers affecting products and the stable procurement of raw ingredients in the processed foods and marine, meat and poultry products businesses. If food product import volumes substantially decrease as a result of these issues, operation rates at logistics centers in the logistics business could decrease significantly and have a serious impact on Nichirei Group’s results.

(3)Product Recall

Nichirei Group is working to enhance its quality assurance system, which covers a wide range of processes including product development, raw ingredient procurement, production and sale, in an effort to provide customers with reliable products and services. We consider the safety and security of our food products to be a top priority issue, and we are working to ensure food safety and defense through a variety of efforts, which include procuring appropriate raw ingredients, managing product quality and production, constructing trace systems and training and properly arranging essential personnel. When quality issues arise, we make judgements regarding their harmfulness and scale and respond appropriately. However, product recalls of unexpectedly large scales could potentially have serious impacts on the Group’s results.

(4)Securing and Development of Human Resources

Securing human resources is currently difficult due to labor shortages. To attain sustainable growth under these conditions, it is important for the Nichirei Group to secure and develop diverse and exceptional human resources and allow them to demonstrate their abilities to the fullest extent possible. Accordingly, we are promoting work style reforms, improving working environment, automating operations and working to save labor and cut back on manpower, in addition to other efforts. However, the Group’s business management could be impacted if it is unable to secure and develop necessary human resources as planned due to factors such as changing employment conditions.

(5)Information systems

Nichirei Group has constructed an appropriate system management framework. However, when we encounter system problems during operation, we face possible obstacles to our business management. Additionally, we implement thorough information management and security countermeasures but still face possible leaks or falsifications of important information or periods of time in which management becomes problematic due to threats such as unknown computer viruses or cyberattacks. Expenses incurred while responding to these issues and the reduction in social credibility they could cause represent serious potential threats to the Group’s results.

(6)Fluctuations in Prices of Products, Raw Ingredients, etc.

A portion of Nichirei Group’s products and raw ingredients are subject to large price fluctuations caused by changing crop yields and market conditions. We are continuously working to expand the selection of processed food products, which are resistant to the effects of market price fluctuations, and strengthen sales of distinguishing products in our marine, meat and poultry products business. In the processed foods business, we are constantly striving to reduce manufacturing costs by improving mixing technologies and raising production efficiency. If, despite these efforts, the Group is unable to absorb increasing costs or conduct price revisions due to intensified competition or other factors, its results could potentially be affected substantially.

(7)Fluctuations in Oil Prices, etc.

Oil price fluctuations impact procurement costs of products, raw materials and heavy oil and other fuels in the processed foods business. The primary operations of our logistics business are storage, which utilizes our electrically powered logistics centers, and transportation and delivery, which are conducted using vehicles. Accordingly, rising crude oil prices lead to higher logistics costs through more expensive electricity and diesel and other fuel costs. The Nichirei Group is working to cut costs by adopting new technologies and improving operations. However, if the Group is unable to absorb these rises in price through cost reduction, or is unable to pass them on to customers, its results could potentially be impacted substantially.

(8)Impact of Foreign Exchange Fluctuations

Nichirei Group procures a portion of the products and raw ingredients used in its core businesses from overseas. We work to minimize the effects of foreign exchange fluctuations on our results through foreign exchange forwards and other measures. However, the Group’s results may be seriously affected in cases of unexpected and rapid changes in exchange rate.

(9)Changes to Legal Restrictions, etc.

When conducting business in Japan, Nichirei Group observes a wide range of legal regulations, including the Food Sanitation Act, Warehousing Business Act, Consigned Freight Forwarding Business Act and Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices. We also comply with all applicable legal regulations in all countries in which we operate overseas businesses. The Group regards ensuring strict compliance as a key management issue and is implementing a variety of related initiatives. However, unpredictable revisions to existing legal regulations, the establishment of new regulations or soft law may limit our business activities and cause us to incur compliance-related expenses. These factors could potentially have a substantial impact on the Group’s results.

(10)Environmental Laws, etc.

Nichirei Group’s business activities are subject to environmental laws and other statues that manage and regulate a variety of matters, including water pollution levels, waste disposal, energy-saving measures and fluorocarbon leaks. Accordingly, we are strengthening systems that enable us to abide by these rules. However, as international environmental regulations continue to be tightened, demand for global warming countermeasures, responses to food waste issues occurring throughout the supply chain and solutions to the problem of marine plastic pollution, such as the promotion of plastic package and container recycling, is on the rise. The Group’s results may be significantly affected by future legal reforms and other regulatory changes involving the environment if the burden of expense required to respond to these changes increases substantially.

(11)Climate Change and Large-Scale Natural Disasters

As countermeasures against climate change and large-scale natural disasters, Nichirei Group is installing high-efficiency facilities at its production factories and logistics centers, conducting thorough energy conservation initiatives, performing seismic strengthening work and deploying emergency power generators, in addition to other measures. Furthermore, we have adopted other Group-wide measures, which include installing an employee and worker safety confirmation system, establishing a disaster prevention manual and a business continuity plan and (BCP) and increasing our number of data centers.
However, as risks associated with climate change, imposed carbon taxes or tightened greenhouse gas emission regulations could seriously affect the Group’s results, as it possesses logistics centers that use a large volume of electric power and utilizes trucks that consume a substantial volume of fuel. Additionally, local tempestuous rainstorms have been increasing in recent years, and they threaten to halt business activities for long periods of time if they do extensive damage to the Group’s bases or important facilities in their neighborhoods, including streets, harbors and railways.

(12)Technological Innovation

Nichirei Group is working to produce various innovations in the fields of food and health while conducting technological development using AI and IoT technology and implementing operational reforms. However, our results are vulnerable to substantial impact from factors such as unpredictable changes in business environment and deteriorating competitiveness as new technical innovations continue to gather speed.

(13)Retention of Non-Current Assets

Nichirei Group retains many production factories and logistics centers that require large amounts of capital investment. In the future, the Group’s results could be seriously affected by falling earnings and impairment and disposal of non-current assets in cases involving worsening geographical conditions at logistics centers caused by cargo owner relocation or changes to road transportation networks; deterioration or obsolescence of facilities at production factories; or base restructuring conducted in response to poor sales.

(14)Retention of Securities

For the consolidated fiscal year under review, Nichirei Group is classifying investment securities other than shares of affiliates under the “other securities” category. We verify the medium- to long-term economic rationality of our strategic shareholdings by individual stock and sell shares when the benefit of retaining them is judged to be insignificant. When conducting this verification, we make comprehensive judgements based on qualitative assessments of strategic importance and other factors after carefully investigating each individual stock to confirm whether their commercial advantages and risks, such as those associated with profits and dividends, are worth their capital costs. However, the Group’s results are susceptible to substantial impact from factors such as damage to equity capital if the market prices of its strategic shareholdings or the financial conditions of their issuing companies fluctuate due to changing trends in future economic environments or corporate profits.