The Group Risk and Compliance Committee, which is composed of the Chairman, President & CEO and all executive officers, meets as needed to deliberate on important matters related to the Group’s compliance and to determine basic policies.
The Committee centrally explores various risks relating to Group companies, identifies risks that have a significant impact on Group business operations, and takes appropriate measures. Since the degree of impact for each risk fluctuates constantly in response to various environmental changes, the Committee reviews them on an annual basis.
The main risks concerning the Group's business operations, operating results and financial position, which could have a significant impact on investment decisions made by investors are as follows.
Forward-looking statements below in this document are based on judgements made by the Group at the end of each consolidated fiscal year. The following are specific examples of major risks that the Group anticipates in order to continue its business, but do not constitute an exhaustive list.
Changes in Economic Conditions
Since the Group's operations are focused primarily on restaurant business in Japan, fluctuations in the Japanese economy and the impact of government economic policies may affect the Group's business, operating results and financial standing. In particular, a slowdown in personal consumption due to consumption tax hikes in Japan and other factors, together with increases in ingredient/raw material prices, labor costs, rent and utilities cost may affect the Group's business, operating results and financial standing.
In response to these risks, the Group pays close and constant attention to changes in economic policies, changes in the market environment and consumption trends. By reflecting them in various sales, investment, and productivity improvement measures, the Group seeks to maintain a stable earnings structure that can respond to changes in the business environment.
Changes in the Domestic Market Environment and Competing Companies
In the restaurant market, in addition to companies that operate restaurant and izakaya (Japanese style bar or pub) chains and fast-food chains, the Group also competes with individual or family-owned restaurants, and may also compete with companies operating convenience stores and super markets that sell deli foods and boxed lunches in the home-meal replacement and home-cooked meal markets. These competitors may be more highly competitive than the Group in terms of food product prices, flavors and quality, range of menu options, store location, attractiveness of facilities, atmosphere and coziness, take-out and home delivery services, skill and experience of staff, societal recognition and evaluation of restaurant brands, benefits such as point cards, and handling of tax-related issues, such as the application of reduced tax rates. If the Group does not have an advantage over these competitors, the Group's business, operating results and financial standing may be affected.
Also, in Japan, the number of restaurant locations operated by restaurant chain operators currently accounts for a relatively low percentage of restaurants in comparison with the number of those operated by fast food and coffee shop chain operators. While we recognize that there is room for further growth for restaurant chains, including those operated by the Group, there is no guarantee that restaurant chains will continue to grow in the future.
In response to these risks, the Group is strengthening its response to demand for delivery and take-out, rather than only focusing on in-store dining. We are also working to optimize our brand/store portfolio and store network by introducing a new brand-in-brand management method in which one store sells menu items of another brand as a part of leveraging of our existing brand store network, as well as starting an e-commerce business.
In particular, the competitive environment is changing as consumers' opportunities and inclinations to eat out are decreasing due to the COVID-19 pandemic, while demand for delivery and take-out services is increasing. In response to such changes in the market environment, we are taking action to enhance our delivery and take-out businesses, but if the delivery market in Japan expands further and delivery services become more widespread, restaurants that were not competitors in the past will increasingly enter the delivery market and competition in the delivery market may intensify. In addition, the Group's dependence on third-party delivery services may increase, which may make us more susceptible to the conditions and quality of such services.
Changing Consumer Preferences
Sales in the restaurant business developed by the Group are strongly influenced by consumer preferences and social trends relating to food and beverages.
If the Group is unable to accurately grasp or predict consumer preferences, or if our research of areas planned for new store openings and brand conversions are not effective, then the Group's business, operating results and financial standing may be affected.
In particular, Gusto—the Group's flagship brand in the restaurant business—has the largest number of stores in the Group and accounts for a large percentage of the Group's sales and profits. If concepts for Gusto menus, price ranges and services do not receive support from customers then the Group's business, operating results and financial standing may be affected.
In response to these risks, the Group endeavors to keep a constant grasp of consumer needs and customer opinions on menus, and reflects these in its brand development, store opening policies and menu development. By analyzing big data such as customer POS data and mobile app coupon data, we strive to respond to changes in consumer lifestyles and preferences.
Occurrence of Food-Related Accidents
In the restaurant business, which is the Group's core business, it is extremely important to ensure food safety.
In order to prevent food-related accidents, the Group's purchasing, menu development, internal auditing and quality control departments and all of the Group's central kitchens have acquired ISO22000 certification, verified foreseeable food-related risks, and have formulated and now operate strict hygiene management rules to ensure safety and security. For example, for products manufactured in central kitchens, we verify that processing conditions are reasonable, monitor important control points during production, and ship only those products which meet our standards. We have also established strict transaction standards for the procurement of food ingredients, and purchase only from suppliers that conform to our standards, after conducting inspections of local factories and processes in accordance with our Purchasing Management Regulations.
At our stores, we have established a system that can deliver consistent quality using hygiene management methods incorporating HACCP management system concepts. As a system for monitoring compliance with rules, including rigorous hand washing and management of employees' health and physical condition, which are aspects of general hygiene management, the Quality Control Group—which is an exclusive organization—performs unannounced inspections of all processes from central kitchen to store, and drives improvement activities with regard to any risks that it discovers, in coordination with relevant departments. With regard to ingredients, in principle, all externally ordered items aside from our products manufactured in-house are concentrated in the company's central kitchen, which also has a delivery function. In addition to inspections at the time of product introduction, we also conduct periodic sampling inspections, to check that products being distributed meet our standards. By conducting these bacteriological tests in our own laboratories, we have established a system that enables us to make fast judgements and responses. The number of tests conducted is in excess of 100,000 samples per year. Despite these measures to prevent the occurrence of food accidents, there is always a risk that such incidents may occur. A serious food-related accident—such as mass food poisoning—caused by the Group would cause great inconvenience to customers, and there is also the possibility of other repercussions including not only administrative punishments but also a decline in brand image and social trust/credibility, a decrease in sales, the incurrence of costs for responsive actions, and the filing of civil lawsuits.
Even if a food accident occurs at a competing business, the Group's operating results may be affected due to a decline in the reputation and credibility of the restaurant industry as a whole, a decline in consumers' willingness to eat out, the disposal of food product inventory that caused the accident, and a surge in prices due to difficulty in obtaining related ingredients.
Difficulty In Procurement and Soaring Prices of Ingredients and Indirect Materials
In the event of uncertainty regarding procurement or a surge in the prices of ingredients or raw materials as a result of factors such as progressive inflation both in Japan and overseas, the occurrence of epidemics such as swine fever and avian influenza (bird flu), the occurrence of unseasonable and abnormal weather conditions, natural disasters and infectious disease pandemics, energy shortages, obstacles to logistics, the imposition of import restriction measures by governments, international fishing restrictions, supply interruptions due to bankruptcy of business partners or accidents and disasters, shipping restrictions and reputational damage as a result of food hygiene problems or radioactive contamination, foreign exchange rate fluctuations and tax hikes, then the Group's operating results may be affected due to a rise in cost of sales ratio and other factors.
In response to these risks, the Group is implementing measures based on procurement strategies such as diversifying sources and production areas of food ingredients and indirect materials, utilizing long-term contracts with suppliers, strengthening relationships, diversifying and developing connections with new suppliers.
Labor Management Risks
The Group has full time employees, contract employees and many part-time employees who are engaged in operational processes at locations such as stores and central kitchens. In relation to work style reforms, there have been significant changes in laws and regulations surrounding both fixed-term and non-fixed-term employees, as well as in the working environment. These include the Upper Limit on Overtime Work Regulations introduced gradually by large companies as of April 2019, the mandatory acquisition of annual paid leave, the review of the special provisions of the 36 Agreement, and the establishment of equal and balanced treatment for equal work introduced in April 2020. As a result of the need to comply with these labor-related laws and regulations and changes in the working environment, it may become very difficult for the Group to maintain the employment of outstanding employees, and the Group's labor costs may soar. In the event of a violation of labor-related laws and regulations by the Group, the Group's business, operating results, financial standing, brand image and social credibility may be affected by orders from regulatory authorities for the Group to improve its operations, or by claims from employees.
In response to these risks, the Group takes measures to prevent violations of labor-related laws and regulations by providing labor data to managers on a weekly basis. We also maintain a system in which we hold monthly labor improvement meetings attended by directors, executive officers in charge of human resources and general managers of sales departments in order to confirm current conditions, consider response measures and implement them immediately. In addition, we are working to continue employment by implementing concrete measures such as curbing long working hours by shortening business hours and systematically encouraging employees to take paid leave.
Securing Human Resources
The Group has many part-time employees who are engaged in operational processes at locations such as stores and central kitchens. Recently, there have been reports of cases in which some restaurant operators were unable to secure part-time employees, and were forced to close or temporarily close some stores. Although no such cases have occurred within the Group, if the recruitment environment deteriorates as a result of factors such as wage increases, growing recruitment expenses, difficulties in securing employees due to an increase in domestic labor demand, the Group may not be able to secure the required number of employees at an appropriate cost, and the Group's business, operating results and financial standing may be affected by an increase in personnel expenses to secure the necessary number of employees, reviews of store opening plans and the temporary suspension of operations at some stores.
In response to these risks, the Group regards human resources as its most important business resource, and is working continuously on various measures to improve employee satisfaction, such as shortening late-night business hours, shortening business hours during the year-end and New Year holiday periods, curbing long working hours, ensuring that employees take paid leave, and providing a comfortable workplace environment.
Real Estate Leasing
Many of the Group's stores lease land and buildings from third parties, and place deposits and security deposits with lessors. Although the Group conducts credit surveys and credit management of lessors, in the event of an unexpected bankruptcy or other insolvency of a lessor, a deposit or security deposit may become unrecoverable, which may affect the Group's operating results.
In addition, at the time of store relocation due to the opening of a new store or aging of the building being leased, etc., there is a possibility that a certain amount of time and expenses may be required to secure the store opening or relocation destination due to increases in rent rates, etc. If negotiations are unsuccessful at the time of renewal of the lease of an existing store, there is a possibility that it may be difficult to open or relocate, and there is a possibility that the cost of leasing real estate will increase, and the Group's business, operating results and financial standing may be affected.
The Group works to reduce these risks by having its specialized internal departments work closely with lessors of land and buildings, while at the same time obtaining information from real-estate-related business partners.
Climate Change
Moves to curb climate change are increasing on a global scale, such as in the rationalization of energy use and laws and regulations to combat global warming. The Group also recognizes the importance of climate change, and the Group's operating results may be affected by climate change transition risks (such as increases in procurement and energy costs due to environmental regulations to combat global warming, or decreases in the number of customers visiting stores because the Group is deemed to be inconsiderate of the environment) and physical risks (acute risks such as suspension of factory and logistics operations due to typhoons, and store closures, and chronic risks such as a decline in the quality of food ingredients or surges in prices due to a rise in average temperature or changes in weather patterns).
In response to these risks the Group has formulated a sustainability policy, and deliberates and reviews measures based on a promotion system led by the Group Sustainability Committee. Details of discussions are reported to the Board of Directors as necessary.
Infectious Diseases
Demand in the restaurant market may fluctuate due to factors such as the occurrence of infectious diseases and other factors that reduce opportunities for consumers to eat out, and/or their willingness to eat out.
In response to these risks, the Group recognizes its restaurants as part of the lifeline for local communities, and has a policy of contributing to the maintenance of societal functions by continuing to operate while implementing rigorous measures to prevent infection and the spread of infections, while avoiding confusion caused by disorderly responses to infectious diseases. We have formulated a system and business continuity plan to ensure the continuity of our business operations, with the safety of customers and employees as our top priority.
COVID-19
The decline in consumer opportunities and/or willingness to eat out due to the COVID-19 pandemic and government measures against COVID-19, the shortening of the opening hours, closure of the Group's stores, and a decrease in the guset count of Group stores all have an impact on the Group's business operations; and the prolongation of this impact may significantly affect the Group's operating results.
In response to these risks, we have established a Group-wide headquarters, and are putting the safety of customers and employees first as we work to implement rigorous measures to prevent infections in accordance with the guidelines set by the government and specialized organizations. In addition, while utilizing government subsidy for shortening of operating hours to support the restaurant industry, we will steadily implement management measures such as offering products and services that respond to changes in lifestyles, further expanding delivery and take-out services, realizing a store portfolio that meets the needs of the times by leveraging our multi-brand portfolio, leveraging our management resources and developing brand-in-brands, and improving productivity by promoting DX. In the second quarter of FY2021, the Company executed a capital increase through a public offering of new shares in order to procure funds necessary for the implementation of such management measures. In addition, the Company is taking measures such as entering into commitment line contracts with financial institutions to ensure stable financing for in case the impact of COVID-19 on our business does not subside in the short term.
However, depending on the prolongation and expansion of the COVID-19 pandemic, including variant forms, the spread and effectiveness of vaccines, and the details of the measures to be taken by the government and other local authorities, such as measures to shorten business hours and accompanying subsidies for businesses and other measures to stimulate the economy, the Group's business performance and financial condition may be adversely affected, notwithstanding the implementation of the above management measures, through the continuation or expansion of the impact of a decline in guest count, the inability of the Group to secure necessary liquidity at hand, a longer than expected waiting period to receive financial subsidies, such as government subsidy for shortened operating hours, or the termination or disadvantageous changes implemented in such financial support schemes.
In addition, if negative rumors were to arise concerning the possibility of COVID-19 infections spreading at our group's stores, our group's brand image and social credibility could be damaged, and our group's business, performance, and financial position could be adversely affected.
Reliance on Management
The management of the Group is, to a considerable extent, dependent on the abilities and contributions of the Chairman, President and Chief Executive Officer (CEO).
If the said officer resigns for any reason, such as their own career plans, state of health or family situation, and the Group is unable to secure a replacement, then the Group's operating results may be affected.
In response to these risks, the Board of Directors and its advisory body, the Nomination Committee, discuss succession plans for the Group's Chairman, President and CEO.
Reliance on IT (Information Systems)
The Group relies on information systems for the operation and operational processes of its restaurants, such as in the procurement and delivery of ingredients, food processing, restaurant operation, and receiving orders from both inside and outside restaurants. In the event of various failures in the Group's information systems due to program faults, computer viruses and external cyber attacks, the efficient operation of restaurants and the timely provision of food to consumers may be hindered, important data may be lost, or response costs may be incurred; and the Group's business, operating results, financial standing, brand image and social credibility may be affected.
In response to these risks, the Group has secured ample allowance for various systems and implemented security measures to ensure that they can operate stably. We have also established a specialized department within the company to prevent attacks from outside and respond promptly to various faults in order to reduce risks.
Internal Control over Financial Reporting
The Group regards the establishment and operation of internal control over the reliability of financial reporting as one of its key management issues, and the Group is working continuously as a whole to inspect and improve its management system. Despite these efforts, the possibility that serious defects in the Group's financial reporting may be discovered cannot be ruled out, and there is no guarantee that effective internal control will always be established and operated in the future. Because of the inherently intrinsic limitations of internal control, the reliability of the Group's financial reporting may be affected in the future if internal control over financial reporting fails to function effectively, or if there are significant defects in the internal control system.
Large Borrowings and Violation of Financial Covenants
The Group borrows large amounts of money from financial institutions. The Group's existing borrowings may constrain new borrowings, which makes the company be vulnerable to economic downturns, or makes the company be less competitive than competitors with higher equity ratios.
In addition, among the Group's borrowings, financial covenants are attached to loans based on financing agreements or commitment line agreements in the form of syndicated loans. In the event of an infringement, if the lender makes a request, the Group will lose the benefit of time under these agreements, so it will be necessary to secure funds to immediately repay corresponding debts, which may affect the Group's financial standing and cash flow. If such funds cannot be secured, it is expected that the benefit of time will be lost for the Group's other borrowings, which may adversely affect the Group's survival.
Application of Impairment Accounting
The global spread of COVID-19 has had a significant impact on the Group's operating results. We have recorded large impairment losses on store assets. Although we evaluate store assets based on the assumption of a recovery in business performance that is considered reasonable at this time, in the event of an incident that has a significant impact on our assumptions, such as the repeat spread of COVID-19, impairment losses on additional store assets may arise, which may affect the Group's operating results.
As of December 31, 2021, the Group recorded goodwill of 146,010 million yen as non-amortizable assets in its consolidated statement of financial position. The breakdown of this goodwill by major cash-generating unit groups (major brands) is Gusto (76,170 million yen), Jonathan's (15,034 million yen) and Bamiyan (16,780 million yen). As with store assets, in the event of an incident that has a significant impact on the Group's anticipated recovery in business performance, an impairment loss on goodwill may arise and affect the Group's operating results.
Goodwill is amortized on a 20-year amortization period in the Group's individual financial statements, and the balance as of December 31, 2021 is 73,865 million yen.
Fluctuations in Foreign Exchange Rates
The Group has suppliers of food ingredients all over the world, and although only a portion of the total food products are currently traded in foreign currencies, the cost and prices of such ingredients, etc., are directly or indirectly affected by foreign exchange rates. Since the Group does not currently hedge to mitigate foreign exchange risks, fluctuations in foreign exchange rates may negatively affect the Group's business, operating results and financial standing.
In response to these risks, the Group strives to reduce risks by diversifying its sources and production areas while maintaining close cooperation with suppliers.
Natural Disasters
Since the Group has stores and central kitchens throughout Japan, in the event of natural disasters such as large-scale earthquakes, wind and flood damage, tsunami, heavy snowfall or infectious disease pandemics, the buildings, machinery and equipment of the Group's head office, stores and central kitchens may be damaged; or the operation of stores and central kitchens, distribution of raw materials, or attendance of employees may be hindered. This could affect the Group's business, operating results and financial standing.
Additionally, due to such natural disasters, restrictions on or suspension of the supply of lifelines (water, electricity, gas), interruption of logistics networks, suspension of delivery and home delivery / courier operations due to difficulties in procurement of gasoline, damage to supplier factories and warehouses, shortages of energy and supplies, large-scale absence of employees and failures of public transportation may hinder the operation of the Group's stores and central kitchens, or prevent customers from visiting the Group's stores, which may affect the Group's business, operating results and financial standing.
In particular, since the Group's stores and central kitchens are concentrated in the Greater Tokyo area, a large-scale disaster in the area could have a negative impact on the Group's business, operating results and financial standing.
In response to these risks, the Group has established a Disaster Countermeasure Headquarters based on the Group Emergency Response Regulations, and has established a system to respond promptly based on BCP (Business Continuity Plans) led primarily by the Disaster Countermeasure Headquarters.
Intellectual Property Rights
The Group considers logos related to restaurants developed by the Group—such as "Gusto," "Bamiyan," "SYABU-YO," and "Jonathan's," and menu-related trademarks such as Gusto's "Cheese IN Hamburger" to be extremely important for brand image and marketing. In order to protect its trademarks, the Group strives to acquire trademark registration in appropriate countries and regions. However, there is a possibility that sufficient intellectual property rights have not been acquired in some countries and regions.
In order to preserve its own intellectual property rights, the Group may have to file lawsuits, etc., against third parties, etc. who make illegal use of the Group's trademarks. However, there is a possibility that the Group may not be able to discover third parties, who illegally use the Group's trademarks in a timely manner; or that the Company's claims may not be sufficiently recognized in lawsuits, etc. filed. In such cases, this may affect the Group's business, brand image and social credibility.
In response to these risks, the Group strives to appropriately manage and operate trademarks in specialized departments within the company.
Reputation Damage Via the Internet
In the event that reputation damage occurs on the Internet due to inappropriate postings or publication of images, related to the Group or related parties, regardless of the authenticity of the content, the Group's business, operating results, brand image and social credibility may be affected.
Even if there is reputational damage to the Group's competitors, if the social evaluation and reputation of the restaurant market as a whole declines, the Group's business, operating results, brand image and social credibility may also be affected.
In response to these risks, the Group works with external specialized consulting firms to detect danger signals at an early stage. At the same time, if inappropriate posts are confirmed, the Group takes prompt and appropriate measures.
Leakage of Personal Information
The Group holds a large amount of customers' personal information in the operation of mobile applications, conducting customer questionnaires, its home delivery and take-out businesses, and settlement of payments. Although the Group pays the utmost attention to the privacy of users and the protection of personal information, and engages in appropriate information management, it is difficult to completely eliminate the possibility of outside leakage or misuse of information due to unauthorized access. If such personal information is leaked to the outside, there is a possibility that the Group's brand image and social credibility will be affected; and the incurrence of costs of responsive actions may affect the Group's business, operating results and financial standing.
In response to these risks, the Group has implemented security measures such as the installation of firewalls and anti-virus software in preparation for system attacks from the outside. In addition to working to reduce risks through preventive measures taken by specialized departments within the company, the Information Security Committee has established an information security management system and various information security-related regulations which stipulate in detail various responses in the event of a security incident, enabling measures to be taken to reduce the impact of any incident that may occur.
Legislative Regulations
The Group's business is subject to various laws and regulations, including the Food Sanitation Act, the Labor Standards Act, the Food Labeling Act, and the Act against Unjustifiable Premiums and Misleading Representations. Business activities may be restricted due to future changes in social conditions, such as revisions to laws and regulations, enactment of new laws and regulations, changes in the interpretation of laws and regulations, and expansion of the scope of regulations. As a result, the Group's business, operating results, financial standing, brand image and social credibility may be affected.
In response to these risks, the Group participates in various industry bodies and strives to obtain information. When revisions are made to various laws and regulations, each of the responsible departments within the Group work together to ensure thorough dissemination of information on revisions to relevant laws and regulations and to establish a system for compliance.
Events or Circumstances that Raise Significant Doubts about the Going Concern
At the end of the previous consolidated fiscal year, the Group had breached the financial covenants related to its borrowings, and there were events or conditions that raised significant doubts about the premise of a going concern. However, since the following actions were taken in the current consolidated fiscal year, we believe that no events or conditions that raise significant doubts about the premise of a going concern exist after the end of the first quarter of the current consolidated accounting period.
(1) Business
During the current consolidated fiscal year, the Company continued to take thorough measures to prevent COVID-19 infection among both customers and employees, while at the same time leveraging our management resources of our existing stores and pursuing strategies to expand sales, including enhancing delivery and take-out sales. Although the recovery of sales and earnings has been slow due to the increase in COVID-19 cases, we expect a certain level of improvement in profitability through self-help efforts such as productivity improvement initiatives and cost reductions, as well as through the use of government subsidy received for complying with government requests to shorten operating hours. Productivity improvement efforts are centered around the use of DX, including the introduction of digital menu books and the introduction of mobile ordering and pre-payment functions for take-out orders in the Skylark app. Cost reduction efforts include reduction of selling, general and administrative expenses through a reduction of fixed labor costs and utilities costs by eliminating late-night operating hours; a reduction of promotion costs; a reduction of rents and change of rent contracts to a percentage of sales through the cooperation of owners; a reduction of headquarters expenses; and suspending the execution of other non-essential and non-urgent costs. As cost reduction measures, the Company continues to implement cost structure reforms, such as lowering purchase unit costs by modularizing food ingredients and menu products to increase the buying volume per item, improving the productivity of production lines in our central kitchens, and changing delivery routes and frequencies. By lowering the break-even point to solidify our business foundation, quarterly operating income has continuously improved compared to each preceding quarter since the third quarter of the previous consolidated fiscal year.
(2) Fund Procurement of Funds
On February 12, 2021, the Company entered into a long-term commitment line agreement of 70 billion yen with a syndicate of five financial institutions including Mizuho Bank, Ltd., ending February 12, 2024 (The amount was subsequently changed to 35 billion yen on December 30, 2021). In addition, the Company raised a total of 43 billion yen by issuing new shares through a public offering on June 7, 2021 and a third-party allotment on June 28, 2021. We believe that these actions will enable us to continue to make necessary investments and smoothly operate our business even if the impact of COVID-19 pandemic on our business is prolonged.
(3) Financial Covenants
Based on a business plan that takes into account the impact of the COVID-19 pandemic on our business, the Company discussed with the financial institutions with which it has existing loans payable, and agreed to revise the financial covenants of those loans payable, and entered into a revised agreement on February 12, 2021. The Company believes that this review and the above recapitalization have considerably reduced the risk of violation of each of the financial covenants.