Business and Other Risks
The AEON Group has designated risk management as a key management priority that all Group companies
and organizational units are responsible for addressing. Under the direction of the AEON Management Committee (AEON’s highest management body),
the Risk Management Committee discusses and decides matters concerning risks that cannot be addressed by individual companies.
Potential risk factors related to the Group's operations are described below. Forward-looking statements contained herein
are forecasts based on the Company's judgment, targets, and assumptions as of the filing date of its latest securities report.
Actual outcomes may differ from these forecasts.
The risks enumerated below do not constitute an exhaustive list of all risks related to the Group’s operations.
Risks Related to the Group’s Operation
Although the status of the new coronavirus infection has been revised to "Class 5 Infectious Disease," the same status as seasonal influenza, effective May 8, 2023 in Japan under the Infectious Disease Control Law, the Group will continue to reduce the risk of infection and make quarantine a part of daily life by selecting the most appropriate measures to deal with outbreaks of infectious diseases based on data and expert knowledge accumulated to date. The Group will continue to strive to reduce the risk of infection and realize a society in which quarantine is part of daily life by selecting the most appropriate measures in response to outbreaks of infectious diseases, without changing the objectives of the AEON COVID-19 Protocol which outlines the Group's standards for quarantine measures based on accumulated data and expert knowledge.
In the areas surrounding the Group's stores and facilities, there is a possibility of such outbreaks of infectious diseases such as new strains of influenza, which have a significant social impact, as well as physical damage to stores and facilities due to natural disasters such as major earthquakes, typhoons, and tsunamis, fire or unexpected accidents, war, riots, terrorist activities, system failure due to computer virus, or other events affecting our suppliers or our purchasing and distribution network.
To prepare for such events, the Group has taken measures based on a business continuity plan, including preparation of information infrastructure, setting up of disaster management bases, anti-seismic reinforcement of stores, conclusion of disaster preparedness agreements with local governments, and the securing of methods to obtain financing in the event of unforeseen events. Nevertheless, any disruption of the Group’s sales, logistics, or supply-chain activities or the occurrence of human suffering or physical damage due to events that exceed the Group’s assumptions could adversely affect the Group’s operations, financial condition, or earnings.
In the areas surrounding the Group's stores and facilities, there is a possibility of such outbreaks of infectious diseases such as new strains of influenza, which have a significant social impact, as well as physical damage to stores and facilities due to natural disasters such as major earthquakes, typhoons, and tsunamis, fire or unexpected accidents, war, riots, terrorist activities, system failure due to computer virus, or other events affecting our suppliers or our purchasing and distribution network.
To prepare for such events, the Group has taken measures based on a business continuity plan, including preparation of information infrastructure, setting up of disaster management bases, anti-seismic reinforcement of stores, conclusion of disaster preparedness agreements with local governments, and the securing of methods to obtain financing in the event of unforeseen events. Nevertheless, any disruption of the Group’s sales, logistics, or supply-chain activities or the occurrence of human suffering or physical damage due to events that exceed the Group’s assumptions could adversely affect the Group’s operations, financial condition, or earnings.
The Group uses large amounts of energy in store operations and employs large quantities of CFC-alternative refrigerants in refrigerators and freezer cases. For this reason, AEON has long addressed the problem of global warming, which has a deleterious impact on the global environment. In accordance with the AEON Decarbonization Vision 2050, the Group is promoting energy-saving practices and working towards a switch to renewable energy with the goal of reducing the total volume of greenhouse gas emissions generated by its stores to zero. The Group is also taking steps to disclose information in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
Nevertheless, higher-than-expected energy expenses or countermeasure-related costs due to the tightening of legal regulations or growing societal demands relating to the environment, significant changes in agricultural or marine product quality or yields in connection with climate change, or if the Group’s initiatives or information disclosure are considered to be insufficient and thus undermine the Group’s credibility in society, the Group’s operations, financial condition, or earnings could be adversely affected.
Nevertheless, higher-than-expected energy expenses or countermeasure-related costs due to the tightening of legal regulations or growing societal demands relating to the environment, significant changes in agricultural or marine product quality or yields in connection with climate change, or if the Group’s initiatives or information disclosure are considered to be insufficient and thus undermine the Group’s credibility in society, the Group’s operations, financial condition, or earnings could be adversely affected.
The Group retains and manages personal information obtained from Financial Services Business customers and customers of other businesses operated by the Group, as well as information about business partners, the personal information of employees, and confidential information concerning management. Amid the growing importance of information security given the widespread use of IT and ICT and the greater adoption of teleworking, the Group considers the information it handles to be an important asset with which to expand its business activities and create added value. The Group has therefore put in place information security systems and regulations to prevent information leaks, and also adopts security measures to the fullest extent possible, including periodic checks and the establishment of concrete standards concerning the handling of information and the administration of information systems. In addition, in order to address the rapidly growing threat of cyber-attacks in recent years, the Group has set up a specialized Group Information Security Team so that it can respond to business continuity risks such as system outages caused by cyber-attacks.
Nevertheless, should leakage, falsification, or unauthorized use of confidential information occur for any reason, or should an incident occurs due to a cyber-attack, any resultant liability for the compensation of damages to injured parties, damage from a widespread suspension of services, and the cost of responding to such incidents, or damage to the Group’ public reputation, could adversely affect its operations, financial condition, or earnings.
Nevertheless, should leakage, falsification, or unauthorized use of confidential information occur for any reason, or should an incident occurs due to a cyber-attack, any resultant liability for the compensation of damages to injured parties, damage from a widespread suspension of services, and the cost of responding to such incidents, or damage to the Group’ public reputation, could adversely affect its operations, financial condition, or earnings.
To enable Group companies to grow into the number one companies in their respective categories and regions, the Group will undertake innovation of existing business models and establish new growth models. The Group may acquire or invest in other companies as part of its growth strategy. When acquiring another company, the Group conducts a detailed preliminary investigation of the target company’s financial position, contractual relationships, and other matters and does its utmost to avoid risk. Nevertheless, after an acquisition is completed, it is conceivable that contingent liabilities or unrecognized liabilities may be incurred or that misconduct, compliance problems, or the like may occur due to the inability to appropriately and effectively apply the Group’s internal controls to the acquired company. Also, an acquisition may entail recognition of additional goodwill and a resulting increase in amortization costs. The inability to achieve the expected results as a result of the above factors could adversely affect the Group’s operations, financial condition, or earnings.
In addition to product quality and safety, the Group considers the provision of products and services required by customers at affordable prices to be its mission as a retailer and one of its top management priorities. Based on this concept, in order to respond to diversifying customer needs, the Group handles a variety of national brand products from Japan and overseas, including TOPVALU, the Group's common private brand (PB) products, highly specialized PB products developed by the Group's specialized business categories, and local PB products, mainly fresh and delicatessen products made by regional business companies. In developing products, the Group employs numerous measures to ensure safety and security, such as establishing exacting standards and conducting scrupulous quality inspections. In procuring raw materials and commodities, the Group strives to lower costs and provide stable supply in various ways. For example, it procures materials and goods from optimal sources in Japan or overseas, consolidates demand by leveraging economies of scale, and streamlines distribution channels. In addition to the development of environmentally friendly products with a view to realizing a recycling-oriented society and accelerating sustainable activities across the entire lifecycle of its products, the Group is also promoting initiatives to improve various social issues in line with its policy of taking responsibility for the entire supply chain. As part of the commitment to respect for human rights, the Group cooperates with its suppliers to check production and manufacturing sites in each country to ensure that workers are appropriately employed, work in a safe environment, and comply with laws and regulations.
Nevertheless, if an incident attributable to one of the Group’s private brand products occurs, if sales of products are voluntarily halted due to contamination or some other reason, if manufacturers raise prices or face difficulties in procuring commodities as a result of higher-than-expected raw material costs, rising distribution costs, sudden fluctuation of the exchange rate, or the impact of unfavorable weather. If the Group’s initiatives aimed at lowering its environmental footprint or giving due consideration to human rights are considered insufficient, in addition to the possibility of lower sales and higher cost of sales, the Group’s operations, financial condition, or earnings could be adversely affected as a result of damage to its brand if it loses the trust of its customers.
In fiscal 2022, the Group experienced a sharp rise in product procurement costs, including purchase prices, raw material costs, and logistics costs, due to the global surge in energy and raw material prices and the rapid depreciation of the yen, etc. However, the Group, placing the highest priority on protecting customers' lives, is striving to maintain prices as much as possible, especially for food and daily necessities of TOPVALU, by simplifying packaging materials, reviewing logistics, and taking advantage of the Group's scale to reduce costs. The Group will continue to absorb cost increases throughout the supply chain and diversify risks by securing multiple supply routes depending on the degree of import dependence, etc., while carefully monitoring the economic environment and geopolitical situation to reduce risks quickly and from a medium- to long-term perspective.
Nevertheless, if an incident attributable to one of the Group’s private brand products occurs, if sales of products are voluntarily halted due to contamination or some other reason, if manufacturers raise prices or face difficulties in procuring commodities as a result of higher-than-expected raw material costs, rising distribution costs, sudden fluctuation of the exchange rate, or the impact of unfavorable weather. If the Group’s initiatives aimed at lowering its environmental footprint or giving due consideration to human rights are considered insufficient, in addition to the possibility of lower sales and higher cost of sales, the Group’s operations, financial condition, or earnings could be adversely affected as a result of damage to its brand if it loses the trust of its customers.
In fiscal 2022, the Group experienced a sharp rise in product procurement costs, including purchase prices, raw material costs, and logistics costs, due to the global surge in energy and raw material prices and the rapid depreciation of the yen, etc. However, the Group, placing the highest priority on protecting customers' lives, is striving to maintain prices as much as possible, especially for food and daily necessities of TOPVALU, by simplifying packaging materials, reviewing logistics, and taking advantage of the Group's scale to reduce costs. The Group will continue to absorb cost increases throughout the supply chain and diversify risks by securing multiple supply routes depending on the degree of import dependence, etc., while carefully monitoring the economic environment and geopolitical situation to reduce risks quickly and from a medium- to long-term perspective.
The Group is developing commercial facilities rooted in communities in coordination with local governments, and set forth the objective of "Acceleration and evolution of the digital shift" in the FY2021～FY2025 Medium-term Management Plan. To that end, the Group is stepping up investments in IT systems, partnerships and collaboration with IT firms, and investments in digital technology and logistics.
In the development of commercial facilities, due to the application of the City Planning Act, Building Standards Act, and Act on the Measures by Large-Scale Retail Stores for Preservation of Living Environment in Japan, and the application of laws, ordinances, and regulations of overseas countries and regions, restrictions could be imposed on the opening of stores in suburban areas subject to the details of urban plans. In addition, increases in real estate acquisition costs or construction costs or lengthening of construction times may occur due to increases in real estate prices or chronic personnel shortages in the construction industry or increases in prices of construction materials resulting from demand for reconstruction after major disasters.” Also, regarding investments in digital technology and logistics, the pace of technological innovation, especially in the area of IT, is progressing rapidly and driving changes in the business environment. This means that the Group may not have enough personnel to incorporate new technologies into its services, its investment projects may become obsolete much sooner than expected, or it may lag behind rival companies.
These factors might prevent the Group from developing new stores or services as initially planned, and may delay the opening of new stores or the provision of new services, which in turn could thwart the Group’s competitiveness, trigger unexpected costs, and prolong the period during which investments are to be recouped. Accordingly, if expected outcomes cannot be achieved or sustained, the Group’s operations, financial condition, or earnings could be adversely affected as a result.
These factors might prevent the Group from developing new stores or services as initially planned, and may delay the opening of new stores or the provision of new services, which in turn could thwart the Group’s competitiveness, trigger unexpected costs, and prolong the period during which investments are to be recouped. Accordingly, if expected outcomes cannot be achieved or sustained, the Group’s operations, financial condition, or earnings could be adversely affected as a result.
The Group has a high share of retail sales in Japan and relies heavily on the Japanese retail market for revenue. As a result, the Group's sales may be affected by the future deterioration of the Japanese economy and a drop in personal consumption, abnormal weather due to extreme weather conditions, a shrinking market due to a declining population, and intensified competition across industries and business categories. In addition, a rapid deterioration in the economic environment, such as exchange rate fluctuations and inflation, or unseasonable weather due to abnormal weather, may cause various costs related to store operations, including product procurement costs, utility costs, facility maintenance costs, personnel costs, and sales promotion costs, to rise, while the severe market environment may make it difficult to reflect the amount equivalent to such costs in sales prices. and adversely affect the Group’s operations, financial condition, or earnings.
Overseas, the Group does business mainly in China and the ASEAN region and imports a certain amount of the merchandise sold in Japan from overseas. Any problems with the Group’s overseas sales activities, logistics or supply-chain activities, taxation, or the like stemming from slowing of economic growth, unstable political or economic circumstances, changes to laws or government policies, or other factors overseas, or any resulting abnormal fluctuations in exchange rates or interest rates, could adversely affect the Group’s operations, financial condition, or earnings.
Overseas, the Group does business mainly in China and the ASEAN region and imports a certain amount of the merchandise sold in Japan from overseas. Any problems with the Group’s overseas sales activities, logistics or supply-chain activities, taxation, or the like stemming from slowing of economic growth, unstable political or economic circumstances, changes to laws or government policies, or other factors overseas, or any resulting abnormal fluctuations in exchange rates or interest rates, could adversely affect the Group’s operations, financial condition, or earnings.
The Group’s business activities are heavily dependent on human resources. In addition to securing and developing excellent human resources for store operations and other areas, utilizing the abilities of diverse human resources with diverse values to respond to rapid social change is essential for growth. In addition to actively recruiting and training future leaders in Japan and overseas, from the perspective of respect for human rights and diversity and inclusion, the Group promotes the development of an environment and organizational culture in which diverse human resources, regardless of race, age, nationality, or gender, can recognize each other and play an active and equal role. As part of the health management practices, the whole Group is working to improve employee productivity and creativity, reduce employee turnover, and increase employee satisfaction and job satisfaction through measures against infectious diseases, support for passive smoking prevention and smoking cessation, and activities to raise employee health awareness.
Nevertheless, inability to secure human resources as planned because of changes in demographic composition due to the declining birthrate and population aging or other factors, increases in personnel costs due to a tightening of labor supply conditions or rapid wage hikes, or considered inadequate for Group's initiatives and information disclosure regarding human capital could adversely affect the Group’s operations, financial condition, or earnings.
Nevertheless, inability to secure human resources as planned because of changes in demographic composition due to the declining birthrate and population aging or other factors, increases in personnel costs due to a tightening of labor supply conditions or rapid wage hikes, or considered inadequate for Group's initiatives and information disclosure regarding human capital could adversely affect the Group’s operations, financial condition, or earnings.
The Group owns assets based on a diverse business portfolio. In addition to a large amount of fixed assets such as inventories; operating receivables; property, plant and equipment; goodwill generated as a result of the Group’s expansion; software associated with digital-related investment, etc. the Group also owns financial assets connected with its financial services and a variety of other financial market-traded assets. With respect to investments in such assets, in order to secure high levels of profitability and financial soundness, the Group analyzes the status of the Group’s businesses in terms of both stock and flow based on the financial statements of each business segment, and invests with focus on optimal allocation of resources, and with emphasis on investments in growth areas and cash flow generation.
Nevertheless, if the book value of any stores becomes unrecoverable due to a decline in profitability, or if the value of assets held by the Group declines due to market turbulence, or if customer contractual defaults result in a larger-than-anticipated increase in doubtful accounts receivable, etc., the Group could incur impairment losses or valuation losses on such property, plant and equipment, goodwill, or other assets, and the Group could record additional allowances for doubtful accounts. These could adversely affect the Group’s operations, financial condition, or earnings.
Nevertheless, if the book value of any stores becomes unrecoverable due to a decline in profitability, or if the value of assets held by the Group declines due to market turbulence, or if customer contractual defaults result in a larger-than-anticipated increase in doubtful accounts receivable, etc., the Group could incur impairment losses or valuation losses on such property, plant and equipment, goodwill, or other assets, and the Group could record additional allowances for doubtful accounts. These could adversely affect the Group’s operations, financial condition, or earnings.
As of February 28, 2023, the Group had bonds, borrowings, and other interest-bearing debt totaling ¥3,483.1 billion (28.2% of total assets). The Group constantly considers a wide variety of financing methods and has developed a financing system capable of rapidly responding to changes in the financial environment.
Nevertheless, the Group may be unable to raise funds in a timely manner on the terms it desires for reasons such as general deterioration of market conditions, including economic recession or credit contraction; deterioration in its creditworthiness due to lowering of credit ratings or other factors; or worsening of the business outlook.
Also, any future increases in borrowing costs due to increases in long-term or short-term interest rates could adversely affect the Group's operations, financial condition, or earnings.
Nevertheless, the Group may be unable to raise funds in a timely manner on the terms it desires for reasons such as general deterioration of market conditions, including economic recession or credit contraction; deterioration in its creditworthiness due to lowering of credit ratings or other factors; or worsening of the business outlook.
Also, any future increases in borrowing costs due to increases in long-term or short-term interest rates could adversely affect the Group's operations, financial condition, or earnings.