Business and Other Risks

The risks associated with COVID-19 became clearly evident during the consolidated fiscal year under review, due to the expansion of the global pandemic and the resulting restrictions placed on activities, including state of emergency declarations both in Japan and overseas. The spread of infection continues in Japan and other Asian countries where the Group conducts business, and the impact on future sales activities and other business activities, as well as the outlook for when the pandemic will be contained, remain uncertain.
Given these circumstances, in June 2020, the Group established the “AEON COVID-19 Protocol for Infectious Disease Control”, which specifies the Group’s standards for infectious disease control measures. Through the actions of all employees and with the cooperation of our customers, we are striving to reduce the risk of infection on an ongoing basis on the way to the establishment of a “new normal”. Furthermore, in November, the protocol was revised to include additional control measures including measures relating to the installation of ventilation and air purification equipment to prevent infection via airborne droplets within facilities, a framework for preventing infection from employees at facilities, and measures to prevent secondary infections following an outbreak. The Group will continue to employ a wide range of integrated infectious disease control measures with the aim of reducing infection risks and establishing safe and reassuring store and work environments.
In the event, however, that a worse-than-anticipated resurgence of COVID-19 infections causes the Group’s sales, logistics, or supply-chain activities to become restricted, or causes additional human suffering, the Group’s operations, financial condition, or earnings could be adversely impacted.

The Group uses large amounts of energy in store operations and employs large quantities of CFC-alternative refrigerants in refrigerator 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 Aeon Decarbonization Vision 2050, a plan instituted with the aim of contributing to the realization of a decarbonized society, the Group is promoting energy conservation and working to convert to renewable energy.
Nevertheless, higher-than-expected energy expenses or countermeasure-related costs incurred due to tightening of legal regulations or growing societal demands relating to the environment, or significant changes in agricultural or marine product quality or yields in connection with climate change, could adversely affect the Group’s operations, financial condition, or earnings.

Physical damage to stores and facilities could occur as a result of major earthquakes, typhoons, tsunamis, or other natural disasters, fires, or unforeseen accidents etc. in the vicinity of the Group’s stores and facilities. Riots, terrorism, system failures due to computer viruses or other causes, or other events that affect the Group’s suppliers or its supply chain or logistics network could also occur.
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 retains and manages personal information obtained from customers of the financial services business and other businesses operated by the Group. The Group has taken the utmost measures to prevent leakage of such personal information, such as measures to ensure the security of information systems. Nevertheless, should leakage, falsification, or unauthorized use of personal information relating to customers occur for any reason, any resultant liability for compensation of damages to injured parties, damage from widespread suspension of services and the cost of responding to this, or damage to public reputation could adversely affect the Group’s 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 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. Inability to achieve the expected results as a result of the above factors could adversely affect the Group’s operations, financial condition, or earnings.

The Group offers private brands and a variety of other merchandise to meet the diversifying needs of customers. The Group considers product quality and safety to be among its top management priorities, and in merchandise development engages in a variety of initiatives to maintain safety and security, such as establishing strict standards and conducting careful quality inspections. Nevertheless, an accident or other problem attributable to one of the Group’s private brand products or voluntary suspension of sales of a product because of contamination or another reason could lead to a sales decline as well as brand damage resulting from erosion of customer trust. This could adversely affect the Group’s operations, financial condition, or earnings.

The Group is developing commercial facilities rooted in communities in coordination with local governments. Due to the application of the City Planning Act, Building Standards Act, and Large-Scale Retail Store Location Act in Japan and the 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, or the Group may be prevented from opening new stores or enlarging or reformatting existing stores as originally planned. Such restrictions could impede implementation of the Group's growth strategy or increase its store development costs. Also, 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. This could adversely affect the Group’s operations, financial condition, or earnings.

The Group has a high share of retail sales in Japan and relies heavily on the Japanese retail market for revenue. For this reason, any future worsening of the Japanese economy, downturn in consumer spending, unfavorable weather due to abnormal climatic conditions, market contraction accompanying population decline, or intensification of competition across industry sectors and business categories 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.
In addition, the new values and rapid changes to behavioral patterns brought about by COVID-19 have had a significant impact on customer consumption trends, and progress is being made with social reforms such as the advancement of digital transformation (DX). Although the Group views such changes in the business environment as opportunities for further growth and is moving rapidly to respond to such changes, it remains unclear when COVID-19 will be brought under control, and the pandemic could adversely affect the Group’s operations, financial condition, or earnings.

The Group’s business activities are heavily dependent on human resources. Since securing and developing excellent human resources for store operations and other areas is essential for growth, the Group is actively recruiting and developing in Japan and overseas personnel who will support the future of the Group. 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, or increases in personnel costs due to a tightening of labor supply conditions 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; and goodwill generated as a result of the Group’s expansion, 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 1) the book value of any stores becomes unrecoverable due to a decline in profitability, or if 2) the value of assets held by the Group declines due to market turbulence, or if 3) 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. The Group could also have to record additional allowances for doubtful accounts, and this could adversely affect the Group’s operations, financial condition, or earnings.
The assumptions for significant accounting estimates used for recording impairment losses on non-current assets are as described in “3. Analysis of Financial Position, Operating Performance and Cash Flows by Management (5) Significant Accounting Estimates and Related Assumptions (Impairment of Non-Current Assets)". In addition, the nature of the financial instruments held by the Group and their associated risks, are as described in “5. Status of Accounting, 1) Notes on the Consolidated Financial Statements (Financial Instruments)”.

In accordance with current accounting standards, the Group recognizes deferred tax assets by reasonably estimating future taxable income in respect of tax loss carryforwards and deductible temporary differences and considering recoverability. If management judges that all or a portion of deferred tax assets are unrecoverable due to significant changes in the business performance of Group companies or the business environment, or if tax system revisions including tax rate changes or accounting standards revisions are carried out, such deferred tax assets are written down. This could adversely affect the Group’s operations, financial condition, or earnings.
The assumptions for significant accounting estimates used for recording deferred tax assets are as described in “3. Analysis of Financial Position, Operating Performance and Cash Flows by Management (5) Significant Accounting Estimates and Related Assumptions (Recoverability of Deferred Tax Assets)"

As of February 29, 2020, the Group had bonds, borrowings, and other interest-bearing debt totaling ¥3,006.6 billion. 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 long-term or short-term interest rates could adversely affect the Group's operations, financial condition, and earnings due to increases in borrowing costs.