Kotobuki Spirits Co., Ltd.

The confectionery-centered lifestyle products business is highly susceptible to seasonal and weather fluctuations. In the event of abnormal weather such as extreme heat or mild winters, or the spread of infectious diseases such as novel influenza, both domestic and inbound demand may decline sharply. A combination of reduced foot traffic due to voluntary outing restrictions and temporary closures of stores at retail facilities could cause a sudden contraction in consumption activity, potentially having a material impact on operating results. While the Group monitors weather forecasts and implements infection prevention measures as countermeasures, responding to events exceeding expectations may prove difficult.

Japan is prone to natural disasters such as earthquakes, typhoons, heavy rain, and volcanic eruptions. If production or sales facilities suffer severe damage and become inoperable for an extended period, this could significantly disrupt production and sales activities. In particular, since the Group generally adopts a one-product, one-factory production system, if a specific factory is affected by a disaster, certain products may become unavailable for sale. While the Group works to minimize the impact through regular equipment inspections, fire insurance coverage, and domestic diversification of production and sales facilities, risks remain in the event of a large-scale disaster.

Issues related to quality and safety, such as false food labeling and mismanagement of expiration dates for raw materials and products, have arisen across the food industry as a whole. If unexpected problems occur in raw materials or manufacturing processes, this could lead to a loss of social trust and damage to brand value, and could also directly affect operating results through the payment of damages and other costs. The Group is working to strengthen its quality control system through compliance with the Food Sanitation Act, the JAS Act, the Act against Unjustifiable Premiums and Misleading Representations, the development of response manuals, and the establishment of a traceability system.

Licenses for confectionery manufacturing, restaurant operations, ice cream manufacturing, and similar businesses must be renewed every five years under the Food Sanitation Act. If a license is revoked due to a violation of laws and regulations, or if a business suspension order is issued, this could have a material impact on business continuity. In addition, the health food business is subject to regulations under the Food Sanitation Act, the Pharmaceutical Affairs Act, the Health Promotion Act, and other laws, and there is a risk that business activities could be constrained if regulations are tightened or laws are amended. Although no grounds for license revocation have arisen to date, continued monitoring of regulatory trends is necessary.

Agricultural raw materials such as wheat flour, red beans, sugar, and fats and oils are at risk of price surges and procurement difficulties due to unfavorable weather in producing regions, natural disasters, and changes in global supply and demand. For imported raw materials, exchange rate fluctuations also affect purchase prices. Rising crude oil prices are also expected to push up the costs of fuel such as heavy oil, as well as packaging materials and containers, raising concerns about the impact on operating results through higher costs. The Group is working to diversify risk through supplier diversification, advance price negotiations, and rapid information gathering, but responding to sudden sharp price spikes may prove difficult.

The Group holds a large amount of customer personal information and confidential business information in connection with its business activities, including the mail-order business. If information systems are disrupted or information is leaked due to cyberattacks, unauthorized access, disasters, accidents, or other causes, this could result in decreased sales, damages, response costs, and a loss of social trust and damage to brand value. The Group has established information management regulations, personal information management regulations, and information security regulations, and is working on employee training and strengthening hardware-based security. Strict management systems are also maintained with respect to the risk of violating the Act on the Protection of Personal Information.

The Group conducts business primarily in Asia through product exports, local subsidiaries, and franchise partners. Unexpected adverse economic or political factors, changes in legal regulations, natural disasters, conflicts, terrorism, or the spread of infectious diseases could disrupt overseas business activities and affect operating results. Because business operations are conducted through local subsidiaries and franchise partners, the financial condition of partners and responses to local regulations are also important risk factors.

The Group holds a large number of fixed assets used in business operations, such as factories and stores. If significant changes in the business environment or business activities lead to declining profitability or deteriorating future cash flows, impairment losses may need to be recognized, which could affect operating results. In particular, as the store network expands and held assets increase, the risk of impairment becomes more likely to materialize if a prolonged slump in demand occurs in a particular region or business format.