OCEAN SYSTEM CORPORATION

The Group operates in the food retail business and is affected by economic conditions and personal consumption trends, as well as intensifying competition with peers and different business formats; similar incidents occur at several stores each year. If the competitive environment deteriorates or consumer spending remains sluggish, this could lead to a decline in sales and earnings. As a countermeasure, the Group strives to differentiate its products and services and achieve low-cost operations.

The Group is subject to regulations under laws related to food safety, hygiene, and labeling, and if a serious hygiene management problem occurs or regulations are tightened, procurement costs, product processing costs, and management costs may increase. Minor incidents such as food poisoning or foreign object contamination occur in several cases each year, and if an issue arises that undermines trust, this could negatively affect business performance. As a countermeasure, the Group has established a dedicated department, conducts audits by third-party organizations, and maintains internal rules and manuals.

If the profitability of stores and other assets deteriorates or the market value of held assets declines significantly, impairment processing may become necessary, affecting business performance and financial condition. In the consolidated fiscal year under review, the Group recorded an impairment loss of ¥253 million, and recognizes that such losses may occur in the future as well. As a countermeasure, the Group conducts regular monitoring and works to minimize impairment loss amounts by responding promptly to changes in the business environment.

The Group operates "Gyomu Super," "Fresh Lunch 39," and "Yoshikei" based on franchise agreements with Kobe Bussan Co., Ltd., Sankyu All Japan Co., Ltd., and Yoshikei Kaihatsu Co., Ltd. Business areas are limited under the area license system, and expansion requires the conclusion of new agreements. The agreements with "Gyomu Super" and "Yoshikei" contain termination clauses, and if grounds for termination arise, this could materially affect business performance and financial condition. As a countermeasure, the Group strives to maintain good relationships with the franchise headquarters and comply with contract terms.

In the store opening plans for "Challenger" and "Gyomu Super," if properties satisfying various conditions cannot be secured, changes or delays to the opening plans may occur, with the impact recognized as approximately ¥200 million to ¥4,000 million in sales per store. If store openings do not proceed as planned, this could affect business performance and financial condition. As a countermeasure, the Group conducts detailed examination of location conditions, trade area analysis, and legal regulations based on its store development regulations.

The majority of the Group's stores are leased properties, and there is a risk that continued use may become difficult due to circumstances of the lessor, or that security deposits, guarantee deposits, and construction cooperation funds may become unrecoverable due to the lessor's bankruptcy or other reasons. As of the end of the consolidated fiscal year, the Group had deposited ¥916 million in guarantee deposits and ¥716 million in security deposits, and if part or all of these become unrecoverable, this could affect business performance and financial condition. As a countermeasure, the Group strives to build good relationships with lessors and gather information.

The opening or expansion of stores in the supermarket business may be subject to the Large-Scale Retail Store Location Law, and the Group is also subject to environmental laws such as the Food Recycling Law and the Containers and Packaging Recycling Law. In addition, the Group employs a large number of part-time and temporary workers, and amendments to the Labor Standards Act and other laws could increase labor costs. As a countermeasure, the Group strives for thorough management through coordination with local residents and municipalities, information gathering, and utilization of legal counsel and other experts.

The Group utilizes communication networks and computer systems for a wide range of operations including product procurement and sales, and if server overload, unauthorized external access, cyberattacks such as ransomware, employee errors, or cloud service failures occur, this could affect business performance and financial condition. As a countermeasure, the Group has established internal rules, strengthened its system monitoring framework, and conducts planned hardware replacement.

If physical damage occurs to stores due to natural disasters such as major earthquakes, typhoons, or torrential rain, or unforeseen accidents, or if a pandemic such as COVID-19 occurs, business operations could be disrupted, affecting business performance and financial condition. This includes broad risks to business continuity, including impacts on procurement and distribution networks. As a countermeasure, the Group has established internal emergency response systems and conducts accident prevention training.

The Group's business is labor-intensive, and continuous recruitment, development, and appropriate deployment of talented personnel is a prerequisite for growth; if it becomes difficult to secure personnel amid business expansion, business growth could slow, affecting business performance and financial condition. Minor impacts from labor shortages are currently occurring. As a countermeasure, the Group strengthens new graduate and mid-career recruitment activities through a dedicated department and works to build personnel development and follow-up support systems.