KOMEDA Holdings Co., Ltd.

Approximately 95% of Komeda Coffee and Okage-an outlets are operated by FC franchisees, and the Group's principal revenue depends on the wholesale of ingredients and other supplies to FC franchisees as well as royalty income. If a slowdown in personal consumption or a surge in labor costs, rent, and utility costs deteriorates the profitability of FC franchisees and makes it difficult for them to continue operations, this would directly affect the Group's operating results. As countermeasures, the Group supports the improvement of FC franchisee profitability through attractive product development and sales promotion initiatives such as campaigns, while also working to enhance brand value through the operation of the fan communities "Sankaku Yane no Shita" and "Komeda Bu".

As a result of past M&A activity, the Group has recorded substantial goodwill in non-current assets, which accounts for a high proportion of total assets. If future cash flows decline due to a deterioration in the profitability of the FC business, or if the weighted average cost of capital rises due to fluctuations in financial markets, the recognition of impairment losses under IFRS could affect operating results and financial position. As countermeasures, the Group verifies the appropriateness of goodwill valuation through strengthened post-M&A integration processes, profit planning and cash flow management, pursuit of an optimal capital structure, and the regular performance of impairment testing.

Prices of raw materials such as green coffee beans fluctuate due to exchange rates, political conditions, and climate change, and flour, oils and fats, which are the main raw materials for bread, may also rise due to abnormal weather, expanding demand, and inflows of speculative funds. In addition, there is a risk that imports from certain regions could be suspended due to conflicts or the spread of infectious diseases, which would affect the Group's operating results. As countermeasures, the Group mitigates price fluctuation risk through yen-denominated forward contracts, diversifies sourcing regions, considers alternative products, and is advancing sustainable coffee bean procurement from Olam.

As funds for the acquisition of shares in former Komeda (2) were primarily raised through borrowings, the Group has substantial borrowings outstanding as of the end of the current consolidated fiscal year, and a rise in interest rates, including on borrowings with floating rate terms, could affect operating results. In addition, if refinancing becomes difficult due to turmoil in financial markets or changes in financial institutions' lending stance, there is a risk that a shortage of funds could affect the Group's financial position. As countermeasures, the Group works to secure liquidity on hand by establishing overdraft facilities with multiple financial institutions, partially fixing interest rate terms, utilizing hedging transactions, and conducting profit planning and cash flow management.

In addition to a slowdown in personal consumption due to economic fluctuations and consumption tax increases in Japan, price increases resulting from rising labor costs, logistics costs, rent, and utility costs may lead to a decline in customer visits. Furthermore, because the Coffee Shop FC Business consists of a single business format, if changes in consumer preferences cause personal consumption at coffee shops to stagnate, it would be difficult to offset this with other business formats, resulting in a significant impact on operating results. As countermeasures, the Group is considering, in addition to service improvement, differentiation, and cost management, geographic diversification through the strengthening of overseas expansion, and avoidance and diversification of business format risk through M&A.

The Group is highly dependent on information systems for ordering and delivery of ingredients, store operations, and head office administrative operations. If a system failure occurs due to computer viruses or external cyberattacks, this could impede proper store operations and result in the loss of important data, potentially affecting the Group's business, operating results, brand image, and social credibility. As countermeasures, the Group has installed antivirus software and unified threat management tools on all terminals, conducts employee education and training, and has built system redundancy and a secondary backup system using data centers in different regions.

The aging of FC franchisees is progressing, particularly in the Chukyo area, and if a large number of store closures occur due to health-related reasons, this could affect the Group's operating results. In addition, there is a risk that FC franchisees may give up continuing operations if substantial renovation costs arise due to the aging of stores. As countermeasures, the Group shares information at monthly sales manager meetings, promotes the referral and transfer of promising properties to other FC franchisees or their conversion to directly operated stores, strengthens its organizational structure by assigning dedicated development personnel to the Chukyo area, and provides support to FC franchisees for the burden of renovation work.

If hygiene problems such as mass food poisoning or foreign object contamination occur, there is concern that store sales could decline due to a loss of credibility. In addition, if there are serious errors in labeling of allergens or calorie content, this could develop into a serious accident affecting human life while also posing a risk of a significant impact on operating results. As countermeasures, the Group complies with laws and regulations under its food quality assurance rules, conducts manufacturing plant audits, distributes hygiene manuals to all stores, performs hygiene checks by supervisors, and conducts unannounced inspections by external specialized institutions, while also disclosing the latest calorie and allergen information on its own website.

If the Group's reputation declines and its brand value is damaged due to the spread of disruptive videos on the internet and other media, inappropriate incidents occurring at FC franchisees, or a decline in the overall social evaluation of the food service market, this could affect operating results. As countermeasures, the Group has established a Compliance Committee, extended the internal reporting system "Komeda Compliance Helpline" to FC franchisees, conducts compliance training for officers and employees, and distributes compliance newsletters to FC franchisees.

With the strengthening of store expansion overseas, business development may be constrained by significant changes in economic conditions, political and social systems in relevant countries, differences in legal regulations and business practices, and the spread of infectious diseases. In addition, disputes with FC franchisees or business partners, or long-term store closures and damage to or destruction of store buildings due to war, civil unrest, or coups, could affect operating results. As countermeasures, the Group works to establish a system for early information gathering through close communication with overseas FC franchisees and business partners, and to build a structure that enables timely and appropriate management decisions.