Risks affecting business activities and other aspects of the POLA ORBIS Group that are considered crucial to the investment decisions of investors are described below. Unless otherwise noted, forward-looking statements in this description of business risks are assumptions and judgments made by management of the Group as of December 31, 2020.
Damage to brand value
The Group has multiple brands, most notably POLA and ORBIS. Through conscientious business management and the supply of products and services designed to elicit customers’ trust, each Group company responsible for a particular brand strives to maintain and enhance the respective brand’s image. However, the operating results and financial position of the Group could be adversely affected if negative opinions and rumors about the Group’s supply chain, from research and development through to procurement, manufacturing, distribution, advertising and promotion, sale, use, and disposal, were to spread, which could lead to loss of trust and impaired brand value. In addition, in recent years, issues have been raised about forced labor, child labor and other human rights issues in the corporate supply chain. These issues are highly relevant to the Group as a cosmetics business operator and therefore the Group is concerned that the use of forced labor and child labor at palm oil plantations primarily in Indonesia and Malaysia could constitute a significant human rights issue. In addition to procuring certified palm oil going forward, we will purchase credits and procure products with supply-chain certification through the Roundtable on Sustainable Palm Oil (RSPO) and as part of our efforts to support palm oil plantations. The Group takes effective and responsible action as a company by conducting annual human rights due diligence and evaluating the impact of human rights risks on its business.
Competition within the Group
The Group adheres to a multi-brand, multi-channel sales strategy wherein new and existing brands are promoted according to target customer segment (demographic base), price bracket and sales channel, thereby minimizing direct competition between brands under the Group umbrella. However, competition within the Group may arise in the course of promoting Group strategies to maximize the value of existing brands and accelerate the process of multi brand development, and such competition could adversely impact the operating results and financial position of the Group. As such, the Board of Directors is working to minimize these risks by establishing multiple key performance indicators for each brand and operation so as to confirm that each brand is producing expected results, and by monitoring the status of maintenance and management of originality at each brand.
Securing sales partners (shop owners/managers and Beauty Directors)
POLA INC., the core company of the Group’s Beauty Care segment, develops business based on consignment sales agreements. Securing sales partners under consignment sales agreements is an important activity for business expansion and something POLA constantly works on. However, if regulations under the Act on Specified Commercial Transactions are tightened or the labor environment changes and securing human resources becomes more difficult, the number of Beauty Director applicants may drop, creating the potential for a shortage of sales partners. Should this occur, the operating results and financial position of the Group could be adversely affected. For this reason, we have been considering the introduction of a new partnership model to complement its conventional consignment sales agreements, and plan to introduce such partnership model on a trial bias during the period of the new medium-term management plan (2021–2023).
Strategic investment activities
The Company oversees the execution of strategic investments within the Group to expand operations abroad, particularly in the Asia-Pacific region, as well as M&A activities and new businesses. Information necessary for making decisions on strategic investment activities is collected and examined. However, the operating results and financial position of the Group could be adversely affected if results initially expected are not achieved due to unexpected situations, such as unforeseen changes in the operating environment.
Furthermore, operating assets and assets such as goodwill accompanying M&A activity may end up as impairment losses on the books, if anticipated cash flow fails to appear due to poor performances. In view of these risks, the Group intends to employ external experts to conduct various forms of due diligence of potential M&A companies and to calculate corporate and stock value as part of its efforts to improve accuracy as well as ensure appropriate acquisition procedures and corporate valuation.
Cosmetics market environment
The domestic cosmetics market has reached maturity. Against this backdrop, competition has intensified, fueled largely by the reorganization of corporate groups through M&A, the entry of new competitors into the market from different industries and the rising influence of distributors and retailers through alliances and integration. Consequently, the operating results and financial position of the Group could be adversely affected in the event that the Group cannot appropriately respond to unforeseen changes in the competitive environment. For this reason, in addition to actively developing overseas markets, especially in China and other parts of Asia, we will focus on cultivating new business areas under the new medium-term management plan.
Research & development
R&D is one source of the Group’s competitive strength, and the Company intends to maintain investment in this area. R&D activities are undertaken in accordance with the annual R&D plan to ensure effective and efficient pursuits, but if the development of a new product is a long-term effort, the results may not be seen until years later. Also, in some cases, when anticipated results cannot be achieved, the development period may need to be extended or additional investment may be required, and in the end, a product still might not reach commercialization. Furthermore, even if a product does reach this stage, it may not necessarily find favor with customers because of uncertainties precipitated by any number of factors. If the initially anticipated results of R&D cannot be achieved as such, the operating results and financial position of the Group could be adversely affected.
For this reason, with a view to shortening the development period prior to product commercialization and improving the accuracy of such process, the Group plans to establish the Technical Development Center, a new R&D base, and is working towards commencing the operation of the Technical Development Center in 2024.
Manufacturing and quality assurance
Efforts are made to continuously secure at appropriate prices the volume of raw materials required to manufacture products by using diversified sources of supply and by maintaining good relationships with suppliers, under the supervision of divisions within the Group responsible for procuring raw materials. However, if an unexpected situation arose due to circumstances not of the Group’s doing, the procurement of the necessary raw materials could be disrupted.
In addition, the Group’s cosmetics are manufactured at two locations, in Japan at POLA CHEMICAL INDUSTRIES' Fukuroi Factory, in Shizuoka Prefecture, and in Australia at Jurlique’s Mount Barker Factory, in South Australia. Steps are taken to ensure practices in line with quality control standards to maintain and improve quality. But if issues with product quality, however remote the possibility, were to arise, the operating results and financial position of the Group could be adversely affected. To preempt such issues, the Quality Assurance Committee, which is composed of quality assurance staff from each Group company, strives to strengthen the Group’s quality assurance framework by formulating the POLA ORBIS Group Quality Assurance Guidelines and sharing the results of audits of subcontractors.
Overseas business activities (including unstable global economic conditions)
The Group’s main sales points are in Japan, but Group companies are developing business in the Asia-Pacific region, where demand is expected to continue to grow, and further development will be pursued in overseas markets.
Business activities in these overseas markets inherently carry the risk of social upheaval caused by economic instability, political unrest, labor problems, the outbreak of war, terrorist attacks and the spread of infectious diseases. The manifestation of such risks could adversely affect the operating results and financial position of the Group. In addition to having its local subsidiaries and the Company’s International Business Management Division collect information, the Group established the Multiple Intelligence Research Center (MIRC), which is a body in charge of collecting important information for the Group’s management and business development, in order to gather information from around the world swiftly. This will not only enable the Group to avoid risks through early risk detection, but also to identify opportunities for it to expand existing businesses and develop new business areas. The Group is also striving to strengthen alliances with other companies and industries, universities, and research institutions and are pursuing initiatives to increase corporate value over the medium to long term.
Paralleling an increase in import/export transactions due to the Group’s expansion overseas, foreign currency-denominated settlements as well as loans extended to overseas subsidiaries carry the risk of exchange rate fluctuation. Additionally, since the local currency-denominated amounts reported by foreign consolidated subsidiaries are converted into yen when consolidated financial statements are prepared, changes in associated exchange rates may influence the operating results and financial position of the Group. For this reason, the Group monitors foreign exchange trends and use forward foreign exchange contracts and other hedging instruments as necessary to hedge such risk.
Limit of protection for intellectual property rights
Steps have been taken to protect the intellectual property rights of companies under the Group umbrella, but third parties could infringe upon such rights through means beyond what might be anticipated. Consequently, the business activities of the Group could be adversely affected by the misappropriation of technologies and the creation of counterfeit goods, and also, third-party intellectual property rights could be infringed upon by a member, or members, of the Group, albeit unknowingly. For this reason, the Group established an Intellectual Property & Regulatory Affairs Center that specializes in managing the Group’s intellectual property and developing strategies. The Center is tasked with formulating and implementing intellectual property strategies, such as securing patent and trademark rights at domestic and overseas bases, and monitoring the existence of any unjustifiable infringement of the rights held by the Company. At the same time, the Group conducts internal investigations and other activities to ensure that it does not unintentionally infringe the rights of a third-party.
All members of the Group carefully manage the handling of confidential information, including personal information and R&D information, through the implementation of internal audits, the use of an information security system, the establishment of an internal code of conduct and educational initiatives by the section in charge of CSR and various committees. However, if such information were leaked for any reason, the Company could face litigation and the reputation of the Company or the Group as a whole could be tarnished. This in turn could adversely affect the businesses of the Group. The Group is implementing the latest defense mechanisms, including regular simulated cyberattacks on its servers, in order to address the rising risk of information leaks caused by cyberattacks in recent years.
Although no lawsuits with the potential to seriously impact the Group were filed in fiscal 2018, the operating results and financial position of the Group could be adversely affected in the event that material lawsuits are brought against a member, or members, of the Group in the future with judgments handed down that are disadvantageous to the Group.
The Group’s production base for cosmetics is the Fukuroi Factory, operated by POLA CHEMICAL INDUSTRIES. Therefore, product supply could be interrupted for a long period in the event of a large-scale earthquake or flooding in the Tokai region, or some other major disaster.
Furthermore, unprecedented large-scale earthquakes as well as other natural disasters or accidents could occur in areas other than the Tokai region and interrupt the procurement of raw materials and components and the supply and sale of products, which could have an adverse effect on the operating results of the Group. To mitigate these risks, we secure BCP inventory of products and irreplaceable raw materials for specific items that are considered vital for the continuation of business (the Group’s priority items), assuming cases in which the operations at the Fukuroi Factory is suspended for a certain period of time and situations where the procurement of products and raw materials becomes difficult due to occurrence of a disaster. We also strive to avoid or disperse these risks by switching the production of some products, primarily of our pillar companies POLA INC. and ORBIS Inc., to external manufacturing contractors and by equipping the Technical Development Center, our new R&D base, with the function to produce the Group’s priority items.
Spread of infectious diseases
Given that face-to-face contact between customers and business partners is characteristic of daily business activities within the Group, the spread of infectious diseases with significant social impact would necessitate voluntary suspension of service and sales activities and the closure of sales offices. In such a scenario, the operating results and financial position of the Group could be adversely affected not only in Japan but also overseas. Consumption of face-to-face services was severely restricted by stay-at-home requests, movement restrictions, reduced business hours, etc. associated with the declaration of the state of emergency due to the COVID-19 pandemic. Meanwhile, there has been a notable shift in purchasing behavior, with many consumers turning to e-commerce and other mail-order sales channels. We are working to respond to this trend and further expand business by strengthening the digital marketing capability at ORBIS Inc. and DECENCIA INC., which position mail-order sales as their main sales channel, and fusing offline and online sales at POLA INC. and ACRO INC., which position face-to-face sales as their main sales channel.
The aggravation of climate change is expected to generate adverse effects, such as more frequent natural disasters and changes in the ecosystems. It is also expected to pose risks on the Group’s corporate activities, with global warming expected to cause changes in consumers’ selection of cosmetics products (such as a shift to summer products and UV-protection products, and an increase in products that provides a sense of coolness). Also, the Group may be forced to change its product ingredients and prescriptions as a result of suspension of operations at offices and factories located near river and coastal areas due to flooding, suspension of operations at offices and factories due to frequent forest fires caused by global warming (mainly in Australia), or an increase in raw materials that are difficult to procure.
The Group, which is primarily engaged in the manufacture and distribution of cosmetics, is also striving to reduce greenhouse gas (CO2) emissions. The Group has set targets for reducing CO2 emissions by 2029 based on the Science Based Targets (SBT) and has been implementing specific measures, including switching to green power. The Group is also working to improve the effectiveness of its measures to resolve climate change issues by linking these initiatives to long-term incentive (LTI) stock compensation for the Group’s directors.
Japan’s declining population
A significant increase in domestic demand, excluding the impact of inbound demand, in the cosmetics market and other industries in Japan will likely not occur because of Japan’s declining population. The declining population could also cause other adverse effects, such as business stagnation. For this reason, the Group has positioned the acceleration of global business development as a priority management theme and has been accelerating M&A of overseas brands as well as the global development of existing brands. Under the new medium-term management plan (2021–2023), we continue to uphold our aim of expanding the overseas business in a profitable way, and are committed to strengthening our physical stores and e-commerce operations mainly in China, our priority market.
Furthermore, Japan’s declining population may not only adversely impact our business performance, but also our ability to secure human resources engaged in business operations. In response to new lifestyles that are expected to continue in the wake of the COVID-19 pandemic, we have greatly expanded remote working systems, introduced side job systems and implemented other workstyle reforms, as well as introduced unrestricted employment extension systems at some Group companies. Going forward, the Group intends to focus on securing labor by promoting diverse workstyles across the entire Group.