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, 2018.
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 products and services were to spread, which could lead to loss of trust and impaired brand value.
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 multibrand development, and such competition could adversely impact the operating results and financial position of the Group.
Securing sales partners (shop owners/managers and Beauty Directors)
POLA INC., the core company of the Group’s Beauty Care segment, develops business through door-to-door sales 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.
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 or a drop in market value.
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&As, 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.
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.
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 quality control practices and maintain 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.
Overseas business activities
The Group’s main sales points are in Japan, but Group companies have expanded into 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.
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 from a monetary materiality perspective. 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.
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.
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.
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 in the Tokai region or some other major disaster.
Furthermore, unprecedented largescale 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.
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.