Major matters which could potentially pose a risk to our operations are described below. In the interests of full information disclosure to investors, information has also been provided on matters which do not necessarily pose a risk to business but that are considered important for investment decisions. Forward-looking statements are based on our judgments as of the end of March 2020. The risks related to investment, however, are not limited to those described below.
(1) Risks related to trends and increased competition in the restaurant sector
The restaurant sector to which we belong continues to face challenging operating conditions, with demand failing to make a full-scale recovery amid economic uncertainty, despite expectation for improvement in personal spending driven by economic recovery, including attempts by major fast-food chains to increase average customer spend by successively launching comparatively high priced promotional menu items.
In such an environment, we are seeking to differentiate ourselves from our competitors by creating restaurants which insist on "freshly hand-made" food and "immersive dining experiences" based on our corporate philosophy "Simply For Your Pleasure". Meanwhile, we plan to maintain earnings potential by striving to maintain and improve QSC and enhance training and by implementing cost-cutting and other measures.
However, the Group's business performance may be affected if revenue from existing restaurants falls more than expected due to contraction of the restaurant market or increased competition or if our cost-cutting measures prove ineffective.
(2) Risks related to restaurant expansion
(a) Basic policy on restaurant expansion
We are mainly engaged in the business of directly operated restaurants. We plan to continue opening restaurants in the future, taking into consideration a wide range of factors including location, lease terms and conditions, and restaurant profitability.
However, the Group's business performance may be affected if restaurant openings are delayed due to problems such as delays obtaining licenses and permits or if we are unable to find the potential sites for new restaurants we expect.
(b) Risks related to opening restaurants in shopping centers
As of the end of the consolidated fiscal year under review, 307 out of a total of 1,147 restaurants directly operated by the Group in Japan were located in shopping centers.
The Group plans to continue opening restaurants in shopping centers in the future but its business performance could be affected if a shopping center which houses one of its restaurants becomes less able to attract customers due to a change in business flow or competition with commercial facilities in the surrounding area or if the Group receives fewer requests to open restaurants due to a decrease in new shopping center openings or slowdown in the pace of shopping center renovation.
(c) Risks related to shopping center agreements
Certain shopping center agreements can be terminated due to non-attainment of the minimum revenue, major changes in the capital structure or management structure, changes in a majority of the management team, merger or other significant change related to operations. Consequently, the Group's business performance could be affected in the event of the termination of an agreement on such grounds.
It is often the case with shopping centers that agreements are entered into between a single landlord and many tenants, and the Group's business performance could be significantly affected in the event of the simultaneous cancellation of multiple agreements with the shopping center landlord.
(d) Risks related to roadside restaurants
As of the end of the consolidated fiscal year under review, 840 out of a total of 1,147 restaurants directly operated by the Group in Japan were roadside restaurants.
The Group's policy is to continue opening roadside restaurants in carefully selected locations because our own operating policies (menu items, sales promotion measures and operating hours) can be directly reflected in such roadside restaurants. However, the ability of roadside restaurant's to attract customers is significantly affected by location. Consequently, the Group's business results may be affected if it is unable to open new restaurants in desired locations.
(e) Risks related to tenant and security deposits and construction assistance funds
The Group's basic policy for restaurant development is to open new restaurants using leased properties (land and building). The Group sometimes deposits tenant and security deposits and construction assistance funds with landlords for leased properties and there may be problems with the return of tenant and security deposits and construction assistance funds or the continuation of restaurant operations depending on the operating status of the landlord in the future.
The Group's business performance may be affected if tenant and security deposits and construction assistance funds are not returned in full or in part due to early termination of an agreement by the Group or the provisions of a lease agreement signed by the Group.
(f) Risks related to dependence on main business format
The Group will seek to develop new business formats and new markets in the future but the Marugame Seimen business still accounts for most of the Group's revenue and drives other business formats as the main business format.
The Group's business performance may be affected in the event of decline in demand for fresh noodles due to changing consumer preferences or other factors.
(g) Risks related to impairment losses and unprofitable restaurants
The Group adopts impairment loss accounting, with each restaurant seen as a separate cash generating unit (CGU), and determines the recoverable amount of any investments in non-current assets used for business purposes in a timely manner.
The Group aims to improve management efficiency by identifying indications of impairment on a timely basis through the adoption of impairment loss accounting, quickly grasping restaurants which will be unprofitable with the background of increasing number of new restaurants openings in the future and being even more selective about invested capital.
The Group's business performance may be affected because it could recognize impairment losses in the event of a significant decline in profitability caused by changes in the business environment or because it incurs losses on the termination of a lease agreement or lease contract in the event of the closure of an unprofitable restaurant.
(h) Risks related to trademark rights
The Group considers trademark rights as important assets for each of its businesses, and its policy is to register trademarks except where registration is difficult.
However, if a trademark used by the Group is found to be violating a third party's registered trademark right, the Group may incur expenses associated with changing the names of its restaurants or it may be the subject of an injunction to prevent use of the trademark, be charged royalties or sued for damages, and the Group's business performance may be affected.
(3) Risks related to securing human capital
The Group believes that securing and developing human resources who are experienced in developing and operating restaurants represents a major challenge for restaurant development in the future, and it focuses on the development of human resources, including stepping up advertising and recruitment, improving the support of employees once hired, providing OJT training opportunities and improving the appraisal system to encourage promotion based on competence. The Group believes that the retention and development of high quality restaurant staff are also important challenges.
However, the Group's business performance and plans to open new restaurants may be affected if it is unable to secure and develop human resources as planned and is, therefore, unable to offer a satisfactory level of customer service.
(4) Risks related to legislation
(a) Risks related to legislation in general
The Group's operations are governed not only by general laws and regulations such as the Companies Act, the Financial Instruments and Exchange Act, the Corporation Tax Act and the Labor Standards Act but also by more specific legislation such as the Food Sanitation Act and other food hygiene related legislation, environmental legislation and building equipment legislation.
The Group's business results may be affected by additional expenses incurred in order to comply with any amendments or revisions for tougher legislation.
(b) Risks related to the Food Sanitation Act
Restaurants operated by the Group obtain business licenses from the public health center with jurisdiction in accordance with the Food Sanitation Act. However, the Group's business performance may be affected in the event of food poisoning or a similar incident, which damages the Group's brand image and undermines public confidence in the Group.
(5) Risks related to food safety
The Group has always placed importance on measures to address food safety and is gradually strengthening these measures, including asking outside specialists to carry out food hygiene inspections at restaurants and deploying the Company's quality controllers to provide direct guidance.
The Group also recognizes the need for further measures in relation to purchased ingredients, and in addition to measures previously carried out such as inspections of suppliers' plants in Japan and overseas to assess compliance with the Company's specifications and designated quality and hygiene management standards and checking the export health certificates of imported ingredients, the Group will also strengthen quality and safety checks for private brand (PB) products.
However, the Group's business performance may be affected in circumstances that cast doubt on the safety of the food provided as part of the Group's services despite of such measures, damaging the Group's brand image and undermining public confidence in the Group.
(6) Risks related to natural disasters
The Group operates restaurants both in Japan and overseas and its business performance and financial position may be affected in the event where raw materials procurement is hindered due to a large-scale earthquake, flood, typhoon or other natural disaster in a region in which the Group operates or in the event of damage to restaurant facilities which force the Group to close its restaurants or shorten their operating hours.
(7) Risks related to overseas business expansion
The Group is expanding its restaurants both in Japan and overseas and its business performance may be affected if it is unable to expand its business as planned due to the political situation, economy, laws and regulations, business customs or other country risk specific to a country in which an overseas subsidiary, joint venture or associate begins to operate.
Our subsidiaries, joint ventures and associates overseas not only operate restaurants themselves but also enter into franchise agreements with local businesses to facilitate network expansion within a country and to create restaurants with close ties to local communities. Consequently, the Group's business performance may be affected if it is unable to expand its network of franchises due to fewer franchisees or a deterioration in business results, leading to decline in royalty income.
(8) Risks related to currency fluctuations
The Group engages in investment and financing in relation to overseas group companies. The Group's business performance may, therefore, be affected due to foreign exchange losses caused by significant fluctuation in exchange rates.
In addition, for preparation of the Group's consolidated financial statements, the income and expenses of overseas group companies denominated in local currencies are converted into yen. Consequently, currency fluctuations could affect the Group's business results.
(9) Risks related to goodwill and intangible assets
Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment every fiscal year and whenever there is an indication of impairment. Recognition of impairment losses as a result of impairment testing could affect the Group's operating results and financial position.
(10) Risks related to the COVID-19 pandemic
The outlook for the Group's business environment is uncertain due to the effects of the COVID-19 pandemic.
It is feared that escalation or prolongation of the pandemic will lead to the closure of restaurants, shorter operating hours and decline in consumption, and the Group's business results and financial position could be affected.
The Group is working to minimize business risks due to the COVID-19 pandemic by formulating a COVID-19 Handbook for employees and urging employees to work from home to prevent the spread of infection.