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Business Risks

Business risks associated with the execution of the Calbee Group's strategies, businesses and other activities are described below. The risks are major factors that management recognize as a significant impact on investor decisions. In addition, the risks described below are not exhaustive of all the risks of the Calbee Group, and there are other risks may have an impact on the decisions of investors.
The following details and forward-looking statements are based on our judgment as of the end of the fiscal year ended March 31, 2023.

We have built a compliance and risk management system based on the “Basic policy on the development of internal control system”. The Compliance and risk management committee examines and decides solutions, and manages status. If the possibility of a risk increases or occurs, we establish an emergency response committee as needed to reduce the risk. However, if a risk actualizes, it may have an impact on our operating results or financial positions.

1. Risks on Product Safety

Providing safe and reliable products is our most important social responsibility, and we continue to work tirelessly to build relationships of trust with customers. In the unexpected event has the potential to threaten the health of customers, we give top priority to the safety of customers and respond promptly. Calbee Group review the design of standards to avoid product risks, as well as audits the raw materials procurement process and the production process. In addition, we have built a quality assurance system that involves conducting quality inspections to determine whether products are meeting the standards. We also have achieved traceability throughout the supply chain from procurement of raw materials, production, logistics, product distribution, retail stores, and customers. We strive to improve supply chain management in the entire supply chain through listening to our customers' voices and analyzing details to reduce their comments.
However, in the event that quality problems arise and there is doubt about the safety of products, we may have to recall the products or discontinue sale of products, which could result in loss of customer confidence and have an impact on our operating results and financial position.

2. Product Development

Under Vision for 2030 "Next Calbee & Beyond", Calbee Group conducts research and development activities to provide customers in both of domestic and overseas with unique, value-added products that maximize the nutritional content and flavor of natural ingredients as product development to lead the growth of Calbee Group. Meanwhile, there are considerable changes in business environments owing to diversifying customer tastes, growing health awareness, and environmental problems, etc. For our business expansion, we need to respond quickly to these changes in the markets and develop high value-added products and health-conscious products. We conduct research and development activities in the areas of new product development, existing brands improvements, quality improvements, cost reduction and basic research in accordance with annual plans.
However, if we are unable to respond appropriately to the needs of our customers and business partners and develop products in a timely manner, which could have an impact on our operating results and financial position.

3. Procurement Risks of Raw Materials and Packaging Materials

(1) Risks on Procurement of Potato (unseasonable weather and decreasing number of potato farmers)

Our main products are potato-based snacks made primarily from raw potato, such as Potato Chips and Jagarico. To ensure stable supply of domestic potato in terms of quality, quantity, and prices, we have built a procurement system through contract cultivation and decentralizing production areas. In anticipation of a decrease in domestic potato farmers, we also provide cultivation and harvesting support and labor saving support to farmers. In principle, it is not permitted to import raw potato under the Plant Protection Law in Japan. However, we have developed factory facilities that are capable of handling import raw potato in preparation for a shortage of domestic potato.
However, depending on the crop conditions, we may not be able to secure sufficient quantities of potato, it may result in losing sales opportunities and costs arising from urgent procurement, which could have an impact on our operating results and financial position.

(2) Risks on Procurement of Potato (potato cyst nematodes)

Potato cyst nematodes are a species of nematodes in the soil and are designated as important pests under the Plant Protection Law. It is prohibited to produce seed potato in the field where they occur. To prevent expansion of potato cyst nematodes, we need to convert potato to a more resistant variety. We have established a project to reform the mix of potato variety as raising the percentage of nematodes-resistant varieties to 50% by 2025 and to 100% by 2030, as well as achieving quality on customer satisfaction.
However, there are risks that we cannot develop of new varieties that meet quality conditions such as crop season, acrylamide and color of products in timely manner, or that the spread of new varieties will not progress throughout the production area, and that potato cyst nematodes expansion at a greater-than-expected rate. If these risks materialize and we delay converting our products to nematodes-resistant varieties, we may not be able to procure seed potato. It may result in decreases in crops of potato and worsened quality of potato based products, which could have an impact on our operating results and financial position.

(3) Procurement Risks on Other Raw Materials and Packaging Materials

With regard to imported raw materials from overseas and packaging materials used in Calbee Group products, we are working to stabilize procurement by diversifying and decentralizing our suppliers and strengthening appropriate inventories, considering all procurement risks such as natural disasters, the occurrence of political disputes and other factors.
However, in the event of further soaring raw material and packaging material prices beyond expectations or changes in import destinations and import routes could have an impact on our operating results and financial position.

4. Risks on Changes in the Political and Economic Conditions of Overseas Businesses

Calbee Group operate in a variety of countries and regions. We avoid risks by considering and implementing measures in advance to deal with possible conflicts, decoupling, pandemics, and other geopolitical risks in the countries and regions in which we have established operations.
However, In the event of supply difficulty because these risks are were more prolonged or expanded than expected, our operating results and financial position could be affected.

5. Risks on Information Securities

If a malicious attacker enters a computer system or network and an information security incident occurs, we have established an incident response system centered on CSIRT (Computer Security Incident Response Team). To prevent the loss, misuse, and falsification of confidential information, we have implemented appropriate security measures for information management including information systems. However, in the event of cyberterrorism, computer virus infections, loss of information and falsification of data, leakage of personal information and company confidential information due to unauthorized access, power outages, disasters, and defects in software and equipment, the shutdown or temporary disruption of information systems could have an impact on the operating results, financial position and social credibility.

6. Compliance Risks

Calbee Group is subject to a range of legal regulations, including the Food Sanitation Act, Act against Unjustifiable Premiums and Misleading Representations, Measurement Act, Unfair Competition Prevention Act, Plant Protection Act, and Consumer Product Safety Act in Japan. In addition, our group companies overseas are subject to the laws and regulations of each country in which we operate our business. Based on Calbee Group's fundamental policy, we have established “Calbee Group Code of Conduct” on social values, ethics, laws, and social responsibilities. We have also formulated Calbee Group Guidelines of Conduct as material actions. Through corporate training systems and awareness-raising activities in Japan and each country where we operate businesses, we strive to ensure compliance with ethics, social norms, laws, and internal rules and to reduce the likelihood of violations of laws and social norms.
However, violations of laws and social regulations due to changes and unexpected introduction may result in punishment or cancellation of authorization by law, the filing of lawsuits, and the loss of trust from customers and other stakeholders. Any of these cases could have an impact on our operating results and financial position.

7. Risks on Securing Global Human Resources

As the foundation that supports our business, Calbee Group is strengthening investment in human resources from a medium-to long-term perspective and promoting corporate reform that can achieve sustainable profit growth. In particular, to support the expansion of overseas business, which is one of the key policies of our growth strategy "Change 2025", we are rapidly introducing "Global Talent Management," a new system for recruitment, placement, training, and evaluation.
However, delays in the development of global human resources and the inability to sufficiently secure the recruitment of global human resources due to changes in the employment situation could have an impact on our operating results and financial position.

8. Risks on Climate Change

Following the adoption of the Paris Agreement at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) and its ratification by countries, efforts to reduce greenhouse gases caused of climate change and global warming are advancing on a global scale. Our medium-term target is to reduce greenhouse gas emissions by 30% by 2030 compared to levels in the fiscal year ended March 31, 2019. Furthermore, aiming for net zero emissions in 2050 (covering Scope1* and 2**). For the target, we work on further energy conservation and the utilization of renewable energy.
In February 2020, we endorsed the recommendations of the Climate-related Financial Disclosure Task Force (TCFD) established by the Financial Stability Board, and analyzed climate change scenarios. The results of the analysis showed that direct damage to factories and raw material producing areas due to severe disasters, changes in consumer behavior due to heightened environmental awareness, and a decrease in potato yields due to insufficient sunlight hours were significant. In response, we will strive to reduce greenhouse gases, convert potato varieties, develop varieties, and diversify production areas. In addition, we believe that responding to ethical consumption and product development of sustainable raw materials will create opportunities. (We disclose details of disclosures based on TCFD framework in our Group-wide integrated report, etc.)
However, depending on the progress of efforts to reduce greenhouse gases, the introduction of a carbon tax could have an impact on our business activities. In addition, consumers' purchasing behavior may change, the quality of potato may have damages, the damage to manufacturing facilities, suspend operation and disrupted supply chain caused by typhoons and heavy rains may increase. Any of these cases could have an impact on our operating results and financial position.

*Scope1 refers to direct emissions of CO2 from the use of fuel in the company (factories, offices, vehicles, etc.).
**Scope2 refers to indirect emissions of CO2 from the use of electricity, heat, and steam purchased by the company.

9. Risks on Natural Disasters or Pandemics

Calbee Group has diversified its production bases and suppliers of raw materials or purchased from multiple suppliers, in order to reduce the risk of natural disasters such as large-scale earthquakes, windstorms and floods. We have also promoted an all-hazard BCP (Business Continuity Plan) in response to the recent disruption in the supply chain caused by the re-infectious expansion of the new Corona Virus in the event of a multiple disaster. By strengthening our BCP, we are working to secure a resilient business structure, including the early resumption of supply of products that should be produced with priority.
However, if supply chain disruptions caused by disasters are prolonged and we are unable to supply products to our business partners, if we incur extended restoration of machinery and equipment and facilities or incur significant costs, and if further increases in raw material prices or difficulties in securing raw materials are greater than anticipated, which could have an impact on our operating results and financial position.

10. Risks on Stagnation in Domestic Product Supply

As represented by the Year 2024 Issue in the transportation and logistics industry, there are concerns about shortage of transportation vehicles by a decline in the working population due to the lower birthrate and aging population, and an increase the number of deliveries with expansion of e-commerce, and the long working hours unique to the logistics industry. In order to secure a transport and delivery vehicles stably, our group is promoting "White logistics activities", by reducing drivers’ waiting times due to automation and AI, reducing the frequency of deliveries, consolidating delivery destinations and promoting pallet transportation etc. We aim to be the logistics of choice for drivers.
However, there is no assurance of securing transportation vehicles at appropriate costs in the future, if it may result in stagnate our product supply or delivery costs increase, which could have an impact on our operating results and financial position.

11. Relationship with Major Shareholders

As of March 31, 2023, PepsiCo, Inc. (hereinafter "PepsiCo") held 21.41% (after dilution) through FRITO-LAY GLOBAL INVESTMENTS B V. (hereinafter "FLGI"), a PepsiCo's 100% subsidiary, and Calbee, Inc. (hereinafter “the Company”) are an equity-method affiliate of PepsiCo. FLGI, which directly owns the shares of the Company, is a wholly owned PepsiCo subsidiary, so PepsiCo effectively makes all decisions regarding the exercise of common share voting rights. PepsiCo is one of the world’s largest food and beverage makers and is listed on the US NASDAQ market. In addition, PepsiCo operates globally in the same snack food field as the Company via group companies, primarily its subsidiary Frito-Lay North America, Inc. On June 24, 2009, the Company and PepsiCo concluded a strategic alliance agreement, based on the understanding that combining management capabilities to generate synergies was necessary to deliver sustained growth for both companies. In order to reinforce the partnership with PepsiCo, the Company allocated new shares to PepsiCo’s wholly owned subsidiary FLGI via a private placement and, at the same time, acquired all the shares of PepsiCo’s subsidiary Japan Frito-Lay Ltd. Under the strategic partnership, PepsiCo has agreed not to operate a snack food business in the Japanese market and therefore does not compete with the Company in Japan. In addition, because no restrictions are placed on overseas business development, the Company believes there are no limits on its management decisions or business development under the agreement. The Company intends to maintain this strategic partnership and work toward boosting corporate value. However, in the future it may no longer be possible to generate synergies from the partnership in the event that PepsiCo makes changes to its management policy and business strategy. In addition, the PepsiCo Group could become a competitor in the Japanese market in the event that the partnership is dissolved for any reason. In addition, PepsiCo's shareholding ratio in the Company may change in the future due to changes in PepsiCo's or the Company's management policies or business strategies, changes in the business environment, or other factors.

12. Risks on Intellectual Property Rights

Calbee Group has established a specialized department to thoroughly protect and manage various intellectual property rights, and at the same time, we make every effort not to infringe on the rights held by third parties.
However, if our intellectual property rights were improperly used by third parties, or if we were pursued by third parties for infringement of intellectual property rights, our operating results and financial position may be affected.

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