DyDo Group Holdings

Business Risks

The following are the types of risks that could have a serious impact on the business performance and financial soundness of the DyDo Group. The items listed below were assessed by the group as of January 20, 2020, and do not constitute all of the possible business risks.

1. Securing and Developing Personnel

A diverse range of personnel with high-level expertise and experience is needed to strengthen and expand our business outside of Japan and to make forays into new business domains, two aspects of the group’s growth strategy. We will also need to secure and develop personnel on an ongoing basis to support the nationwide operation of our vending machines and our manufacturing plants, such as in our pharmaceutical-related and food businesses.
In today’s Japanese business climate, changes are taking place in the labor market, such as a declining labor force due to a declining birthrate and an aging population, and the diversification of values and working style needs. In such a climate, should we find it difficult to secure suitable personnel on an ongoing basis, it could affect the group’s business performance and financial situation.

To minimize these risks, the group is taking stronger measures to secure and develop personnel. We are also establishing various systems and improving work efficiencies to ensure that we keep our personnel, including efforts to transform working styles.

2. The Management and Control of Overseas Subsidiaries

The group has positioned the full-scale expansion of international business as part of our medium-term growth strategy. We have set up overseas beverage subsidiaries in Turkey, Malaysia, Russia, and China as strategic bases for significant growth in the future.
A wide range of risks are involved, however, including differences from country to country in laws and systems, politics, economies, social conditions, cultures, religions, and business practices, not to mention exchange rate fluctuations. If business development is impeded by unforeseen problems that arise, or if such problems make it difficult to recover our investment or hinder other activities, it could affect the group’s business performance and financial situation.

To minimize these risks, the group has set up an operational management and risk management system whereby overseas beverage subsidiaries are under the direct management and control of the holding company. We are also strengthening and developing the international beverage business and working to create synergies with the domestic beverage business to achieve significant growth.

3. Corporate Takeovers and Business/Capital Alliances

The group has positioned new business development related to food and health as part of our medium-term growth strategy. Corporate acquisitions and strategic investments such as business and capital tie-ups are effective means of accelerating business expansion, and we are constantly looking into these possibilities. However, when effective investment opportunities cannot be found or the initially anticipated benefits from a strategic investment do not emerge, the group’s business performance and financial situation may be affected. Also, when entering new business domains and new markets through a corporate acquisition, etc., new risks may emerge that are unique to that particular business and market.
For every corporate acquisition we conduct detailed investigations of such things as the business plans, financial details, and contractual relationships of the target company, and fully assess the risks involved, but if unforeseen problems arise or the business development does not go according to plan, it may become necessary to record an impairment of goodwill, which could affect the group’s business performance and financial situation.

To minimize such risks, the group transitioned to a holding company system, which establishes a framework for responding flexibly to the expansion of business domains and further enhancing the functions of the Board of Directors based on its evaluated effectiveness. In these and other ways we are taking measures to continuously improve corporate governance.

4. Focus and Reliance on the Vending Machine Channel

The core business of the group is the domestic beverage business. Our corporate growth has paralleled the spread of vending machines in Japan over time. By establishing localized sales activities, we have built a high-quality operational system and nationwide network of approximately 280,000 vending machines. In this consolidated fiscal year, the vending machine channel accounted for 83.1% of domestic beverage sales, far above the average for the industry.
Price stability and sales stability are relatively high for vending machines compared to other sales channels, and stable cash flow can be secured with profitable canned coffee as the main product. In recent years, however, the total number of vending machines has begun to decline in the market overall, and sales per vending machines are on a downward trend due to the spread of low-price sales and an increase in sales through convenience stores and other sales outlets. These developments could affect the group’s business results and financial situation.

To minimize such risks, the group will promote initiatives such as optimizing product lineups and installing vending machines in locations where stable sales can be expected, such as inside company offices, while at the same time reforming the fixed cost structure in the vending machine channel and developing IoT vending machines. Through such measures we are working to revitalize the vending machine business model.

5. Market Competition in the Beverage Industry

WIn the domestic soft drink industry market, with the impact of the declining birthrate and aging population, which will only continue to intensify in the future, it is difficult to expect major growth in the medium to long term. Companies in the industry are placing a priority on profits, concentrating on strategic brands and revamping their products and containers. However, we are seeing a trend toward lower prices as consumption becomes polarized; mergers and consolidation in the distribution chain require stronger negotiating in the area of sales promotion; highly competitive private brands are emerging. There is also intensifying competition in the drugstore industry. These factors mean that the selling price of beverages is not going up, and we can already see an increase in sales promotion expenses for maintaining and expanding product shipping to stores.
In addition, companies throughout the industry are coming out with all kinds of new concepts for products and container designs in response to diversifying customer needs. Failure to respond adequately to changes in this competitive marketplace, including pricing and other marketing strategies, could affect the group’s business performance and financial situation.

To minimize these risks, the group is working to further strengthen the appeal of the DyDo Blend brand, which has provided authentic flavor, with no added aromas, since its launch in 1975. Through measures such as developing innovative products that respond to diversifying needs, we will continue to work to increase the appeal of our products.

6. Procurement of Ingredients and Materials

A wide range of ingredients and materials are used to produce the group’s products. One of those, coffee beans, is a staple ingredient in the domestic beverage business, and its procurement cost is affected by fluctuations in both international commodity prices and exchange rates. Other raw materials and resources are also affected by price fluctuations. Particularly with the international beverage business in Turkey, some materials are procured in a foreign currency denomination, so fluctuations in the Turkish lira exchange rate can affect procurement costs.
Rises in the cost of ingredients and materials lead to higher manufacturing costs and sometimes these costs cannot be passed on through the sales price due to market conditions, and this could affect the group’s business performance and financial situation.

To minimize these risks, the group contracts with domestic roasting companies for coffee beans at a market price with a view toward the future and aims to stabilize procurement prices. For other materials we are also promoting cost optimization through procurement strategies.

7. Production System and Quality Control System

To provide safe, high-quality products, the group has a system in place to implement thorough quality control and freshness management. In the domestic beverage business, we take every step through to product planning and then outsource manufacturing to factories outside the group based on our specifications. We maintain safe, secure manufacturing and shipping through a strict management and inspection system at both our end and at subcontracting factories.
The group has not experienced any serious accidents or litigation concerning food safety, quality control, or improper product labeling. However, if such a case were to occur in the future such as in which there was product contamination, or in which a product with defective quality or improper labeling was distributed, such an occurrence could affect the group’s business performance and financial situation.

To minimize these risks, in our domestic beverage business, the group conducts quality assurance audits every year of subcontracting factories that carry out manufacturing. The audits improve safety and quality and build trust. Meanwhile, in the pharmaceutical-related and food businesses we have our own factories. For these factories we are aiming to further improve quality by acquiring the international ISO 9001 certification for quality management systems and the international FSSC 22000 certification for food safety management systems.

8. Other Risks

In addition to the above, risks also exist that are attributable to external factors such as changes in economic conditions, weather and natural disasters, laws and regulations, and the management of environmental problems such as climate change and resource depletion. Other risks include those related to customer information management and compliance. Such additional risks could affect the group’s business performance and financial situation.