Risk Factors

Last update: June 15, 2020

 The Group conducts risk assessments on a regular basis to identify and assess potential risks and recognize its overall risk profile. We have established a framework for prioritizing and implementing countermeasures according to the importance and urgency of risks identified, and for monitoring the status of improvements.
 Among the risks recognized under this framework, those that may have a significant influence on the judgment of investors are described below. However, these do not cover all risks related to the Group; there are risks other than those listed that are difficult to foresee. Also, these risks are not independent of each other, and certain events may lead to an increase in various other risks.
 Any of these risks may affect the Group’s business performance, operating results, and financial position. Recognizing the potential for these risks to materialize, the Group strives to take measures to prevent them from arising while working promptly and appropriately to address when they materialize. This section includes forward-looking statements and future expectations as of the submission date of the Group’s Securities Report.

1. RISKS RELATED TO ECONOMIC CONDITIONS

  • Existing business risks (changing economic trends, fluctuations in procurement and purchase prices of products and raw materials, etc.)

     The Group conducts main businesses in Japan and also operates around the world. As a result, the business climate, personal consumption trends, and other economic conditions in Japan and other regions where the Group does business may affect its operating results. In addition, the Group is strengthening its development and lineup of products with an emphasis on regional characteristics, and also actively handles and develops products based on its sales strategies in order to adequately fulfill customer needs. However, unexpected changes in consumer behavior due to the government’s economic policies, abnormal weather, or other external factors may affect the Group’s operating results and financial position.
     To effectively conduct its business activities, it is essential for the Group to procure products and raw materials of sufficient good quality in a timely manner. The Group is diversifying its procurement sources to prevent excessive dependence on specific regions, business partners, products, technologies, and the like. In particular, temperature increases, changing weather patterns, and other aspects of climate change may lead to unexpected changes in agricultural product cultivation areas and fishing grounds over the medium and long terms. In response, the Group emphasizes decentralized procurement and collaborates with primary producers to improve yields. However, any breakdown of purchasing channels stemming from temperature increases, changing weather patterns, and other aspects of climate change may affect the Group’s business performance.
     Products handled by the Group include items whose supply and demand are affected by weather; items affected by changing prices of crude oil and other raw materials; and other items whose purchase prices may fluctuate due to external factors. In addition, future prices of electricity and other forms of energy used in the product manufacturing process may drastically increase due to regulations and policies related to climate change, which may affect purchase prices. Any changes in such prices may affect the Group’s operating results and financial position.
  • Market risk

     The Group engages in derivative transactions, such as forward exchange contracts and interest rate swaps, in order to mitigate interest rate fluctuation risk, reduce funding costs, and optimize future cash flows. However, any fluctuations in interest rates will affect interest income and expenses and the value of financial assets and liabilities, which may affect the Group’s operating results and financial position.
     The assets and liabilities of overseas Group companies, denominated in local currencies, are converted to yen for preparation of the consolidated financial statements. In addition, some of the products sold by the Group have been developed overseas and thus are impacted by exchange rate fluctuations, which may affect the Group’s operating results and financial position.

2. RISKS RELATED TO THE GROUP’S BUSINESS ACTIVITIES

GROUPWIDE RISKS

  • Growth strategy risk
      The Group provides products and services that address all the life stages and lifestyles of its customers and pursues a growth strategy aimed at maximizing “lifetime value” (value over the lifetimes of customers) by generating Group synergies. However, various factors may prevent the desired results from being achieved.
      The Group’s management team, including its president, is enhancing organizational cooperation to formulate and execute more effective Group management strategies. However, certain factors may prevent the Group from completely achieving its goals, which may affect its operating results and financial position.
  • Digital strategy risk
      The Group pursues a strategy of strengthening “relationships with customers,” numbering around 25 million people who visit its stores every day. Through the apps of each Group company, we collect and analyze various data related to purchases by customers registered with “7iD,” our Groupwide membership platform, in order to enhance the effectiveness of our sales promotion activities. In the course of pursuing our digital strategy, our “7pay” settlement system was accessed without authorization in July 2019. We deeply regret any inconvenience caused to our stakeholders. The problem was due to the fact that the original “7pay” authentication system and fraud detection/prevention protocols were not fully secured. Also, the security policy guidelines did not function properly when the system was rolled out across the Group. We take this matter very seriously and are committed to rebuilding the foundation of our digital strategy. Accordingly, we established our in-house Group IT Strategy Development Division (currently: Group DX Strategy Division) to integrate functions related to the Group’s digital strategy promotion activities. We also established the Security Management Office under the direct control of the president to raise the level of information security. However, we cannot guarantee that information security will be completely ensured in the face of the increasingly sophisticated unauthorized accesses such as cyber attacks and other intentional actions. Consequently, personal information and other business data may be lost, destroyed, or leaked to the outside. If any of these events occur, the Group may be liable for damages to those thus harmed, which may incur large costs for countermeasures and adversely affect the Group’s business performance and reputation, as well as its operating results and financial position.
  • Financial strategy risk
      As a basis for strengthening relationships with customers, we introduced “7iD” for our Groupwide membership platform, which we are using to collect and analyze various data related to our customers’ shopping patterns. We use information obtained in this process to develop one-of-a-kind financial products and services that help increase customer convenience—including loans, asset management services, savings, and insurance products. Going forward, we aim to provide new value to customers across the retail and finance spectrums. However, we may be unable to derive the expected benefits or achieve our strategic objectives, which may affect the Group’s operating results and financial position.
  • Group product strategy risk
      The Group aims to achieve sustainable new growth by reviewing the entire supply chain to address such issues as food loss, declining working population, and increases in transportation costs stemming from driver shortages. We are closely examining our current procurement methods and logistics issues and building a procurement system to ensure that we deliver “new valuable products” that make customers happy to the sales floor. However, we may be unable to derive the expected benefits or achieve our strategic objectives, which may affect the Group’s operating results and financial position.
  • Food strategy risk in the Tokyo Metropolitan Area
      Currently, sales of food in our superstore operations—covering Tokyo and three prefectures (Kanagawa, Chiba, Saitama)—total around ¥570 billion annually. We operate one of the leading supermarket chains in the Tokyo Metropolitan Area. To effectively build on this foundation, we are working to develop multiple appealing store formats. In addition to the conventional food supermarkets of between 500 tsubo and 700 tsubo (approximately 1,650 and 2,300 square meters), we are also developing smaller stores of around 300 tsubo (approximately 1,000 square meters) in central urban areas. Leveraging know-how gathered in the food supermarket business, we are working to create new store formats and build a product procurement platform. However, we may be unable to derive the expected benefits or achieve our strategic objectives, which may affect the Group’s operating results and financial position.
  • Business continuity risk

     In addition to the head office and stores of main businesses, which are located in Japan, the Group is expanding its businesses around the world. A multitude of factors may lead to disruption of the Group’s supply chain or suspension of its business activities, or incur substantial costs in repairs of facilities. These include earthquakes, typhoons, floods, tsunamis, and other natural disasters; frequent abnormal weather associated with climate change; fires, blackout, nuclear power plant accident, and war; and illegal acts, such as terrorism. Such events could severely impede the Group’s business operations, which may affect its operating results and financial position. The impact would be particularly significant if a major disaster were to occur in the Tokyo Metropolitan Area, where the stores of our main businesses—including our convenience store and superstore operations—are concentrated.
     Moreover, the Group’s core business is the retail business, which plays an integral role in people’s lives. In order to fulfill our responsibility to communities and society after ensuring the lives and safety of our customers and employees, we have taken measures to maintain business continuity in the event of an infectious disease outbreak. Depending on the spread and prevalence of infection, however, we may need to take various measures, such as shortening business hours and limiting the number of stores in operation. Also, our supply chain could be disrupted, making us unable to offer products. Any of these events may affect the Group’s operating results and financial position.
     With respect to risks associated with COVID-19, we are currently examining the impacts and taking appropriate measures based on our findings. Depending on how the pandemic plays out, however, the Group’s operating results and financial position may be affected.
  • System risk

     The Group owns many IT systems to conduct its business activities. To ensure the stable operation of these systems, we have various mechanisms in place, including system redundancy, network redundancy, regular patching, rigorous pre-release testing, and meticulous management of IT assets. To prepare against external system attacks, meanwhile, we take various security measures, such as installation of firewalls and antivirus software. We are also developing systems that will allow us to continue operations if unexpected situations arise. Despite taking these measures, however, system failures may still occur due to various factors, including typhoons, earthquakes, and other natural disasters, as well as power outages, software defects, double failure of hardware, human error, and unauthorized access to our networks and systems due to cyber attacks. Any failure of these systems would impede business operations, which may affect the Group’s operating results and financial position.
  • Product quality control/labeling risk

     The Group endeavors to provide customers with safe products and accurate information by enhancing food hygiene-related equipment and facilities based on relevant laws and regulations, by implementing a stringent integrated product management system that includes suppliers and by establishing a system of checks. However, the occurrence of a problem beyond the scope of the Group’s measures could reduce public trust in its products and incur costs stemming from countermeasures. If such is the case, the Group’s operating results and financial position could be affected. Further, the Group is striving to provide customers with new value-added and high-quality products and services through the active introduction of Seven Premium private-brand products and original products developed by respective Group companies. Therefore, the occurrence of a major incident that involves its products and leads to product recalls or product liability claims may affect its operating results and financial position.
     The United Nations adopted “Guiding Principles on Business and Human Rights” in 2011 and “2030 Agenda for Sustainable Development Goals (SDGs)” in 2015. These protocols underscore the social mission and responsibilities of companies, which include respect for and protection of human rights across the entire supply chain of products (including business partners), legal compliance, occupational health and safety, global environmental protection, and information management. Based on the spirit of the Corporate Creed “Trust and Sincerity,” the Group engages with stakeholders in order to help realize a sustainable society. To this end, we ask our suppliers to understand and comply with our “SEVEN & i Group Business Partner Sustainable Action Guidelines ” If a problem occurs that goes beyond these efforts, however, it may affect the Group’s operating results and financial position.
  • Personnel- and labor-related risks

     The Group conducts its main businesses in Japan, which faces the social challenge of a shrinking workforce due to an ageing, declining-birthrate population. The Group has many stores in Japan. In addition to attracting sufficient numbers of employees, we aim to help our various human resources feel motivated to demonstrate their abilities. To this end, it is important that we support each employee’s voluntary efforts for self-improvement and link this support to our improved productivity as a company. The Group is actively promoting three initiatives as cornerstones of its human resource policy: “Promote diversity and inclusion,” “Reform work styles to improve productivity,” and “Establish a human resource development system.” However, it may not be able to achieve these objectives, due to various factors, such as revision of laws and systems, which may affect the Group’s operating results and financial position.
     Each of the Group’s businesses essentially requires human resources with good communication skills when dealing with customers and other stakeholders. In the future, however, intensifying competition for human resources in each business field and region may make it difficult to attract suitable personnel or lead to an outflow of human resources, which may affect the Group’s operating results and financial position.
  • Investment recovery risk

     The Group engages in new business development and reorganization of its business portfolio through M&As, business alliances, joint ventures, and other arrangements. However, we may be unable to derive the expected benefits or achieve the objectives of these strategic investments, which may affect the Group’s operating results and financial position.
  • Business credit risk

     The Group pays security deposits and guarantee deposits to landlords when renting its stores. If the economic circumstances of a landlord deteriorate or the value of property collateralized for credit protection declines, the Group’s operating results and financial position may be affected.
  • Asset risk

     The Group owns many fixed assets, including tangible fixed assets and goodwill, and applies impairment accounting. Any future deterioration of store profitability or significant decline in the market prices of owned assets may affect the Group’s operating results and financial position.
  • Existing business risks (regulations on store openings)

     The Group’s opening of stores is subject to various laws and regulations, such as the Large-Scale Retail Stores Location Law, the City Planning Law and the Building Standards Law. In the event that those laws are amended or local authorities change related regulations, it may become difficult to open stores in accordance with initially prepared store-opening plans or remodel existing stores; there may be a decline in potential candidate areas for future store openings; or costs related to legal or regulatory compliance may be incurred. If such is the case, the Group’s operating results and financial position may be affected.

RISKS BY SEGMENT

  • Domestic Convenience Store Operations

     The Group’s convenience store operations in Japan are primarily organized under a franchise system, centered on SEVEN-ELEVEN JAPAN CO., LTD. and chain operations are conducted under the same name, 7-Eleven. The franchise system is a joint enterprise in which franchised stores and the Group fulfill their respective roles based on an equal partnership and a relationship of trust. In the event that agreements with numerous franchised stores become unsustainable because either the Group or the franchised stores won’t be able to fulfill their respective roles, its operating results may be affected.
     In Japan, conditions for store management are becoming severe as the declining birthrate, aging workforce, and other employment-related factors deteriorate. In light of the consumer market and store management conditions, we have started reassessing our business model with a view to realizing sustainable growth as a social infrastructure provider for customers in each region. However, unexpected factors may prevent us from completely achieving this goal, which may affect the Group’s operating results and financial position.
     To address ever-changing customer needs, meanwhile, we have built a portfolio of convenient services that support differentiated, high-quality products and lifestyles, while working with business partners to innovate our manufacturing, logistics, and sales processes, as well as the information systems that support those processes. We have built our own business infrastructure together with business partners who share our commitment to the franchise system. Therefore, if we become unable to maintain business relationships with our various partners, or if their technological capabilities decline significantly, the Group’s operating results and financial position may be affected.
  • Overseas convenience store operations

     The Group’s overseas convenience store operations primarily consist of 7-Eleven, Inc. (SEI), which has been proactively increasing stores (mainly those with gas stations) in the United States and Canada. Sales of gasoline account for around half of SEI’s net sales. By vertically integrating its gasoline supply chain, SEI offsets the risk of profit margin declines resulting from retail fuel price fluctuations. However, unexpected changes in the business environment, such as drastic fluctuations in fuel prices, may affect the Group’s operating results and financial position.
     In addition, a reduction in royalties or sales resulting from misconduct by area licensees who do not belong to the Group or by stores operated under such area licensees may affect the Group’s operating results and financial position.
  • Superstore operations

     The Group’s superstore operations consist of GMS (General Merchandise Stores) business and food supermarkets business, operated mainly by Ito-Yokado Co., Ltd., York-Benimaru Co., Ltd., and York Mart Co., Ltd. To respond appropriately to changes in consumer needs, the Group is taking measures to restructure its superstore operations. These include advancing its store management policy—under which individual stores play leading roles in assorting products that meet local market needs—and continuously promoting merchandising reform and strengthening communication with customers by stepping up interactions with them. At the same time, we are also closing unprofitable stores. For food supermarkets business, the Group endeavors to establish a new model of lifestyle-proposal supermarkets by emphasizing in-store manufacturing to assure the delicious taste of freshly prepared food, while implementing merchandising reforms and enhancing productivity. However, if a problem occurs related to product quality, or if the Group becomes unable to achieve its objectives completely due to unforeseen factors, its operating results and financial position may be affected.
     Other factors may also affect the Group’s operating results and financial position. These include a decline in tenancy revenues due to changes in economic conditions, overdue rent payments, reductions in rent upon the request of tenants, and decreases in rental income stemming from an increase in vacancy rates in case tenants move out.
  • Department store operations

     The Group’s department store operations are spearheaded mainly by Sogo & Seibu Co., Ltd., which is currently pursuing a growth strategy of store reforms centering on the Tokyo Metropolitan Area to better meet local market needs. It is also implementing business structural reforms, including the closure of stores deemed unable to improve their future performances. However, changing business conditions and other unexpected factors may prevent Sogo & Seibu from completely achieving its goals, which may affect the Group’s operating results and financial position.
  • Financial services

     The Group provides financial services, including banking, credit card and electronic money operations businesses.
     Seven Bank, Ltd. owes its revenues mainly to ATM operations business. Therefore, the occurrence of circumstances such as the growing use of alternatives to cash for settlement, intensifying competition for ATM services and/or the peaking out of ATM network expansion may affect the Group’s operating results and financial position.
     In its credit card operations business, the Group is striving to provide customers with highly convenient financial services integrated with retail services by issuing and promoting the use of the SEVEN CARD plus / SEVEN CARD credit cards, CLUB ON / Millennium CARD SAISON credit cards and nanaco electronic money card. Regarding credit card operations business, an increase in bad debt ratio, unexpected bad debt expenses or restriction on the total volume of lending pursuant to the Money Lending Business Act, etc., may affect the Group’s operating results and financial position. Regarding electronic money operations business, the Group has built an original system and worked to achieve differentiation, but the rapid spread of electronic money in Japan has been accompanied by qualitative changes such as increased versatility, etc. In the event that the Group fails to maintain its competitiveness, its operating results and financial position may be affected.
  • Specialty store operations

     The Group operates specialty stores that provide characteristic products and services. Akachan Honpo Co. Ltd., a specialty store for maternity, baby and kids’ products; THE LOFT CO., LTD., a specialty store for household goods; and Seven & i Food Systems Co., Ltd., which operates restaurants, and manages fast food services and contract food services (meal provision), are implementing growth strategies by strengthening the development of products in response to changes in customer segments based on shifts in demographics, lifestyles and customer needs and by enhancing productivity. However, the Group may not attain its objectives completely because of unforeseen factors such as changes in business environments. If such is the case, its operating results and financial position may be affected.
     In addition, Nissen Holdings Co., Ltd., which operates a mail order business using catalogs and the Internet, is facing difficult changes in its business environment, including declines in product competitiveness and increases in transportation costs. In response, it is striving to enhance product competitiveness and sales promotion efficiency. However, changing business conditions and other unexpected factors may prevent Nissen Holdings from completely achieving its goals, which may affect the Group’s operating results and financial position.

3. LEGAL RESTRICTIONS AND LITIGATIONS

  • Accounting risk/tax risk

     Any unexpected introduction of new accounting standards or tax systems, or changes to such standards or systems, may affect the Group’s operating results and financial position.
  • Environmental risk

     The Group is subject to a variety of environment-related laws and regulations, such as those pertaining to container and packaging recycling (including food waste and plastic), waste management, and climate change countermeasures. In the future, changes in laws and regulations may result in additional costs related to legal compliance for the Group or restrict its operating activities. Under official climate changes policies, for example, restrictions on greenhouse gas emissions may become more stringent, or new laws and regulations or policies, such as carbon taxes, may be adopted.
     In addition, tighter regulations could lead to changes in the cost of energy, including electricity, water, and gas, resulting in higher expenses for store operations, which may affect the Group’s operating results and financial position.
  • Information management risk

     The Group engages in a variety of business fields, including the retail and financial services businesses, and handles important information necessary for such business operations, notably personal information about customers and business partners, as well as trade secrets. In order to manage this information in a coordinated manner, the Group has established regulations related to information management, and also appointed information management supervisors at each Group company. Moreover, the Group’s Information Management Committee is responsible for organizing important information and the comprehensive implementation of human, organizational, physical, and technical safety measures.
     Despite taking all these measures, however, it is not possible to completely avoid the risk of important information leaking to the outside or being tampered with due to unexpected disturbances such as unauthorized access, computer viruses, system malfunction, human error, or inadequate management by subcontractors. Depending on the scale of damage thus incurred, the Group may be subject to damage claims from customers and business partners and loss of credibility, which may affect its operating results and financial position.
  • Legal risk

     The Group is exposed to the risk that it will be subject to various legal procedures stemming from lawsuits, etc., or regulatory authorities in regard to the execution of its business activities. Currently, no lawsuits that significantly affect the Group’s business performance have been filed against the Group. However, if decisions unfavorable to the Group result from lawsuits with a potentially significant effect on business results or social standing, its operating results and financial position may be affected.
     Also, a substantial legal liability or adverse regulatory outcome, and the substantial cost for regulatory proceedings due to the implementation of more stringent laws and regulations or interpretations, may affect the Group’s operating results and financial position.
  • Risks related to intellectual property rights (trademark rights, etc.)

     The Group holds registered trademarks and other intellectual property rights in Japan and overseas and works hard to protect those rights. However, the Group may become unable to assert its intellectual property rights due to various factors, such as disputes with third parties, which may affect its operating results and financial position. If it is revealed that the Group has violated the intellectual property rights of a third party, moreover, it may become liable for large damage claims.

4. OTHER RISKS

  • Retirement Benefit Obligations and Retirement Benefit Expenses

     The Group calculates retirement benefit obligations and retirement benefit expenses based on assumptions such as discount rates and expected rates of return on plan assets. However, unexpected changes in underlying factors such as domestic and overseas share prices, foreign exchange rates or interest rates; deterioration in the return on plan assets due to such changes; or changes in the general pension system may affect its operating results and financial position.
  • Deferred Tax Assets

     Some Group companies record deferred tax assets based on estimates of future taxable income or scheduling results with temporary differences. However, if estimates of taxable income are lowered due to a worsening business climate or other significant changes, the Group may be required to reduce the amount of its deferred tax assets, resulting in an effect on its operating results and financial position. Seven & i Holdings and its eligible consolidated subsidiaries introduced a consolidated taxation system in the fiscal year ended February 28, 2013.
  • Reputation Risk (Brand Image)

     An occurrence of the risk events itemized in this section, misconduct on the part of subsidiaries, affiliates or franchised stores, or human rights or environmental problems in the supply chain could damage the Group’s overall brand image. As a result, consumers’ trust in the Group could diminish, the Group could lose personnel or face difficulty securing needed human resources, which could affect the Group’s operating results and financial position.