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Business Risk Factors

In relation to the execution of the strategy, businesses and other operations of the Kirin Group, the major risks that are considered to have the potential to cause a significant impact on the decisions by investors are outlined below. Also, information regarding matters that would not necessarily have a significant impact is given with the aim of promoting the active disclosure of information to investors.
At the Kirin Group, the risks with the potential to turn into a severe crisis or risks in terms of executing the strategy and businesses are identified and reviewed by the Group Risk and Compliance Committee, and they are then organized as important risks of the Group. In addition, the Kirin Group has prepared various risk management structures with which risks in relation to the execution of the strategy are appropriately managed and controlled, the risks with the potential to turn into a crisis are prevented to the extent possible, and the impact in the event a risk turns into a crisis is minimized.

  • (Note)The Kirin Group has prepared this document using the business segments from FY2019 based on the Kirin Group 2019-2021 Medium-Term Business Plan, but the future matters in this document are based on the details determined by the company as of December 31, 2018.

A. Risks in relation to the execution of the strategy and compliance

1. Risks in each business domain

(1) Risks regarding the Food & Beverages domain (alcoholic beverages & non-alcoholic beverages)

The demand for alcoholic beverages and non-alcoholic beverages is expected to decline over the long-term as the population declines in Japan. In addition, the prices are becoming increasingly polarized and tastes are becoming more diverse. The economy categories including RTD are expected to grow, while the demand for products in the premium categories such as craft beer and health-related products such as sugar free and beverages with function claims are also expected to increase. Overseas, the business environment differs depending on the country and region. In developing countries, overall demand is expected to increase as a result of population growth and the economy categories are expected to grow as more new consumers enter the market. On the other hand, similar to Japan, there is expected to be demand for health products and growth in the premium categories in the markets of advanced nations and developing nations that have advanced beyond a certain level.
In order to respond to these changes in the market environment, the Kirin Group is aiming to establish a competitively advantageous brand portfolio by strengthening the connections between consumers and the brands, providing experience-based value beyond just products and strengthening "Customer centric marketing ability" to maintain and foster strong brands.
However, in the Japan Beer & Spirits business (Kirin Brewery), the composition of the categories in the alcoholic beverages market may change more than expected as a result of competitor activities and changes in sales prices following the consumption tax increase planned for this fall and the phased increase in the liquor tax directed towards unification of the beer tax in 2026, and the Group may be unable to achieve the sales plan.
In the Oceania Integrated Beverages business (Lion), mainly the major brewers are racing to be more competitive in the premium category such as overseas craft beer business strategically targeted by Lion , and it is possible Lion will be unable to develop the business in line with the strategy. In the Japan Non-alcoholic Beverages business (Kirin Beverage), the Group may be unable to generate profits based on growth as planned due to deterioration in the container mix or a greater than expected decrease in sales of the core brands.
In the US Non-alcoholic Beverages business (CCNNE), fundamental structural reforms are being conducted following an expansion of the business area, but if the establishment of an appropriate business structure is delayed, it is possible that no progress will be made towards achieving the targeted profit improvements.
From the perspective of the supply chain, it is possible that the supply chain may be severed due to the impact of torrential rain, drought, unusually cold summers, weather abnormalities or large-scale natural disasters such as an earthquake. In addition, it is currently difficult to secure sufficient manpower throughout the overall supply chain, including a shortage of truck drivers in Japan. As the supply chain environment is becoming increasingly harsh, the Kirin Group is working to increase the precision of supply and demand forecasts, strengthen the distribution capability and reduce the risks. However, if the changes in the external environment and labor shortage have a more serious impact than expected, the cost of procurement, manufacturing and transportation may increase and sales opportunities may be lost, resulting in an adverse impact on the Group’s business performance and financial position.
As other risks, in the Oceania Integrated Beverages business, the Kirin Group started considering the transfer of shares of Lion Dairy & Drinks business to a third party from October 2018, but if there is a major delay to the share transfer process or inability to execute the share transfer, the establishment of the new business structure may not proceed as planned.
Also, in Myanmar Alcoholic Beverages business (Myanmar Brewery), the Group may be adversely affected by the entry of new participants or attacks by competitors.

(2) Risks regarding the Pharmaceuticals domain (Pharmaceuticals and Bio-chemicals Businesses)

In the pharmaceuticals business (Kyowa Hakko Kirin), the Kirin Group is steadily advancing the measures aimed at becoming a "Global Specialty Pharmaceutical Company" and accelerating the business development overseas along with developing and launching global strategic products. On the other hand, if the market penetration of the global strategic products slows or a problem occurs in relation to stable supply, it is possible that "maximize the value of global strategic products" may not proceed as planned.
Also, the Kirin Group is working to establish a definite supply system as part of the global business development in the pharmaceuticals business. However, in the event the supply of products is halted or delayed due to a technological or legal problem at a manufacturing or distribution site or the supply of raw materials or fuel is halted or in the event of insufficient product supply due to higher than expected product demand, the business performance and financial position of the pharmaceuticals business may be adversely affected.
In addition, it requires a long time and great research and development costs to develop new pharmaceuticals, and during the development process, it may become necessary to abandon research and development if the expected efficacy is not obtained or for safety reasons. Also, in the event intellectual property is violated, product revenue or technology licensing revenue may decline faster than expected. If a legal suit is filed by a third party alleging violation of the third party’s intellectual property, an injunction may be issued against the manufacturing and sales of the product or the Kirin Group may be required to pay compensation or a settlement. In the event of competition with a competitor’s product or introduction of a generic product after the expiration of the patent for a Kyowa Hakko Kirin group product, the revenue may decline.

(3) Risks regarding "New businesses bridging Pharmaceuticals and Food & Beverages"

The Kirin Group is using the organizational capabilities and resources accumulated in the existing business domains, alcoholic beverages, non-alcoholic beverages, and pharmaceuticals and bio-chemicals to establish and foster "New businesses bridging Pharmaceuticals and Food & Beverages". In this domain, the company will conduct initiatives that uniquely utilize Kirin’s strengths in pharmaceuticals and food & beverages to respond to the various issues, such as maintaining health and well-being and improving quality of life by preventing the onset or slowing the progression of diseases and limiting social insurance spending. The Group is working to establish businesses that provide products and services with scientific evidences through channels with strong appeal, and foster these businesses into next-generation pillars of the Group. The "New businesses bridging Pharmaceuticals and Food & Beverages" is a new business domain, and if a competitively advantageous business model or appropriate organizational/ governance system cannot be established or technological development does not proceed as expected, the new businesses may not be established and fostered according to plan.
Moreover, when developing markets and promoting sales in the "New businesses bridging Pharmaceuticals and Food & Beverages" and conducting R&D of new materials, it will be essential to utilize ICT and partnerships with outside experts and businesses with abundant knowledge, but if this utilization is insufficient, it may not be possible to establish and foster the new businesses as planned.

2. Common risks in each business domain

(1) Risks regarding the "maintenance and expansion of the business domains"

The Kirin Group is constantly considering the business model that appropriately responds to the changes in the values and lifestyles of consumers in both the existing and new business domains. Through internal and external partnerships, the Group is creating a supply chain for development, manufacturing, transportation and sales, but if these functions decrease as the result of changes in the business environment or the response to such changes is delayed, the Kirin Group’s business performance and financial position may be adversely affected. Against the backdrop of advances in information technology, changes in the supply chain and changes in the products and services, in addition to the current competitors, companies from different business domains and industries may enter the same business domains as the Kirin Group and become new competitors. In particular, if a competitor expands its business into a domain occupied by the Kirin Group based on a revolutionary business model utilizing ICT, the Kirin Group’s business model and traditional strengths may rapidly become obsolete and it may be difficult to maintain and expand the business.
The Kirin Group is assuming business and capital alliances for the expansion of the business domains aimed at new growth, but there is the possibility the Kirin Group will be unable to exercise sufficient control over the management, operations or assets of the alliance partners.
Also, it is possible the business execution will be affected by changes in the business environment in existing business. As a result of these factors, the Kirin Group’s business performance and financial position may be adversely affected due to a downturn in the business performance of existing business and companies in which the Group has equity.
If this situation occurs, the Group may be forced to record an impairment loss, such as the goodwill possessed in existing business or arising from a new investment, and the business performance and financial position may be adversely affected.

(2) Risks related to information technology

The Kirin Group is aiming to establish ICT solutions and platforms, as well as provide products and services that realize the insights obtained from a deeper understanding of consumers, increase the quality of business operations and improve/ resolve the issues in the business processes. However, the Group may be unable to realize the creation of competitive value due to a delay in the establishment and operation of ICT. Also, the Group is aiming to reestablish and enhance the management foundation, increase productivity by streamlining the business operations between group companies and introduce standardized information systems, but if these do not progress as planned, the business performance and financial position of the Kirin Group may be adversely affected.
Concerning the information systems, it is possible the information systems can cease to function or temporary confusion can occur due to a data loss, data alternation or leak of personal information or company secrets as the result of a computer virus or unauthorized access or due to the occurrence of a natural disaster such as an earthquake.

(3) Risks regarding the securing and training of Human Resources

In order to execute the business and realize innovation, it is necessary to gather and accept human resources with diverse values and specialties, and the Kirin Group respects the diversity of its employees and aims at improving the organizational capabilities to realize value creation. The Kirin Group is conducting business activities in Japan and overseas, and the background of Kirin Group employees varies in terms of race, nationality and culture. Also, with the aim of training human resources who will advance Group management, the Kirin Group is working to strengthen the leadership of top and middle management employees who will promote changes to the organizational culture and value creation. However, if the Group is unable to sufficiently secure and develop human resources who promote the Group management and highly specialized human resources necessary for the Group’s business activities, it may be unable to realize a competitively advantageous organizational capability.

(4) Risks regarding product safety

The Kirin Group makes maximum effort regarding quality assurance by conducting groupwide audits through enhanced product quality assurance that encompasses products manufactured at the Group’s own factories, as well as those imported or manufactured on a commission basis at other companies. However, if an unexpected quality problem arises beyond the scope of the quality assurance initiatives, the Group’s business activities may be restricted and its business performance and financial position may be adversely affected.
In addition, pharmaceuticals undergo a strict safety evaluation during the development phase and are subject to approval following an examination by the competent authority. However, in the event unforeseen side effects occur after a pharmaceutical is launched onto the market, the Group’s business performance and financial position may be adversely affected.

(5) Risks regarding compliance

The Kirin Group is subject to the application of various laws and regulations, including the Liquor Tax Act, Food Sanitation Act, Pharmaceuticals and Medical Devices Act, Act on Prohibition of Private Monopolization and Maintenance of Fair Trade and environmental laws and regulations etc. in the domestic business execution. The Group is also subject to local laws and regulations in the various countries in which it is conducting business. In the event of a violation of these laws and regulations or an act violating social requirements, the Group may be subject to legal penalties, lawsuits or social sanctions or customer trust may be lost.
The Kirin Group has defined compliance to mean "observe laws and ordinances and all internal and external rules and regulations, uphold social norms, fulfill legal obligations and social ethical responsibilities, and thereby prevent unexpected losses and loss of credibility and maintain and increase stakeholders’ trust in Kirin Group" and is promoting compliance through risk management cycles and awareness training for employees in an effort to reduce the possibility of legal violations by employees and acts that violate social norms. Also, the Group is working to prevent bribes and has prohibited the giving and receiving of inappropriate money, gifts and entertainment, as well as other benefits.

B. Risks that may affect the business from a medium to long-term perspective

(1) Risks regarding alcohol related problems

The Kirin Group conducts advertising and publicity in accordance with self-imposed rules based on strict voluntary standards in order to meet its social responsibilities as a corporate group that manufactures and sells alcoholic beverages. Also, the Kirin Group is implementing initiatives aimed at eradicating harmful drinking in all countries where it operates an alcoholic beverages business. On the other hand, the World Health Organization is considering international regulations with respect to the sale of alcoholic beverages. If the regulations are strengthened well beyond the Kirin Group’s assumptions, the consumption of alcoholic beverages may decline due to a rapid contraction of the social acceptability of alcohol, resulting in an adverse impact on the Group’s business performance and financial position. In addition, there is possibility the corporate brand value may decrease.

(2) Risks regarding environmental issues

As a result of increased international interest in marine pollution caused by microplastics and changes in the distribution channels for waste plastic, the problem of plastic containers such as PET bottles is receiving more attention. If the Kirin Group is unable to appropriately respond to these problems, the Group’s business activities, particularly the non-alcoholic beverage business, may be adversely affected.
Also, the world’s interest in global warming and the requests that the risks from climate change be disclosed as financial information are increasing. In December 2018, the Kirin Group became the first food and beverage company in Japan to express agreement with the proposal issued by the "Task Force on Climate-related Financial Disclosures (TCFD)", which was established by the Financial Stability Board. Moreover, the Group was the first food and beverage company in Japan to receive certification in March 2017 under the "Science Based Targets (SBT) initiative" because the Group set forth the medium-term target of reducing greenhouse gas emissions by 30% by 2030 compared to 2015, and has started conducting activities directed towards reducing greenhouse gas. However, if these targets cannot be achieved or if the Group causes an environmental accident, the business activities may be adversely affected.
In addition, it is possible that production may be halted at the Group’s production locations in Japan and overseas if water resources could not be secured due to depletion or pollution, and the corporate brand value may be damaged as the result of procurement linked to the destruction of forests or the environment.

(3) Risks regarding human rights

The Kirin Group has formulated "The Kirin Group’s Human Rights Policy" in conformance with the "Guiding Principles on Business and Human Rights (UNGPs)" endorsed by the United Nations in 2018, and it is strengthening the efforts to promote respect for human rights. In addition to not permitting child labor, forced labor or slave labor, including human trafficking, the Kirin Group is calling for the prohibition of all types of discrimination based on race, ethnicity, nationality, social status, lineage, sex, existence of a disability, health condition, faith/ beliefs, sexual preference/ gender identity, occupation and employment status. Also, the Group is conducting human rights due diligence as an initiative to identify, prevent and minimize the negative impacts on human rights. However, in the event the Kirin Group causes a human rights related problem or procures materials problematic in relation to human rights, there may be a severe adverse impact on the business activities in the relevant country or globally.

(4) Risks related to national policies in each country or situations unique to the industry

The Kirin Group has business activities in a wide range of countries and regions, and particularly in developing nations, there is expected to be trouble resulting from changes in the laws and regulations, political/ social/ economic confusion caused by terror/ war/ other factors, or differences in culture and traditions. If such country risks are realized, the business performance and financial position of the Kirin Group may be adversely affected.
In the pharmaceuticals business, the Kirin Group is subject to various regulations under the pharmaceutical administration and regulations of each country in which it operates. In Japan, in addition to the downward revision of drug prices under the official drug pricing system, changes are being made to the medical system through the promoted use of generic pharmaceuticals and other measures. Overseas, the pressure to limit healthcare spending is increasing. In the event the sales prices of pharmaceuticals fall as a result of the pharmaceutical administration and regulations and the impact cannot be covered by increased sales volumes or other measures, the business performance and financial position of the pharmaceuticals business may be adversely affected. Also, if an unexpected change occurs to drug prices or social insurance system following a major deterioration of finance for the healthcare in each country, there is the possibility the pharmaceuticals market will contract, profitability may decline, progress in pharmaceutical development may be delayed, and it may become more difficult to launch new products. Also, in the countries and regions the Kirin Group conducts business activities, recreational marijuana has been legalized following deregulation overseas, and in the event marijuana use replaces alcohol consumption, the business performance and financial position of the alcoholic beverages business may be adversely affected.

(5) Risks regarding finances and taxes

The Kirin Group procures funds for its business operations mainly through borrowing from financial institutions and the issuance of corporate bonds and commercial paper. For this reason, in the event of instability or rising interest rates in the financial markets or a downgrade of the Kirin Group’s credit rating by a rating agency, the Group can face limitations on its financing, increased financing costs or be unable to procure funds at all. Such a situation may have an adverse impact on the Group’s business performance and financial position.
Also, because the Kirin Group is procuring some of the products and raw materials from overseas, in the event of rapid market or currency fluctuations exceeding forecasts, the Group’s business performance and financial position may be adversely affected. Moreover, the overseas subsidiaries and equity method affiliates prepare the business results on a foreign currency basis, and the results are converted into Japanese yen in the consolidated financial statements. However, because the value changes after conversion into yen depending on the exchange rate, there is the possibility the business performance and financial position of the Kirin Group may be adversely affected.
In relation to taxes, the Kirin Group is conducting business activities in compliance with the applicable tax laws in each country, but there is the possibility an additional tax burden will be levied or social credibility will be lost as the result of a revision to the tax system, a change in the tax administration system or differences of opinion with the tax officials concerning the tax return in each country.

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© 2007 Kirin Holdings Company, Limited.

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