(1) Risks related to our business model
The core principle of our business model is to meet the needs of environmentally aware and health-conscious customers by offering organically grown and specially-cultivated fruit and vegetables, as well as processed foods conforming to safety standards, which are difficult to obtain via general distribution channels (such as supermarkets and mass merchandise stores). We aim to offer a convenient service, supplying as wide a customer base as possible, through our easy to use e-commerce website. Although we expect that customers' environmental and health-related requirements will continue to expand in future, and that the online sales of our products will continue to grow strongly, there is a possibility that our business and business performance may be affected if safe, high added-value food products become more widely available at lower prices via general distribution channels as a result of factors such as advances in technology and innovations in distribution.
(2) Risks related to the nature of our business
a. Competition in the online food market and food delivery services
We are currently a major online specialist food seller, but there are many other companies, including smaller ones, that sell food online. There is also a trend towards the growth of "shopping mall-type" e-commerce companies with a large subscriber base to support their food sales, and towards large groups, such as major distributors, operating their own online shopping businesses. As the online shopping market expands in the future, competition in the food sector may intensify if these operators increase their focus on food sales. If competition intensifies, our business and business performance may be affected.
b. Food safety
With respect to fruit and vegetables, we only sell "specially-cultivated agricultural products", as defined in the "guidelines for specially-cultivated agricultural products" by the Ministry of Agriculture, Forestry and Fisheries. For processed foods, we have established a Food Quality Audit Committee to provide guidance on hygiene control to our suppliers to ensure quality and safety. With regard to the risk of radioactive contamination of food posed by the nuclear power plant accident resulting from the Tohoku earthquake and tsunami of March 2011, we started to check for radioactive materials in the products we sell from that month onwards. We have also been striving for an improvement in our environmental standards to ensure that our customers can buy our products safely and with confidence, through changes in reference values related to radioactive materials, installation of new testing equipment and improvement of our testing processes. However, we cannot deny the possibility of displaying or providing false or incorrect information from our suppliers on the use of pesticides, for example, or the quality of the products we handle. Regarding the problem of radioactive contamination of food, there is as yet no commonly accepted view on radiation and food safety, but if any related legal regulatory framework were to be established in the future, it might not be possible to implement the measures required by such laws and regulations with immediate effect. Under these circumstances, there is a possibility that warnings might be issued or disciplinary action might be taken against us by regulatory bodies, and that our clients might file complaints and claims for damages. These could affect our business and business performance by adversely impacting the brand image of the company and damaging our perceived external trustworthiness.
c. Impact of poor weather conditions
Fruit and vegetables, which account for around 30% of our sales, are sourced from various production areas throughout Japan. In principle, we procure our principal items from multiple production areas to ensure we can source products from different regions in the event of a poor harvest, or a deterioration in quality due to poor weather conditions in certain areas. However, if the duration or scope of poor weather conditions is worse than expected, our business and business performance may be affected by factors such as shortage of supply or quality deterioration.
d. Seasonality of the business
Our sales and earnings typically increase in December due to the sale of high margin year-end products such as "osechi ryori" (special New Year food dishes). This means that our performance for the full year is heavily weighted towards our performance in the third quarter. For this reason, it is difficult to assess our full-year forecast based solely on specific quarterly results, and our performance in the third quarter may have a significant effect on our annual operating results.
e. Concentration of our logistics operations
Our distribution center is located in Ebina, Kanagawa Prefecture, where our logistics-related operations (including inspection, storage, sorting and packing of the products we sell) are concentrated. We ship around 80% to 90% of companywide sales to our customers through this center. Therefore, if we are unable to operate our distribution center due to unforeseen circumstances, such as a natural disaster or fire, our business and business performance could be affected by factors such as loss of inventory, delivery delays, or temporary suspension of services.
f. Business relationship with Yamato Transport Co., Ltd.
Yamato Transport Co., Ltd. is responsible for the majority of deliveries to our customers. Although we strive to maintain a good business relationship with the company while working to build relationships with alternative shipping companies, if Yamato Transport were to increase its shipping fees materially, or to reduce its levels of service, in the future, this could affect our business and business performance.
g. Membership numbers
Increases or decreases in our membership numbers have a significant impact on our sales. In addition to focusing on activities to acquire new members, we are also working to improve customer satisfaction to retain our existing members. However, if initiatives to expand the "Oisix Club" membership base do not progress as planned, or if there is a decline in membership due to a decline in customer satisfaction, this may affect our business and business performance.
h. Systems failure
Most of the operations of our food delivery service, including website management, the receipt and placing of orders, purchasing, inventory management, shipping and selling, are dependent on our business management systems. We have various measures in place to protect against systems failure, including backup systems and reserve data retention functions, firewalls, and virus checks to protect our systems from external attacks. However, in the event of a failure or a malfunction in our systems arising from factors such as an unexpected increase in user accesses, computer viruses, willful destruction, or a failure of built applications, our business and business performance may be affected.
i. Handling of personal information
Since we handle and possess a large amount personal customer information for the online sales of our products, our company is classified as an entity handling personal information under the Act on the Protection of Personal Information (personal information protection law) which came into effect in April 2005. Therefore, in addition to measures such as data encryption, strict access control, and periodic system diagnosis by external organizations to protect the personal information we handle, we have regulations and guidelines established for information management, and provide education and training to program creators, as well as in-house training of all employees. We are also working to enhance the maintenance of our information management systems, and in June 2008, we received Privacy Mark certification. Notwithstanding such measures, however, if there was a leakage of personal customer information from our company, compensation for damages and the impact on our social credibility might affect our business and business performance.
j. Response to technological innovation
Since the online industries in which our company operates are characterized by the continual emergence of new technological innovations and services, we aim to apply these changes, as appropriate, in our service models, and to incorporate the new functions accompanying these technological innovations in our business. However, in the event of a delay in our response to technological innovation, or unexpected increases in investment and expenses related to our systems, our business and business performance could be affected.
k. Legal restrictions
Since we sell food products, including specially-cultivated agricultural items, our company is subject to a range of related laws and regulations, such as the Food Sanitation Act, the Act for Standardization and Proper Labeling of Agricultural and Forestry Products (JAS), the Act against Unjustifiable Premiums and Misleading Representations, and the Act on Specified Commercial Transactions (Specified Commercial Transactions Law). We strive to improve our compliance with these laws and regulations through rigorous management systems, and through employee education. However, if we were to transgress or be in breach of any of these laws and regulations, a decline in customer trust due to damage to the brand image of our company could affect our business and business performance, for example, through a decline in our membership numbers or in our members' frequency of purchase. At the same time, if legal restrictions were to increase due to amendments of these laws or regulations, or by the establishment of new laws or regulations, this could adversely affect our principal business activities.
(3) Risks related to business structure
a. Dependence on the head of the company
Kohei Takashima, President and Representative Director, is a central figure in terms of the company's establishment and the promotion of its business. He plays an important role in the overall business activities of our company, including the development of management policies and strategy. Our company is heavily dependent on him. We promote the delegation of authority to other directors and employees in order to ensure that our management structure is not excessively reliant on him. However, if, due to unforeseen circumstances, he was unable to perform his duties, this could affect our business and business performance.
b. Human resources
Due to the rapid expansion of our business, procuring and training outstanding talent has been vital to the company's development. We have focused on internal training and selection of personnel, as well as external recruitment. At the same time, since customer services operations handling delivery-related tasks at the distribution center and inquiries from customers tend to be labor-intensive, and because there is a constant need to allocate employees to these areas efficiently and in large numbers, the company is also focusing on recruitment and training for these roles. However, if our market grows strongly in the future and competition intensifies, competition for personnel from our competitors will also intensify. This could lead to the loss of some employees to competitor companies, and could constrain our ability to recruit new talent. Also, if there was strong growth in our employees' workload due to a rapid growth in the number of orders received in the future, our efficiency could decline as a result of a shortage of personnel in key delivery-related operations and in customer services. Such circumstances could affect our business and business performance.