Risk management systems
The UNITED ARROWS Group has established a Risk Management Committee, which regularly identifies risks related to business activities. The Committee also selects and evaluates key risks each year and analyzes management issues, etc. affecting the following year, in principle. Additionally, the Committee considers and actively promotes the implementation of initiatives targeting risks in each division.
Furthermore, the UNITED ARROWS Group also has systems in place to respond quickly and appropriately to any incidents or emergencies arising as a result of various risks, by establishing a working group or task force as necessary, in accordance with the Risk Management Regulations. In particular, the UNITED ARROWS Group established a task force led by the President in February 2020, in order to respond to risks associated with the spread of COVID-19. The activities of this task force include sharing information related to these risks and implementing various responses.
Risk assessment activities
The UNITED ARROWS Group collects risk information from each division mainly in accordance with the following procedures. In the process of collecting risk information, risks are classified into strategic risks, which can affect management’s strategic decisions, and operational risks, which are perceived by each division or store. Then, targets for hearing surveys are separated so that the criticality of each type of risk can be identified comprehensively. The Risk Management Committee assesses and selects key risks (with a distinction between “particularly key risks” and “key risks”) from among the identified critical risks, considers countermeasures, and performs monitoring thereafter and other activities.
Risks related to businesses, etc.
Of the matters related to the status of the UNITED ARROWS Group’s businesses, financial position, etc. in the annual securities report, matters that may materially affect the judgment of investors are as follows.
Furthermore, forward-looking statements are based on the judgment or assumptions of the UNITED ARROWS Group as of the end of the consolidated fiscal year under review, and may differ from actual results. Please also note that the information below does not constitute a comprehensive list of all the risks related to the UNITED ARROWS Group’s businesses.
Particularly key risks
The UNITED ARROWS Group mainly operates a B2C business focused primarily on retail sales of apparel, etc. It believes that continuing to offer customer satisfaction forms the core of the Company’s businesses, as shown by its Corporate Philosophy, “With sincerity and a sense of beauty, we continually create new tomorrows for our customers, setting the standard for lifestyle culture.”
In addition, with our management policy of “Providing Inspiration—Wonderful Customer Service, Attractive Products, Great Service, Great Products,” which was set for the fiscal year ending March 2023, we believe it is important for us to refine our company’s absolute strength of “providing inspiration” to pave the way for the future.
Based on this approach, the UNITED ARROWS Group believes that the ultimate risk is that it “will not be able to keep up with the times,” i.e. that it will not be able to continue responding to the social environment and the needs of its customers as they change with the times. Specifically, the UNITED ARROWS Group considers the following risks as “particularly key risks.”
(1) Risks related to changes in economic situations and business environment
The UNITED ARROWS Group’s medium to long-term business performance is highly likely to be affected by sluggish consumption due to economic stagnation associated with economic fluctuations and by changes in consumption trends due to demographic factors. Such impact includes a decline in sales and excess inventory.
In addition, the Group’s business is constantly at risk of being affected by changes in the external environment, such as globalization of the market, ever-advancing technological innovation in the domains of DX, consideration for the global environment and sustainability, heightened awareness of human rights protection in the supply chain, and intensified competition with new entrants. Such changes in the external environment are highly likely to impact the Group’s medium to long-term business performance, such as a decrease in sales and excess inventory.
Furthermore, the Group is still facing a severe business environment caused by the spread of COVID-19, including decline in inbound demand, weak consumer confidence, and decrease in the number of customers visiting physical retail stores as a result of the spread of behaviors to avoid crowded spaces.
To address these risks, the Group decided on a basic policy for its medium-term management plan of “Weather the crisis and regain our earnings power,” and espoused the promotion of DX and sustainability as base strategies that prop up the priority strategies set in the management policy for the fiscal year ending March 2023 with the aim of facilitating the digital transformation of the supply chain and revamping core systems that perform a series of product-related operations. In addition, the Group will minimize the volume of products that are disposed of, promote activities for decarbonization, actively use environmentally conscious materials, and respect human rights throughout the supply chain.
(2) Risks related to the ability to respond to changes in customer preferences and propensity to consume
The UNITED ARROWS Group collects information from markets in Japan and overseas and put its efforts to plan and develop products that meet customers’ preferences (needs) and respond to changes over time. However, customers’ preferences (needs) and trends in the fashion market tend to change rapidly in a short period of time.
At present, the influences of the COVID-19 pandemic are lingering, and it is necessary for the Group to build a business model based on the assumption that changes in the propensity to consume (prevailing online consumption, casual fashion, etc.) caused amid the pandemic are no longer a transient phenomenon, but rather fundamental changes in lifestyle that will take root even in the so-called post-coronavirus era.
If the Group fails to successfully respond to changes in the trends of the times or propensity to consume, its competitiveness and brand value are highly likely to decline, affecting the medium to long-term business performance of the Group.
To address these risks, the Group chose “Creation of excitement” and “Challenge for new UA” as priority tasks of the management policy for the fiscal year ending March 2023, and will strengthen its product development capabilities; make improvements in securing five rights — right time, right products, right volume, right value, and right place; develop new brands without being bound by past successful experiences or stereotypes; and consider expanding into domains that will lead to the provision of new value. In addition, as part of the promotion of DX mentioned above, the Group first renewed its online shopping site UNITED ARROWS ONLINE in March 2022, and will work further to promote OMO* approaches as well as to strengthen its marketing capabilities by making full use of digital technologies.
To ensure resilient management that can support the implementation of the above measures, the Group will review, as needed, decision making methods, in-house communication, PDCA of business plans, and priorities in policies and operations, etc.
* OMO: Online Merges with Offline, which means integrating of online and offline.
(3) Risks related to human resources
The UNITED ARROWS Group believes that it needs to continuously strive to allocate in-house human resources in a way that meets customer attributes and preferences, to secure the right persons in the right places, and to develop human resources in order to respond to changes in the trends of the times and business models. Although there is no notable problem at the moment, if the Group fails to secure human resource allocations that meet the trends of the times demanded by customers, or is unable to lay out a recruitment plan and human resource development plan that are appropriate to our strategies such as digital transformation, it will become difficult for the Group to implement strategies and to achieve the management vision.
Furthermore, new lifestyles, casual fashion, and online consumption that are prevailing in this post-coronavirus era are forcing companies to devise new methods to sell products (improvement in e-commerce site sales ratio, augmentation of digital marketing, etc.), to figure out product lineups and methods to show them which appeal to people with the latest sense of the times.It is important to attract talented human resources required in the new era, such as marketing personnel and young employees in the procurement division. Becoming a company attractive to such human resources who are sensitive to changes in the trends of the times is also an important management agenda for the Group. Failing to do so will lead to the outflow of human resources, which in turn will lead to a decline in competitiveness in the market. Since the UNITED ARROWS Group has been differentiated with its sales capabilities, the Group’s operation of stores and expansion of business areas are highly likely to be hampered in a medium to long term.
To address these risks, the Group will increase the amount of investment in the training of human resources who take on major functions, investment actively in acquiring human resources in the digital and IT fields, improve efficiency, and promote automation of operations using technologies, etc. In addition, espousing the promotion of ES* as a base strategy that props up the priority strategies of the management policy for the fiscal year ending March 2023, the Group will promote human resource allocation that ensures the right persons in the right places while making use of talent management systems.
In the digital and IT field, the DX Promotion Division was established in the fiscal year ended March 2022, and experts in the field who have extensive experience at other companies took on the positions of the Executive Officer in charge and the General Manager of the Division.
* ES: Employee Satisfaction, which means the satisfaction of employees.
Following the assessment and selection procedures described above, the following are regarded as key risks.
(1) Risks related to sustainability
The UNITED ARROWS Group believes that corporate management that puts emphasis on the environment, society, and governance is essential for the realization of a sustainable society. Companies in the apparel industry are required to give due consideration particularly to the environment and human rights throughout the supply chain in their business operations. If the Group fails to secure such management, its business activities are highly likely to become unacceptable to society, and lose support from customers and investors in the medium to long term.
To address these risks, the Sustainability Committee consisting of Executive Directors and Executive Officers was established under the Management Committee. The Group also set five themes, “supply chain,” “resources,” “community,” “human resources,” and “governance,” based on “Creating five values” described in the Corporate Philosophy, and is actively engaging in activities that contribute to society and solve social problems through business activities by pushing ahead with measures under these themes.
* Reference: Sustainability Promotion Framework Diagram
(2) Risks related to climate change
The UNITED ARROWS Group stores are concentrated in large cities in Japan, with distribution centers and headquarters functions also concentrated in the Tokyo metropolitan area.
If this area is hit by natural disasters such as major typhoons or heavy rain, which are physical risks, stores and facilities are highly likely to be damaged and forced to shut down, or procurement of products may be hindered.
On the other hand, if changes in the highest and lowest temperatures or a shift in the seasons occurs and affects the demands and purchasing behavior of customers, etc., it is highly likely that the Group will not be able to deal with the changes with conventional product plans. An abnormal climate and increases in average temperatures may also cause a hike in costs due to impacts on the production of the raw materials for our products.
To address these risks, the Group will develop and establish a risk management system in the Risk Management Regulations to respond to natural disasters, and will continue to review its Business Continuity Plan (BCP). In order to enhance the effectiveness of its crisis management system, the Group will regularly conduct drills to check the damage situation during disasters.
In addition, it will make efforts to increase the ratio of regular price sales by enhancing its product strength, such as introduction of season-less products, and by reviewing product plans and introduction timing, such as a shift from season MD. At the same time, the Group is considering diversifying the procurement risk of raw materials and examining alternative materials.
In the process of transition to a decarbonized society with the aim of avoiding climate change, new policies and regulations to restrict greenhouse gas emissions will be introduced, such as carbon taxes and carbon pricing, and there will be changes in the market. Therefore, the Group is exposed to the risk of being unable to successfully respond to the changes, and the balance sheet of the Group is highly likely to be affected. If the risk comes to the surface, the Group’s reputation (evaluation or review by customers and society) may be tarnished, leading to a decline in brand value.
To address these risks, the Group is not only considering its carbon reduction targets, but is already using renewable energy at some stores. The Group will continue to promote further measures to realize a decarbonized society.
(3) Risks related to the procurement of products
The UNITED ARROWS Group purchases products produced not only in Japan but also in many other countries, mainly Asian countries. If political and economic fluctuations, sudden changes in exchange rates, war, terrorism, or natural disasters, etc. occur in those countries, the procurement of products may be hindered, affecting the business performance of the Group. At present, the Group is faced with a strong depreciation of the yen and a sharp rise in the prices of some raw materials. To cope with this situation, it is reviewing supply chains and promoting procurement using RCEP and other methods.
In addition, if a supplier or a subcontractor that has an important and unique impact on the UNITED ARROWS Group goes bankrupt, or if an area where the supplier is located is blocked, product delivery may be delayed or impossible, and depending on the situation, that may affect business performance.
The Group will also develop a system to prepare for emergencies, including the preparation of emergency response manuals for product procurement.
(4) Risks related to quality
The UNITED ARROWS Group has worked to raise awareness of quality issues among employees and established a thorough quality control system. Even so, if a product is contaminated with hazardous materials, such as needles, due to improper inspection, etc., and such resulted in damage to customers, customer confidence in the Group may deteriorate, affecting business performance.
In addition, any violation of relevant laws and regulations due to improper labeling may lead to deterioration of the brand image. In particular, with the expansion of the e-commerce business, the total amount of labeling has increased, and the risk of improper labeling is growing year by year.
In the past, the UNITED ARROWS Group was subject to administrative dispositions by the Fair Trade Commission and the Consumer Affairs Agency for violating the Act against Unjustifiable Premiums and Misleading Representations, and if the Group receives similar administrative punishment again, its social credibility may deteriorate, and its business performance is highly likely to be affected.
To address these risks, the Group will make continuous efforts to develop and build a management system in accordance with in-house rules and to ensure compliance. When defective products or improper labeling occur, the incident and recurrence prevention measures are shared at company-wide meetings, etc.
(5) Risks related to information management
The UNITED ARROWS Group handles many types of confidential information, including personal information, and pays close attention when handling the information. If a leakage of confidential information occurs due to attacks by computer viruses, cyber-terrorism, management mistakes by employees or contractors, etc., the brand image of the Group may deteriorate and the Group may have to bear the cost of pursuing legal responsibilities. The Group’s business performance is highly likely to be affected. As the number of remote workers is increasing due to the spread of COVID-19, the risk of leakage of confidential information is increasing.
To address these risks, the Group has high quality security systems and conducts risk management in cooperation with companies specialized in security and in line with the Information Security Regulations, which was revised on April 1, 2021. Such systems and management include measures against unauthorized access, anti-virus measures, data protection measures, and user authentication. Furthermore, in order to prevent leakage of information from within the Group, the Group stipulates an Information Security Policy to ensure appropriate information management, and provides Information Security Training for employees.
Furthermore, this fiscal year the Information Security Committee was newly established within the Risk Management Committee to discuss these types of risks with members including management, and thereby countermeasures will be planned and implemented at an early stage to mitigate such risks.
(6) Risks related to asset valuations
The UNITED ARROWS Group calculates the actual sales ratio below cost and the estimated amount of inventory digestion for the valuation of its products. Since the calculation is performed based on the forecast of future inventory digestion, etc., if the actual result is different from the estimation due to changes in economic conditions, etc., the write-down of the product in the consolidated financial statements for the following consolidated fiscal year is highly likely to be affected significantly.
In addition, since the recoverable amount used for the impairment assessment of fixed assets is calculated based on their value in use, and the calculation is based on business performance forecasts for the future, etc., if the actual result is different from the forecasts due to changes in economic conditions, etc., the amount of impairment loss in the consolidated financial statements for the following consolidated fiscal year is highly likely to be affected significantly.
To address these risks, the Group has controlled merchandising based on marketing surveys in the domestic and overseas fashion markets, and weather forecasts or the results of sales trend monitoring before predicting inventory digestion for the future, etc.
(7) Risks related to store development
The UNITED ARROWS Group operates many of its stores in rented spaces in commercial facilities such as shopping centers, and therefore changes in the number of customers visiting the relevant commercial facilities may affect the business performance of the Group, such as decrease in numbers of customers visiting stores and a falloff in sales. Due to the spread of COVID-19, the number of customers visiting commercial facilities has declined, and this risk is considered to be lingering.
In addition, depending on the financial condition of the store lessor or commercial facility, it may become impossible for the Group to collect part of debts and the security deposit it has paid at the time of opening a store, the rent may soar due to increases in real estate prices, or an unexpected situation may occur and make it difficult for the store to continue operating, causing a drop in revenue. The Group’s business performance is highly likely to be affected.
To address these risks, before deciding to open a new store, the Group closely checks the market conditions in the area where the store will be opened, conducts a credit check for the business partner before concluding a contract, regularly monitors the profits and losses of the store after the opening, and when there is a discrepancy between the plan and actual results, actively pushes ahead with sales promotion activities in cooperation with developers. Thus, the Group continues to take follow-up measures. Furthermore, the Group will continue applying in-house rules regarding investment and withdrawal.
(8) Risks related to business infrastructure
If an event that makes it difficult for the UNITED ARROWS Group to continue business operations occurs in the logistics network and information systems that support the Group’s business activities, or in the operation of an e-commerce site, its business performance is highly likely to be affected. For example, product supply may be disrupted.
To address these risks, the Group will promote the development of the BCP, including redundant configuration of information systems and e-commerce sites in a cloud environment, will distribute risks to several sites, and will continue to enhance business operations and communication with contractors.
(9) Risks related to intellectual property
The UNITED ARROWS Group owns numerous intellectual property rights and endeavors to protect them. However, an illegal infringement of rights related to the Group by a third party, etc., may impede the Group’s business activities, lowering its brand image. In such a case, the Group’s business performance is highly likely to be affected.
To address these risks, the Group will promptly respond to infringements on the Group’s intellectual property. For example, investigations are performed regularly with the support of outside companies, and the Intellectual Property Management Department issues warnings to infringers in cooperation with legal experts.
(10) Other risks
The UNITED ARROWS Group faces the risk that the safety and health of customers who visit stores, as well as employees and their families, may be harmed as a result of the spread of COVID-19. In the event that a cluster of COVID-19 infections occurs at one or more stores as a result of insufficient measures to prevent the spread of the disease or other factors, the UNITED ARROWS Group may be forced to temporarily close stores, and may also suffer a decline in its brand image.
The UNITED ARROWS Group places the utmost priority on the health and safety of its customers, employees, and all other related stakeholders. For this reason, the UNITED ARROWS Group is taking all necessary measures to prevent infection at its stores, offices, and other locations, and requests that customers visiting stores cooperate with such measures.
In addition to the above, operating results in the UNITED ARROWS Group’s overseas business is highly likely to be affected by local economic fluctuations, political turmoil, social unrest, changes to laws, regulations, etc., natural disasters, or infectious diseases, etc.
In response to these risks, the UNITED ARROWS Group has developed systems for appropriately managing risks based on coordination between divisions promoting overseas businesses and divisions administering affiliates.
At present, due to Russia’s military invasion of Ukraine and the resulting economic sanctions against Russia, political instability continues worldwide. However, the Group considers that the impact of the situation is limited.