Risk Factors

The following items are major risks related to the business activities of the Benesse Group that could potentially have a significant effect on the judgment of investors. Recognizing the possibility that these risks may materialize, the Benesse Group considers and implements concrete measures with the aim of avoiding such risks and minimizing the impact on the Group's results and financial position in the event that they should occur. The following discussion of risk factors contains forward-looking statements, and reflects management's judgment as of June 24, 2019, the submission date of the Group's securities report (yukashoken hokokusho).

1. Trouble Arising from Information Security and Information Systems

The Group manages a variety of information on its information systems required for providing products and services and for sales activities. This includes personal information of existing and potential customers, such as their names, genders, birthdates, addresses, telephone numbers, and so forth, in addition to other information required for business activities.

Moreover, the Group provides educational services utilizing original tablet PCs and other digital devices, as well as language lessons and other services using the Internet.

The Group takes information system security measures in managing this information to completely prevent leaks caused by unauthorized external access such as cyber attack to the system or leaks by internal personnel. The Group also takes the necessary measures to ensure stable operation of its information systems, such as backing up information and appropriate server maintenance.

In response to the leak of customers' personal information that came to light in 2014, the Group carried out rigorous fact-finding surveys to identify the cause and made every effort to control the spread of damage, while implementing countermeasures to prevent leaks, which it has continued to improve.

Nevertheless, if another leak of customers' personal information should occur, such an incident would impair the Group's trustworthiness and brand value. This could also affect the Group's results and financial position.

2. Impact on the Domestic Education (Japan) Business

In the Group's mainstay domestic education business, the Group conducts member-based correspondence course businesses, which had an enrollment of 2.62 million members as of April 2019, such as Shinkenzemi and Kodomo Challenge for students aged from preschool to senior high school. The Group also operates the school and teacher support business and the cram and prep school business, and English language class business.

The largest post-war reform of Japan's education system, from elementary and secondary education to post-secondary education, is underway. It encompasses new kindergarten education guidelines and daycare centre guidelines, transitional measures for new teaching guidelines starting from elementary school in the year 2020, and a trial run of new university entrance exams.

The Benesse Group aims to expand its operations in each of its three main educational business spheres – the school and teacher support business, the correspondence courses business, and the cram schools/prep schools and English language class business – by responding to changes in customers’ thinking and needs and continuously collecting information on reform of the education system, reform which it sees as a business opportunity. At the same time, it targets growth in the overall domestic education company by promoting the development of products and services that cross the boundaries of these individual spheres by responding to needs for four-skill English language education at all educational institutions from elementary schools through to high schools.

However, following the education system reform, if the environment were to change rapidly and at a scale exceeding the Group's measures in the domestic education business, or if the market entry of companies in other industries were to result in price destruction and a significant change in the competition environment, this could affect the Group's results and financial position.

3. Nursing Care Insurance

The Group's Nursing Care business mainly involves operation of specified facilities. Competition for housing for the elderly is intensifying as a result of entry into the market by major competitors and other industries, soaring construction costs, and a shortage of sites. Furthermore, the shortage of caregivers is becoming more serious. Japan's social security budget is strained, and difficult financial conditions are expected to persist for nursing care insurance. The group has created a business model with a low degree of reliance on nursing care insurance revenue compared with other companies in the same industry. Moreover, we are launching and expanding peripheral businesses such as staffing and recruitment, nursing care consultation, and food delivery services for seniors to develop businesses which are less susceptible to the impact of system changes.

However, if future revisions to related laws and the medical fee payment system, including the next round of revisions scheduled for FY2021, develop in a negative direction for the Group’s businesses, there is a possibility that our earnings and financial situation may be impacted.

4. Damage from Natural Disasters

In preparation for large-scale natural disasters including earthquakes and typhoons, the Group has prepared measures to ensure the continuity of its businesses, including drawing up business continuity plans for each Group unit, creating information gathering structures to assess the state of damages, and strengthening logistical sites and information systems in its domestic education company.

However, in view of the fact that its main business company functions are concentrated in Tokyo and the major publishing and logistical functions for its domestic education company are centered on Okayama, there is a possibility that the group’s earnings and financial situation may be impacted by suspension of operating activities in affected areas, damage to group facilities, dislocations in social infrastructure such as transportation, communication, and logistics, and damage to suppliers in the event of a large-scale catastrophe such as a Tokyo near-field earthquake or Nankai megathrust earthquake.

5. Production and Distribution

The Benesse Group relies on postal services and the distribution services of other external parties for the production and delivery of its Shinkenzemi and Kodomo Challenge educational materials and direct mailings. The Group is currently promoting further digitalization of its educational materials and is developing marketing approaches beyond direct mail. Nevertheless, the Group's results and financial position may be affected by an increase in production and distribution costs.

6. Overseas Procurement and Business

The Benesse Group oversees manufacturing of and procures educational tools and toys mainly in China. Elsewhere, subsidiary Berlitz Corporation operates over 460 schools in more than 70 countries and regions worldwide. The Benesse Group also operates a business primarily providing preschool education services in China and other East Asian countries. As of April 2019, the business in China had 1,180 thousand members, the business in Taiwan had 90 thousand members. In an attempt to mitigate risk, the Benesse Group actively collects data concerning legal and regulatory revisions and policy trends, particularly in East Asian countries, and ascertains the status of civil conflicts in which it could inadvertently become involved. Similarly, the Group hedges against volatility in foreign currency exchange rates, and seeks to identify new procurement sources. Nevertheless, natural disasters, cultural and religious tension, political or economic instability, or the new establishment or amendment of laws or regulations in any of these countries and regions could have an adverse impact on the Benesse Group's results and financial position.

7. Accounting for Asset Impairment

In the event of a dramatic decline in the profitability of the Company or its individual Group companies, it is likely that impairment losses will need to be posted with respect to land, buildings, goodwill, or other assets held. The posting of such losses could affect the Group's results and financial position.

Last updated : 2019/07/26