Risk Factors

This section lists major risks related to the business activities of the Benesse Group that could potentially have a significant influence on investor decisions, and that management recognizes as having the potential to seriously impact the Groupā€™s balance sheet, operating results, and cash flow. The Group has designated people in charge of its administrative divisions, and based on assessment of potential risks from an expert viewpoint and recognition of the possibility that these risks might materialize, it considers and implements specific measures to avoid the occurrence of such risks and minimize the impact on the Group's business performance and financial position in the event that they do occur.

Forward-looking statements in this section are based on judgments current as of June 26, 2023, the date of submission of the annual securities report (yukashoken hokokusho).

1. Information Security

The Groupā€™s Education Business in Japan operates enrollment-based correspondence courses such as Shinkenzemi for students ranging from elementary school to high school, the Prep School and Classroom Business for cram schools, prep schools, and classrooms, School & Teacher Support Business such as Shinken Simulated Exams, University and Working Adult Business such as study abroad support and online education for working adults. The Kids & Family Business operates Kodomo Challenge, a correspondence course mainly for preschoolers in countries and regions such as Japan, China, and Taiwan as well as the magazine publishing and mail order business.

In the Nursing Care and Childcare Business, the main operations are nursing home resident care services, home help services, and kindergarten and after-school child care services.

In the course of providing and marketing these products and services, the Group holds personal information about existing and potential customers such as their names, gender, birthdate, addresses, and telephone numbers, as well as various other information necessary for business purposes, in order to provide products and services that meet customersā€™ needs. Moreover, in the process of expanding these businesses, the Group holds trade secrets regarding development and marketing of products and services.

The Group is committed to constructing an information security environment that takes into account confidentiality, integrity, and availability when managing and utilizing this information. Necessary measures are being taken to prevent information leaks and service interruptions due to external cyber attacks such as targeted emails, ransomware, and unauthorized access, as well as inappropriate use and information leaks by insiders; to fully comply with rules concerning the selection and operation of services when using public cloud services; to establish a security environment for increased teleworking; and to enhance verification and monitoring.

Also, following the leak of customersā€™ personal information which occurred in 2014, we have implemented thorough measures to prevent a recurrence, and continue working to reinforce these measures.

However, as digital technology spreads and develops and attacks on information security become more advanced and sophisticated, if measures taken by the Group are insufficient to prevent external cyber attacks, or if new leaks and service interruptions occur as a result of willful misconduct or negligence on the part of employees or subcontractors, the Groupā€™s credibility and brand value could be damaged, and its business performance and financial position could be affected.

2. Information systems and network problems

The Group manages personal information about existing and potential customers as well as various other information necessary for business purposes on its information systems. It also provides education services using the internet, as well as ICT education services for schools and cloud-based learning support and school business support services.

In managing these information systems and networks, the Group develops and upgrades the infrastructure necessary to provide its products and services and implements necessary measures to reduce development risks. These include continuous efforts to strengthen its supervisory framework and ensure that operations are thoroughly based on regulations, emphasis on ensuring the stable operation of information systems and networks, appropriate server maintenance and information backup, improvement of system development capabilities in accordance with the digital transformation of business, and enhanced pre-screening and monitoring for the new development of important projects.

However, in the event of failure of the public cloud used by the Group to manage information and provide goods and services, hardware or software defects or accidents, or large-scale network failure due to disasters or accidents, not only would the continuous and stable supply of products and services be compromised, but the suspension of the business base including orders and receivables management could impact the Groupā€™s business performance and operations.

3. Human resources

In order to continue to develop and operate products and services that meet the needs and circumstances of individual customers, people with a high level of expertise in technologies such as AI and IoT who can support the implementation of business plans are indispensable. Considering the DX human resource needs of each business, we are making efforts to attract and train people by identifying the necessary skills for each area of planning, development, and manufacturing, by bolstering recruitment, and by introducing development programs for each job category.

In addition, we believe that attracting and retaining adequate nursing care and childcare staff is a key issue for realizing continuous growth and providing stable service in the Nursing Care and Childcare Business. In the nursing care business in particular, the Group is working hard to attract personnel by creating an environment where capable people can play an active role in the Group through measures to enhance the professionalism of nursing care staff, and by improving how the staff is treated in a way that reflects their evaluation according to job function, experience, and skills.

However, inability to adequately attract capable people due to intensifying hiring competition and changes in labor market conditions, lack of success in training in-house personnel, or obstacles to continued employments could affect the Groupā€™s business performance and financial position.

4. Natural disasters

The Group has formulated a Group-wide business continuity plan in preparation for major disasters such as earthquakes, storms and flood damage. Based on this plan, the Company and each Group company are working to build systems which can ensure the safety of their customers and employees and the continuity of their operations by introducing safety confirmation systems, conducting various training, ensuring equipment support measures at their facilities, storing disaster stockpiles, and formulating business continuity plans for major businesses.

However, the headquarter functions of the Groupā€™s main operating companies are concentrated in Tokyo, most residential nursing care facilities are located in the Tokyo Metropolitan area, and the main production and logistics functions of the correspondence education and simulated exam businesses are concentrated in Okayama. In view of these facts, in the event of a major disaster such as an earthquake with an epicenter in Tokyo or a Nankai Trough earthquake, any resulting damage to the Groupā€™s facilities in the affected areas, power outages, disruption of social infrastructure such as transportation, communication, and logistics, and damage to suppliers could affect the Groupā€™s business performance and financial situation.

5. Pandemics

The Group provides services at locations for its Prep School and Classroom Business and study abroad support business in the Education Business in Japan, China business in the Kids & Family Business, Nursing Care and Childcare Business, and the Naoshima business. Although the COVID-19 has been recategorized as a Class 5 disease, in preparation for another pandemic which could be caused by virus mutations and new influenza strains, we are developing measures based on our experience in dealing with COVID-19, to prevent the spread of infection and to continue operating in the event of an outbreak. For example, we are revising and implementing guidelines and manuals to prevent the spread of infectious diseases in the Nursing Care and Childcare Business, and improving the environment for providing online lessons in the Prep School and Classroom Business. At our business offices, we are continuing a hybrid work model combining working from home and at the office. In addition, we are considering formulating a pandemic business continuity plan based on the business continuity for natural disasters.

However, if a new pandemic were to emerge that exceeds current assumptions, it could have a serious effect on the Groupā€™s business performance and financial position due to a decline in sales as a result of a voluntary reduction of on-site services and rising costs for pandemic preparedness.

6. Procurement and production

Efforts are being made to lower procurement, production, and logistics costs for the production and distribution of educational materials and direct mail in the Groupā€™s correspondence course business by digitizing educational materials and developing marketing methods other than direct mail. We are also communicating with our existing suppliers to thoroughly inform them of the impact these efforts will have on them. Among the educational materials used in the correspondence course business, teaching tools and toys are procured mainly from China. Given the rising procurement costs due to soaring labor and raw material costs and the possibility of delays in receipt of products due to country risk, we are working to identify new suppliers.

However, if there is a sharp increase in the cost of paper and other raw materials or an increase in procurement costs due to logistics costs and exchange rate fluctuations on a scale that exceeds our current expectations before these measures succeed, or in the event that country risk materializes, the Groupā€™s business performance and financial position could be affected.

7. Overseas business

The Group is expanding our business in East Asia, Southeast Asia, and southern Asia. The Group operate its Kodomo Challenge business in China and other countries and regions, and as of April 2023 enrollment is 790,000 in China and 90,000 in Taiwan.

Overseas business could be affected by differences and changes in the laws and regulations of each country and region, foreign capital regulations and tax systems, deteriorating political and economic conditions, differences in business practices and culture, labor problems, changes in the social environment such as deterioration of relations with Japan, and by war and terrorist incidents. Because of that possibility, the Group collects information on legal system revisions and administrative trends, etc., mainly in China and other East Asian countries, and is also working on preparations to respond quickly if risks materialize.

In addition, we are working to collect information through continuous monitoring and other means on overseas business partners we heavily rely on, in order to minimize the impact on the Group if and when their business conditions deteriorate.

However, if a situation occurs in these countries that is beyond expectations, overseas business development and business continuity could be obstructed, or the Group could be forced to bear a greater burden in responding to these events, which could affect the Group's business performance and financial position. In addition, if an overseas business partnerā€™s business condition deteriorates on a scale that exceeds our expectations, it could have a negative effect on the business.

8. Product safety and location safety

The Group provides a wide variety of products and services in its Education Business in Japan and Kids & Family Businesses, including teaching tools and toys for correspondence courses, cram schools and classrooms, events such as concerts, and a mail order business. Moreover, in its Nursing Care and Childcare Business, the Group provides services for the elderly, infants, and elementary school students. We are working hard to build and improve the management structure required to ensure the safety of our products and our locations so that our customers in these businesses can use our products and services with peace of mind.

With respect to product safety, we formulate our own safety standards based on international product safety standards, and along with evaluating and managing the safety of products from the design stage, we work to develop safer products which reflect customer feedback. In addition, in the Prep School and Classroom Business and the Nursing Care and Childcare Business, we strive to provide safe and secure spaces by establishing accident prevention guidelines and various manuals for on-site operations and conducting accident response training.

However, in the course of providing products and services, if there is an accident that harms the life, body, or property of a customer due to a defect in a product or service, it could undermine the Group's credibility and even affect the continuation of the business itself.

9. Impact of earnings deterioration at subsidiaries

The Group intends to aggressively invest in areas it has positioned as growth fields. Therefore, it is possible that intangible assets including goodwill on the consolidated financial statements and shares of affiliated companies on the Company's financial statements will increase in the future.

However, in the event of a dramatic decline in the profitability of the Company or the Group, it may be necessary to reduce the book value of the land, buildings, goodwill and other assets held by the Group to the recoverable value and to record the difference as impairment losses on the consolidated financial statements. In addition, it may also be necessary to reduce the book value of the shares of affiliated companies held by the Company to their fair value or market value and to record the difference as a loss on valuation of shares of affiliated companies on the financial statements. This could have an impact on the business performance and financial position of the Company and the Group.

Although no impairment loss was recorded during the current fiscal year for goodwill (Ā„2,150 million at the end of the current fiscal year) associated with the acquisition of Heart Medical Care Co., Ltd. as a consolidated subsidiary, signs of impairment have been identified. For the related assumptions used in accounting estimates, please refer to ā€œPart I, Chapter 5, Status of Accounting, 1. Consolidated Financial Statements, etc., (1) Notes to Consolidated Financial Statements (Significant Accounting Estimates)ā€ in the Annual Securities Report for the 69th term (in Japanese only).

For the assumptions used in accounting estimates related to the valuation of Company-held shares of Hearth Medical Care Co., Ltd. (Ā„4,294 million at the end of the current fiscal year), please refer to "Part I, Chapter 5, Status of Accounting, 2. Non-Consolidated Financial Statements, etc., (1) Notes to Non-Consolidated Financial Statements (Significant Accounting Estimates)ā€ in the Annual Securities Report for the 69th term (in Japanese only).

Last updated : 2023/06/26