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Risk Management

JFR Risk Management Philosophy

The Group defines risk as “uncertainty, which affects the organization’s profit or loss in a changing environment.” Risk has both a positive side (opportunity) and a negative side (threat) and we think a company will grow in a sustainable way if risks are addressed properly.

Risk Management Structure Centered on the Risk Management Committee

For risk management, we have formed the Risk Management Committee as an advisory body to the President and Representative Officer, which is chaired by the President and Representative Officer and comprises Executive Officers and others.
The committee has a secretariat headed by an officer in charge of risk management.
The secretariat shares the policies and important matters decided by the Risk Management Committee with operating companies to promote risk management across the Group.
By positioning risk as the starting point of strategy and linking risk with strategy, we promote risk management as one of initiatives to enhance corporate value.

Latest Environment Recognition

Geopolitical tensions including US-China struggle for supremacy and natural disasters that cause serious damage remain great risks.
In addition, consumption hurt by consumption tax hike and COVID-19 that spread rapidly all over the world as a “black swan (an unpredictable event that has potentially severe consequences)” have brought the Group to a serious crisis that endangers its survival.

Impact of Outbreak of COVID-19 and the Group’s Response

The impact of COVID-19 was far greater than initially envisioned. Physical stores of the Group’s core retail business were forced to close for a long time and the connection with many customers was severed during that period. COVID-19 is not yet expected to end and we feel a great sense of crisis.
In such an environment, the Group resumed sales activities by ensuring the safety and security of customers and sales staff including people from suppliers and strengthening cooperation with suppliers to coexist with COVID-19.

Medium- to Long-term Impact of COVID-19

We expect that COVID-19 will become a major turning point in all aspects. People’s values about consumption and consumption behavior will change, and accordingly, the values expected of retailers will also change.
Work styles and employment are also expected to change in the future partly due to widespread telework. For business transactions, companies will be expected to rebuild a strong supply chain through departure from over-dependence on certain regions such as China and by other means.
In addition, advanced digital technologies and accelerated digital transformation in people’s lives have a great impact on all aspects including consumption, work styles and supply chains.

Response to New Normal

The Group considers this situation as new normal and works on sustainability and transformation using digital technologies without being bound by conventional common sense in order to survive.
Going forward, without changing the basis of our business that we empathize with customers and value lifelong connection with them, we will always foresee changes, accelerate the transformation of existing business model of each business, and rapidly restructure the business of the entire Group.

List of the Group key risks

Cetegory Risk item Impact on the Group Negative side of risk (threat) Positive side of risk (opportunity)

Hazard risk

Infection

Occurrence: Will increase
Change: Rapidly accelerating
Affects the survival of business

●Loss of human life●Temporary closing●Radical review of business activities and work styles●Changes in consumer values and behavior

-

Disaster

Occurrence: Has increased for a few years
Change: Rapidly accelerating
Critical impact on performance/finance that affects the survival of business

●Damage to human life●Suspension of business activities●Decline in store ability to attract customers●Occurrence of repair cost●System halt

-

Strategy risk

Advanced technologies

Occurrence: Has increased for a few years
Change: Further accelerating
Very severe impact on retail and other existing businesses

●Creative destruction of existing businesses by IT companies●Decline in competitiveness of existing businesses due to delayed use of big data

●Use of technologies in existing businesses●Use of big data●Improvement of operations

Progress of sharing economy

Occurrence: Increasing over the medium term
Change: Moderately accelerating
Very severe impact on retail business

●Expansion of areas for sharing by emerging companies●Spread of consumption behavior not based on buying

●Creation of new demands in response to changes in consumers●Participation in circular businesses

Increasing importance of ESG

Occurrence: Increasing over the medium to long term
Change: Further accelerating
Very severe impact on corporate value, reputation and financing

●Harsh look at link between ESG initiatives and increase of business profitability

●Growing consumer interest in a sustainable society●Positive impact on financing

Shift of existing businesses from maturity to decline

Occurrence: Has increased for a few years
Change: Moderately accelerating
Very severe impact on the performance of the entire Group including retail business

●Loss of customers due to obsolete business model

●Momentum of consumers emphasizing the experiences only physical stores can deliver

Changes of suppliers

Occurrence: Has increased for a few years
Change: Rapidly accelerating
Very severe impact on retail business

●Poorer assortment and lower appeal of retail stores

●Opportunity to revise the supplier policy●(new development, new collaboration with existing suppliers)

Finance risk

Financing●Changes in liquidity●Interest rate fluctuations

Occurrence: Current greatest problem
Will increase for at least one or two years
Change: Rapidly accelerating
Very severe impact on financial stability

●Worse conditions for securing funds (amount/cost/timing)

●Efficient/effective financing

Exchange●Exchange rate fluctuations

Occurrence: Will increase for at least one or two years
Change: Rapidly accelerating
Severe impact on profitability

●Decrease in foreign tourists, decline in motivation to spend●Increase in procurement cost

●Increase in foreign tourists to Japan, brisker spending on big-ticket items●Decrease in procurement cost

Share●Stock market fluctuations

Occurrence: Will increase for at least one or two years
Change: Rapidly accelerating
Severe impact on performance and financial condition

●Downturn in affluent consumer confidence●Decrease in profit●Difficult to manage pension assets

●Brisker spending on big-ticket items●Increase in profit●Better management of pension assets

Impairment●Changes in asset value

Occurrence: Will increase for at least one or two years
Change: Rapidly accelerating
Very severe impact on financial condition

●Lower evaluation from stakeholders●Weaker brand power●Decline in the value of assets held by the Group

●Alignment between profitability and asset value

Operation risk

Information management

Occurrence: Has increased for a few years
Change: Further accelerating
Severe impact on reliability and corporate image

●Loss of social credibility●Damage compensation

-

Legal restraints and revisions

Occurrence: Remains high
Change: Constant
Severe impact on stable operation and credibility of existing and new businesses

●Restrictions on business activities●Occurrence of compliance cost●Penalty for violation of law●Decline in credibility

-

Strengthening Resilience

J. Front Retailing and each operating company in the Group have formulated BCPs to deal with unexpected natural disasters and accident occurrences, which threaten business continuity. Specifically, based on the experience that we gained when our stores were damaged by the Great Hanshin-Awaji Earthquake, we have in place business continuity manuals that contain the actions to be taken, ensure multiple communication means including emergency walkie talkies, company smartphones and company intranet, secure an emergency power source, maintain an emergency stock, and maintain a safety confirmation system.
Daimaru Matsuzakaya Department Stores complies with the guidelines provided by the local and national governments and strengthens sanitization and makes efforts not to cause three Cs in stores to prevent COVID-19.

Information security measures

In recent years, cyber attacks have become more complex and sophisticated, and information security risks are increasing. To minimize such risks, we established the Group’s common security policy in July 2018 and are continually implementing security measures based on this policy.
First, in order to visualize and improve the security measures of each Group company, we conducted hearings on the security measures of the systems owned by each company, performed vulnerability assessments to confirm the safety of websites with high risk of information leaks and the systems that hold personal information, and made improvements to promptly ensure the safety of the systems and websites where problems were discovered. We also conducted continuous surveys of the status of communications related to unauthorized access to personal computers used by employees and information leaks. In addition to continuing these efforts this fiscal year, we will also take measures to strengthen security, including investigating the robustness of servers, strengthening monitoring, and reviewing internal rules for more appropriate information management.
In fiscal 2019, the departments in charge of security at the Company and its consolidated subsidiary JFR Information Center worked together to strengthen the security management system and prepared countermeasures and initial actions in case of an accident. Specifically, we launched the JFR Group CSIRT*, and officially joined the Nippon CSIRT Association in July. The documents developed by this JFR-CSIRT were shared horizontally among the Group companies, and a system for dealing with incidents was launched at each Group company. In fiscal 2020, we established the IT Governance Policy and Rules as guidelines for controlling a set of actions from developing IT strategy to implementing it.
And employee education is an important element of security. In fiscal 2019, continuing from the previous fiscal year, we conducted e-learning-based education and targeted attack email training. Also in fiscal 2020, we will continue activities to raise the level of information security for employees through education and training.

* CSIRT: Computer Security Incident Response Team

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