Risks in Ready-to-Drink Green Tea in Overseas Market

Green Tea in overseas market has shown rapid growth, while competition is becoming increasingly intense. In addition, several local laws and regulations as well as consumer behavior in overseas may become a matter of restriction to the business. The Company, therefore, gives priority to thoroughly understanding business regulations and establishing relationship with experienced partners in each country. At the same time, we directly penetrate each market and conduct on ground activities to connect with the local consumers and focus on strengthening the brand image as to create demand. While maintaining and establishing favorable relationship with our agents is also vital to give us a strong foundation once there is a business opportunity to enter and invest in a specific country.

Risks in New Product Development

Although it is a common practice that all new beverage products must pass various processes of quality testing during production, including manufacturing, packaging designs, tasting, advertising and promotions, which cost a substantial amount of money, some new products were unable to penetrate the market due to the intense competition in beverage market. As a result, the Company has highlighted consumer’s health by intensifying the preparation of new product launching in terms of the customer demand, product quality control, as well as cost price, selling price, and the marketing activities in order to ensure that new products are able to successfully penetrate the beverage market.

Limitation in Raw Material Sourcing

Due to the Company’s commitment to produce only quality products made from premium materials, the Company has no policy to purchase raw materials from only one supplier which might cause the risks of material shortage or disadvantage in price negotiation. Therefore, the Company’s R&D and Purchasing Departments has been looking for more qualified suppliers to reduce the possible risks and maximize the Company’s ability in raw material sourcing.

Fluctuation in Raw Material Costs

Certain factors have caused the rise in production cost e.g. the rise in fuel cost, transportation, paper pulp, and petroleum packaging, which are fluctuated according to the demand and supply of the market. Thus, the Company secured medium to long term contracts with some suppliers to avoid possible difficulties. Moreover, there are bulk purchases for the whole business group to increase the negotiating power and upstream material purchasing is also considered to avoid risks.

Competition Risks

Competition in beverage business is quite intense and there have always been new high-potential entrepreneurs with aggressive marketing activities to penetrate the market. However, the Company has strengthened its competitiveness through its brand and product image by means of effective advertising, marketing, and promotional activities. The Company believes that the competition offers advantages to consumers and beverage industry as the growth of the market will help improving the Company’s performance in the business.

Tax Risks

According to the beverage excise tax on the cost and amount of sugar which were effective since September, 2017, Ready to Drink tea is considered one of the beverage products with excise tax. This affects the production cost of Ready to Drink tea, and as a result, the business operators must adjust the selling price of the products. This factor mainly contributes to the decline of Ready to Drink tea market in the past year. However, the Company has strategized possible tax risks in advance by setting distribution plan and packaging that align with the selling price as to maintain the appropriate selling price for specific distribution channels. R&D for new healthy products are also conducted according to the intention of the Company to produce healthy products that meet the market and customer demand as well as effectively manage manufacturing costs and other expenses. These strategic plans help mitigate the impacts of tax risks to some extent.

COVID-19 Risks

The COVID-19 outbreak has impacted every business and industry, especially food and drink business that is essential for human survival. During the lockdown period, there was an increase of bulk purchasing on drinks for family consumption. Nevertheless, the Company has adapted to online business by opening online channel such as e-commerce and mobile application with delivery service provided, which escalated the access to products for consumers. Consumers’ consumption and purchase behavior have also changed as they have been more attentive on health, safety and proper packaging that can preserve food and is convenient for transportation, safe, and trustworthy for consumers. The Company has also developed healthier products such as low-sugar, no-sugar green tea, and Oishi Plus Vitamin C 200% as additional options for consumers.

Demographic Structure and Changing Consumer Behavior

The world is rapidly changing. Without any doubt, it affects every life and business. The COVID-19 pandemic will become an accelerator that drives trends that once were believed would take years to rise.

Internet will become basic infrastructure accessible at any time and any place, creating more convenience in life, for example working and studying online as well as other basic things like purchasing and selling goods on a daily basis. COVID-19 will change consumption behavior to be more internet-based. Nowadays, e-commerce platforms such as e-market place or online delivery have taken an important role that is rapidly growing because the pandemic forced consumers to stay at home to avoid risks. Online purchasing behavior will become a new normal way of life. The convenience that consumers nowadays are intensely focusing on will drive entrepreneurs to shift to online market to increase business opportunities by reaching out to their potential customers who tend to stay at home more themselves by utilizing online platforms at its best capacity that can be run even without having a physical place to sell or to stock goods or products. Moreover, not only sales growth that they will achieve, but also the consumer database that allows businesses to know and understand their consumers better, create marketing plans that suit consumption behavior, and use big data more effectively. Consumers will be more and more familiar with the using of big data by businesses to analyze their behavior and will start to look for reliable ones, so entrepreneurs will need to adjust their marketing plans to gain trust for their businesses and also make it more outstanding than their competitors.

COVID-19 has also sped up the emergence of cashless society as consumers were afraid of getting infected from touching money. People are changing to use online transaction such as mobile banking, e-payment or credit card, etc. Furthermore, the pandemic accelerated the coming of Internet of Things and new virtual experiences.

People are paying more attention to health and sanitation. The post-COVID trends will become a new normalized social responsibility standard as well as medical and public health system which are more accessible for everyone. Many businesses will have to adjust their strategies to show consumers that they understand and are well-prepared to be trustworthy in terms of cleanliness and sanitation.

Location for Outlet Expansion and Current Location Retention

Before the coming of the COVID-19 pandemic, location is one of the crucial factors that can potentially indicate the success of each restaurant. However, since the pandemic situation has been getting worse, the infection prevention measures were put in place, forcing cities to go under lock-down. Restaurants, especially ones in malls, were severely affected. The Company had to work on every aspect to get to the customers, such as food trucks, Grab & Go, or kiosks. Surprisingly, gas stations at many locations are becoming interesting opportunities for food trucks to explore. Moreover, the company is planning to find new locations outside of malls, which require less space, while maintaining some locations near office areas and communities where the purchasing power of people in the areas is still high. The Company can still maintain good relationships with its renters, such as malls or community complexes, and could even get discounts on rents during the situation. Additionally, we adapted our restaurants to the situation by reducing the space used or changing the restaurants that people usually dine in to sell our a la carte or ready-to-eat products to make the most out of what we have.

Raw Materials and Products Obsolescence

Good quality and freshness of raw materials and products are the key success factors for restaurant business. Over 50% of raw materials and products such as meat, seafood, vegetables, fruits and bread are perishable. For this reason, effective raw material management greatly affects production cost. In order to avoid such risk, the Company has adopted policies to only purchase from suppliers who have production methods that get certified by international standards to ensure freshness and trackable sources. Also, the inventory system management has always been kept track of and has a clear method to properly manage the inventory to control the number of products to appropriately meet the demand. Each type of raw materials is stored in suitable condition and temperature to meet the standard that has been set by the Quality Assurance department. In addition, the First-In-First-Out (FIFO) inventory control scheme is also being used.

Limitation in Raw Material Sourcing

Due to the Company’s commitment to produce only quality products made from premium materials. The Company always keeps in mind that our main raw materials must be in the best quality without neglecting any risk about material shortage. We support competitiveness between our suppliers to encourage them to improve their product quality, therefore we purchase raw materials from suppliers in accordance with our risk categories on product qualities and conditions as well as seeking new potential suppliers to ensure that the Company will not face the problem of raw material shortage and avoid a lack of bargaining power in terms of product pricing and quality.

Fluctuation in Raw Material Costs and Production Costs

Some materials are highly popular among the consumers. Unexpected situations such as epidemics in plants and animals cause material shortage and price fluctuation. However, the Company has entered into medium to long contracts with some suppliers of the highly demanded materials to avoid such difficulties from the fluctuations.

Competition Risks

Many new Japanese restaurants operators emerge constantly due to the increasing popularity of Japanese food in Thailand. Certain competitors open their stores with the same menu and at nearby locations. However, the Company has policies to compete in terms of product quality, advertising, and promotional activities without cutting the price. This is to say, the Company takes food quality as well as consumer healthiness into consideration and believes that business competition offers advantages to food industry as the growth of the market will help improving the Company’s performance in the business.

Economic Risks

Economic risks may affect consumption level and consumer confidence. Business operations may face with the rise of raw material costs, labor costs, and other expenses due to the fluctuation and uncertainty of the economic status. This results in the rise of household expenses and the reduction of consumer’s consumption. These factors have an influence on the overall benefits of food business. Despite the effect from the abovementioned risks, the Company continues to monitor the situations carefully and set appropriate strategic and marketing plans which, therefore, cause no significant impact to the Company’s business.

COVID-19 Risks

“Eat hot food, use your personal spoon, wash your hands, wear a mask, and socially distance yourself from others” is a sentence that has been spreading throughout the society during the COVID-19 period. People are choosing to stay at home more to reduce the infection rate of the pandemic, and that severely affects many businesses. Restaurants had faced a new hard challenge and have to adjust themselves to the “new normal” in the era of COVID-19. The number of foreigner and Thai tourists have sharply declined due to the prohibition on traveling across certain provinces was placed, and the economic slowdown resulted from temporary shutdown of many business sectors. This continued to result in a decrease in consumer confidence over employment opportunity and purchasing power, causing business sectors and consumers to be more cautious about their spending. Restaurant business must deal with a huge difficulty even though the intense pandemic period has passed, because the situation is still not likely to end soon and it is possible that new infection waves can happen as well as the infection prevention and monitoring measures such as travelling prohibition in some areas that were put in place during recent pandemic period.

Consumers are more careful and aware of their spending than ever which results in the decrease of customers at the restaurant as well as the amount of money spent on each service each time. This decreases the earnings of business while entrepreneurs have to pay more on their business adjustment to make it suit the changed situation, such as new business plans, adaptation to new prevention measures from the government, especially in the most seriously controlled and monitored areas, or cleaning tools or equipment. This will be likely to happen to almost all kinds of restaurant business. However, businesses will be damaged unequally depending on the kind of services offered. Restaurants located in a shopping mall or touristic destinations with only dine-in feature are more vulnerable to the challenges. These restaurants will continuously face the decrease of income as a result of a smaller number of customers as they tend to avoid outside activities. Moreover, there will be loss from opportunity cost and raw material price fluctuation as well.

This will be likely to happen to almost all kinds of restaurant business. However, businesses will be damaged unequally depending on the kind of services offered. Restaurants located in a shopping mall or touristic destinations with only dine-in feature are more vulnerable to challenges. These restaurants will continuously face the decrease of income as a result of a smaller number of customers as they tend to avoid outside activities. Moreover, there will be loss from opportunity cost and raw material price fluctuation as well.

Behavioral change of Consumers in order to stay away from being infected a huge negative impact on business as it will create a chain reaction to wellbeing job insecurity of employees as well. The main behavior changes that will disrupt business are: avoiding public places, staying more at home, spending more on food delivery, dining at a less crowded restaurant, and consuming more instant food at home.

Fluctuation in Raw Material Costs and Production Costs

At present, the market shares of Ready to Cook and Ready to Eat products are considered not quite high compared to the size of the overall market. Therefore, the production management in the manufacturing plants of OISHI group is not utilized to its highest capacity which results in a lack of overall efficiency, making the production cost higher than it should have been. However, the Company set up guidelines for all the relevant units to cooperate towards the same goal in managing and improving the production capacity, sales, and budget control effectively. Additionally, the Company also considered medium-term and long-term contracts with its main raw material suppliers to prevent impacts from the price fluctuations. Furthermore, the Company also expands the distribution channels that cover more locations to generate more sales volume which may result in the reduction of production cost and other expenses as well as encourage new competitiveness in the market.

Competition Risks

The competition in Ready to Cook and Ready to Eat business is highly competitive. The distributors from our distribution channels started to produce the products under their own brands. For the business owners, not only they have to conduct product research and development, but they must also have the bargaining power in trade negotiation. As Oishi Group is a leading company in Japanese food, Ready to Cook as well as Ready to Eat products, it is compulsory for the Company to create strengths and stands out in the market by prioritizing the development and maintaining quality of the products as well as promoting our brand’s popularity and creditability.

Risks in New Product Development

As the convenience stores are still the main distribution channels for our Ready to Cook and Ready to Eat products, the need for constant product development is required such as microwavable products to support the fast-paced modern lifestyle. With the happening of the pandemic, some consumption behavior has unavoidably shifted more towards to the Ready to Cook products. Despite such awareness, the consumer consumption behavior is very dynamic. Therefore, our product development team focuses on the innovation and development of the products in order to respond to the market demands and satisfy the dynamic consumption behavior.

Limitation of Distribution Channels

At present, as the Company’s distribution channels mainly rely on the convenience stores, negotiation power and benefits are consequently limited. The Company has attempted to reduce such limitations by expanding the distribution base and increasing sales volume in other channels such as modern trade stores: supermarket, department store, and hypermarket as well as other potential distribution channels such as food service and exporting. Online market has also become another highly potential channel that has grown significantly during the pandemic situation. The online platforms of the modern trade channels as well as newly developed online platforms have accelerated the Company to adapt to the new channels to ensure market expansion and avoid the risk of losing opportunities to sell.

Logistics Risks

As the Company’s products are mainly in either chilled or frozen products, the storage after production and logistics management to maintain the quality and taste of the products are profoundly significant. As our business growth has continuously increased, we emphasize on logistics infrastructure e.g. the expansion of cold storage to properly preserve the products for domestic and international distribution, discover alternative suppliers in case that the main suppliers are not able to provide raw materials, and remodify purchasing plans to adjust to the situation. The cold chain logistics system should always be carefully prepared and monitored in collaboration with the service providers and its efficiency should support the Company’s business growth as well as prevent and reduce any unforeseen risks.

COVID-19 Risks

People are placing much more importance on cleanliness and sanitation ever since the COVID-19 appeared. They purchase more carefully from reliable producers. Oishi packaged food is produced from the certified factories that meet international standards with safe packaging that has been strictly tested.

Information technology is an important tool for business operations as it helps elevate the efficiency of production process, customer service, communication, data collection, and data assessment and analysis. Therefore, such difficulties and the risks of cyber security are considered important as they may affect the continuity in system and computer usage as well as the stability, information security and the risks of computer-related crime. The occurrence of such risks requires the monitoring process, which may cause business interruption.

To avoid such risks, the Company has prepared action plans, systems, and preventive measures for risk mitigation and management.

1. Provide the security protection of information and legal punishment as well as continuously raise the employees’ awareness and responsibility regarding the use of technology via e-mail, functional training programs and activities to ensure that they thoroughly understand the use of technology, and are secured from cyber threats or illegal cyber actions.

2. Provide a security system for the network and computers as well as the devices that may trigger the risks of external cyber threats.

   • Set up a Firewall as the basic preventive measures and only authorized users shall be allowed to access the Company’s information technology systems.

   • Install computer anti-virus program on every computer and connect all network to the central system for the purposes of remote access and trouble shooting. The causes of cyber threats shall be determined in order to solve and avoid repeat problems.

3. Set up different access levels to define the information confidential level. Effectively manage the data access to prevent confidential data access and data espionage, as well as set up the information access system in order to effectively review and monitor the data access.

4. Establish data center and back up important data to support the Company’s business operations in case of system failure or problem as well as to ensure the information recovery and the continuity of business operations.

5. Collect internet access data according to Computer-related Crime Act and monitor visited websites that might be considered illegal or trigger the risks of data espionage.

6. Install all computers with the programs that monitor any illegal software in order to avoid copyright or intellectual property right infringement. In addition, the Company’s server must have a license and it has to be renewed yearly.

7. Increasing the system of recording and tracking the solutions of computers and equipment for the responsible unit can communicate with users and resolve various problem effectively.

Furthermore, the Company has put in place procedures and measure to support Personal Data Protection Act B.E. 2562 (PDPA). It includes measures on collection, utilization, disclosure, and transferring of personal data requesting consent and go according to the Act,

At present, the organization’s reputation and image are factors that greatly affect the customer buying decision process, especially for food and beverage business. OISHI group has always been aware of its brand reputation and image and, thus, operates its business with good corporate governance, transparency, and reliability. The Company also pays attention to all stakeholders including community, society, and the nation. However, the Company, sometimes, encounters inevitable external factors which pose a threat to its reputation. As social media has become a popular communication channel for people to exchange their thoughts and comments on products and services, these online channels allow negative comments to spread quickly in a matter of minutes and may easily affect the organization’s reputation and image. Therefore, the Company has set policies and risk management plans as described below:

1. Manage the Crisis Management Team to cope with any possible events that might affect the organization’s reputation and image as well as appropriately and immediately manage and prevent any difficulties that might occur.

2. Provide an effective communication system with modern technology to assess the customers’ action, satisfaction, expectation as well as provide them with immediate information and responses to provide precise and immediate understanding.

3. Provide news and information as well as organize activities and events that are beneficial to the society and the country continuously to ensure corporate accountability and trustworthiness as well as build the best brand image.

The Company has initiated “PASSION 2025” strategic roadmap to become one of the leading foods and beverage business operators in ASEAN. Although the strategic roadmap has been carefully reviewed, there could still be internal and external factors which may affect the execution of the strategy and cause the Company’s operating performance to fail to reach the planned targets.

However, the Company’s Board has considered and approved the Annual Action plans which are in accordance with the Company’s long-term strategic plans. In addition, the Company has carefully monitored and assessed the results in every stage to ensure that the operations are according to the strategic plans. The strategies and operational plans are constantly being reviewed and updated in accordance with the changing situations.

The Company has estimated distribution proportion to companies within Thai Beverage Public Company Limited group of companies (“ThaiBev Group”) of approximately 90% of total sales revenue in beverage business which is considered one of the most efficient distribution channels with the most area coverage. However, Thai Beverage Public Company Limited (“ThaiBev”) is the major shareholder of the Company with 79.66% of total shares. Thus, distribution of beverage product segment is dependent on channels of the major shareholder’s group which may possess some risks and affect the Company’s operation in case there are changes in shareholding structure by the major shareholder or refusal in the Company’s product distribution.

However, The Company always has good business cooperation with the major shareholder’s group and the Company’s operation is in alignment with the international standard. Moreover, the product distribution of the Company through the companies within ThaiBev Group is considered very efficient in terms of resource management and utilization for the best interests for the Company and all shareholders. In addition, the Company has entered into medium-term distribution agreements with the major shareholder. Should there be any restructures within the shareholder’s group, they will be obliged to be our distributors according to the terms of agreements. The Company, therefore, will have time to prepare and assign new distributors without interrupting the business operation.

Risks from the Control of Major Shareholder

As of September 30, 2021, Thai Beverage Public Company Limited or ThaiBev is the major shareholder of the Company with 79.66% of shareholding in the paid-up capital. ThaiBev, therefore, is able to control the resolutions of the Shareholder’s Meeting including the Director’s appointment, approval on other matters that require a majority vote from the Shareholder’s Meeting and agendas which by laws or by the Articles of Association of the Company, require 3 out of 4 votes of the Shareholder’s Meeting. Hence, other shareholders might not be able to collect enough votes to counter the agendas raised by the major shareholder.

However, in order to achieve business transparency and good corporate governance, the Company has set an organizational structure consisting of potential and knowledgeable employees and provided them with clear roles and responsibilities. The Company has also appointed the Audit Committees consisting of 3 independent directors, which have no interests in the Company in order to monitor and review the Company’ operations and protect the interests of minority shareholders resulting in appropriate check and balance and verifiable system.

Risks from Low Free Float of the Company’ Securities, which may result in Transaction Liquidity in the Stock Exchange of Thailand (SET)

As of September 30, 2021, the Company has free float of 20.34% which results in relatively low liquidity transaction of the securities listed in the Stock Exchange of Thailand (SET). Shareholder may have some risks of not being able to sell the Company’s shares immediately at desired price.

Nevertheless, the Company will continue to monitor and maintain appropriate free float level for shareholders on an on-going basis.