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INTEGRATED REPORT 2018 We love Nature ITO EN Integrated Report 2018 contents 02 Management Message TOP MESSAGE 03 Aiming for Sustainable Corporate Growth Becoming a good, global company and spreading Japanese food culture and technology Interview 07 Aiming to Become a 100-Year Company Yoshitsugu Minagawa, Chief Counselor, Norinchukin Daisuke Honjo, Research Institute Co., Ltd. President, ITO EN, LTD. The ITO EN Value Creation Story 09 Creating Value Based on“ Always Putting the Customer First” 11 Value Chain for Building a Competitive Advantage 13 Medium- to Long-Term Management Plan Towards a “Global Tea Company” 15 Product Planning and Development / Procurement / Production and Logistics / Sales and Distribution / Foundation 25 The Value Created by Tea Tasters 27 “Always Putting the Customer First” / Oi Ocha ’s History of Technological Innovation and New Market Creation 29 Establishment of the ITO EN Brand 31 Oi Ocha : 30 Years as a Well-Loved Brand / Spreading the Deliciousness and Enjoyment of Tea Second Core Business and Strengthening Revenue Base 34 Creating value with barley tea 35 Creating value with vegetable beverages / Creating value with coffee beverages 37 Developing Brands as a Comprehensive Beverage Manufacturer 39 External recognition / In-house award scheme 40 Creating value through culture Response to ESG 41 Environment 43 Corporate Governance 46 Comprehensive risk management 47 Sustainability Management Strengthening our financial foundation 49 Financial summary and financial management List of Officers/ Company Outline 51 List of Officers 53 Introduction of Main Group Companies / Company Outline 01 ITO EN INTEGRATED REPORT 2018 Management Message Definition of “our” customers ⃝ Consumers ⃝ Shareholders ⃝ Retailers ⃝ Suppliers ⃝ Financial institutions ⃝ Local communities Group’s management principle “Always Putting the Customer First” “Always Putting the Customer First” is the ITO EN Group’s management principle, representing the fact that the foundation of business management at ITO EN is our commitment to placing importance on each and every customer. We regard everyone involved with the ITO EN Group as our customer. Customers mean consumers, retailers, suppliers, shareholders, financial institutions and local communities and we earnestly strive to address our customers’ needs through the opinions and requests we receive, and by always using the perspective of our customers as the foundation of our management strategies. At the ITO EN Group, we currently have a long-term vision of aiming to become a “Global Tea Company.” To achieve this objective, we commit ourselves to further growth through the concerted efforts of all of our employees in Japan and overseas by such means as strengthening the domestic profit base, improving the collective brand capabilities of the Group, and creating synergy, as well as expanding overseas business and establishing new growth areas. Hachiro Honjo, Chairman of the Board and CEO Daisuke Honjo, President ITO EN INTEGRATED REPORT 2018 02 TOP MESSAGE President ITO EN, LTD. Aiming for Sustainable Corporate Growth Becoming a good, global company and spreading Japanese food culture and technology From Japan’s No.1 tea manufacturer Financial highlights (consolidated) to “Global Tea Company” The ITO EN Group entered the beverage business in 1980 Units Fiscal 2017 (actual) Fiscal 2018 (planned) with the development and launch of the world’s first canned (100 Net sales million 4,947 5,078 oolong tea, a sugar-free, tea-based beverage. Working based yen) on our product development concept of“natural, healthy, (100 safe, well-designed and delicious” and paying particular Gross profit million 2,339 2,396 yen) attention to our raw materials, we have introduced (100 numerous innovations and solidified our foundation as Operating income million 220 230 Japan’s No. 1 tea company; with a central focus on leaf tea, yen) matcha (powdered green tea) and tea-based drink products. (100 Ordinary income million 214 225 Moving forward, the ITO EN Group will continue working yen) together with all of its stakeholders—including consumers, shareholders, retailers, suppliers, financial institutions, local indicators Management Gross profit ratio (%) 47.3 47.2 communities and Group employees—to resolve social issues through its business operations and increase its corporate Operating income ratio (%) 4.5 4.5 value, based on its management principle of“Always Putting the Customer First.” ROE (%) 9.0 9.5 Over half a century has now passed since our initial founding. Looking ahead, we will seek to achieve long-term Total return ratio (%) 48.5 40% or higher sustainable growth, with a view to becoming a“Global Tea Company,” and aim to be a company that continues to be needed by society for the next 100 or 200 years. 03 ITO EN INTEGRATED REPORT 2018 ending April 2022: consolidated net sales of 600 billion yen or 1 REVIEW more, a return on equity (ROE) of 10% or higher, and a total return ratio of 40% or higher. Review of fiscal 2017 In terms of the social environment, competition in the beverage industry is intensifying further, owing to factors 3 INNOVATION such as Japan’s declining birth rate, population aging, and a continuing strong-rooted trend towards budget-mindedness amongst consumers. Refining our strengths and attempting Fiscal 2017 marked the first year of our new medium- to long-term management plan, and during the year we to deliver new innovations strengthened our efforts further in terms of both product In its flagship green tea business, ITO EN has built its own development and sales activities, aiming to improve unique single value chain system encompassing everything profitability with a view to achieving sustainable growth. from product planning and development to procurement, In terms of consolidated business results for the fiscal year production and logistics, sales and distribution. By working ended April 2018, ITO EN posted net sales of 494,793 million in cooperation with stakeholders to resolve social issues, we yen (up 4.0% year on year), operating income of 22,043 million create value through our business operations at each and yen (up 1.2%), and ordinary income of 21,441 million yen (down every one of these stages. 0.4%). Profit attributable to owners of parent stood at 12,553 In product planning and development, the Group is million yen (down 8.3%). responding to the global increase in health-oriented attitudes by driving the development of health-conscious products. Sugar-free products account for approximately 70% of all ITO EN drink product sales, including tea-based beverages, 2 VISION and we are making effective use of this advantage in strengthening our strategy of proposing healthy lifestyle Aligning our thoughts with a view to choices. The Group is also enhancing its R&D capabilities. In a achieving our medium- to long-term triple joint R&D effort between ITO EN, SHIMADZU CORPORATION and the University of Tsukuba venture management plan, and challenging company MCBI (Molecular and Clinical Bioinformatics) Inc., we will be conducting clinical trials on patients with mild ourselves to achieve record profits cognitive impairment (MCI)—the stage prior to the onset of Fiscal 2018 is the second year of our medium- to long-term actual dementia—in order to evaluate the effects of matcha management plan. We regard this year as a stage to aim in curbing the decline of cognitive functions. Through this for further growth and record profits, and are continuing to research project, we will aim to contribute to preventing work together as a team, with the ultimate goal of achieving dementia, which is becoming a serious social problem. our long-term vision of becoming a“ Global Tea Company”, In procurement, the Group is continuing its efforts in and with a priority focus on the following four key areas. the Tea-Producing Region Development Project, working First, the Group is seeking to further enhance its domestic together with tea farmers and public administrative operations. In addition to intensifying its sales visits to agencies to develop efficient, large-scale tea plantations existing customers and working to secure more new and support the growing of tea; a vital raw ingredient for customers, ITO EN will also seek to bolster sales of its the Group’s operations. We have also commenced various main brands, focusing primarily on Oi Ocha, with the aim of initiatives in the field of environmental conservational increasing its market share. agriculture, and are promoting efficient farm management, It will also aim to increase and diversify its core business such as in the effective utilization of tea plucking machines operations, such as by expanding the number of its brands in the harvesting of raw materials for Aojiru (Green Juice) with annual sales in excess of 10 million cases from four during the agricultural off-season for tea in certain regions. to six, and continue working to increase profit ratios by In production, the Group has made effective use of its improving profitability and increasing productivity. unique Used Tea Leaves Recycling System. In 2018, in a joint Second, the Group is bolstering the development and effort with sports equipment and sportswear manufacturer expansion of its overseas business operations. With a central MIZUNO Corporation, ITO EN developed the Field Chip focus on the North American and Chinese markets, ITO EN “Greentea” filler material for synthetic turf; the composition will seek to achieve double-digit growth by bolstering sales of which includes used tea leaves produced as a byproduct of leaf tea (tea bag) and matcha products, centering around during the manufacture of Oi Ocha. The filler has the effect the ITO EN global brand. of suppressing increases in surface temperature, and is The Group has set itself the target of securing the No. expected to be introduced at recreation grounds at sports 1 market share for green tea both in Japan and overseas, facilities, and see use in an even wider range of locations in and is seeking to expand and increase group synergies by the future.