Risk Factors

Among the matters concerning the status of the MonotaRO Group's (hereinafter “the Group”) business and accounting, the items that are considered to be important to investors’ decisions are described below. From the perspective of effective information disclosure for investors’ decisions, the matters that are not necessarily considered as a business risk factor for the Group but are considered to be important to investors’ decisions are also described below.
The Group recognizes the possibility of these risks in conducting the business activities. It should be noted that judgements on stocks issued by MonotaRO (hereinafter “the Company”) should be made based upon careful consideration of this section.
Note that the situations described below are as of March 2021 when the Annual Securities Report was submitted.

1. The Group’s Business

(1) Potential price competition
Selling products through the Internet may bring about simplifications of the distribution structures, reductions of sales and administrative costs, etc. to the sellers. There is therefore possibility that selling prices will be lowered as a result of lowered transaction costs realized by purchasing and selling through the Internet.
Also, for purchasers, as the cost of collecting price information on the Internet has been lowered due to the development of price comparison sites, price comparisons among sellers have become easier. If multiple sellers disclose price information on the Internet, price competitions are likely to be intensified.
The Group's total product lineup exceeds 18 million items, and the proportion of the product lineup exposed to the sales competitions on Internet is small. There are a few other competitors that sell products on the Internet; therefore, the comparisons on the price comparison site are not realistic. However, if the proportion of products sales on the Internet by other sellers increases, there is the possibility that some parts of the Group's product lineup may fall into price competitions. This may lead to reduction of profitability and negatively affect the Group's financial positions and operating results.
(2) Factors Hindering the Group’s Business Model
Many technological developments could potentially become threats that undermine the Group's business model. If other companies, for example, developed the new business models that had a pricing function which could flexibly change product prices while checking the balances between product prices of other sellers and supply and demand, the Group's business model would face a threat. If a competitor established a completely different pricing structure for each single customer, thereby setting the price of products which are benchmarked by the customer always below the Company's price and optimizing profits with other product, the competitiveness of the products the Group sells would relatively decrease. The Group does not set prices individually and, as a result, would fall always behind in setting competitive pricing.
The Group has will to respond to the emergence of the new business models and technological advances above mentioned. However, if such the technological developments occurred and became threat to the Group's business model, it may become possible that the Group's profitability would decline, and the financial position and operating results were negatively affected by such the developments.
(3) Competition
The Group faces many competitors in the business field of e-commerce sales. In the business field of indirect material sales for factories, on the other hand, there exist more competitors selling the products in different ways. There are not many competitors that are equipped with the both at the moment. If, however, the existing e-commerce competitors expand the range of products that are sold by the Company or if the existing indirect material sales competitors change the sales methods to e-commerce sales, the competition with those competitors is expected to intensify.
The Group will strive to differentiate itself from competitors by expanding the products lineup that meets customer needs and by optimizing the prices, while taking the first-mover advantage of businesses. If other competitors with superior business models appeared, competitions among existing businesses and new entrants would become intensified and negatively affect the Group's financial condition and operating results.
(4) Customer Acquisition
The Group's sales are changed based on the number of registered customers of the sites provided and operated by the Group and the usage rate and average purchase amount of registered customers, and growth of the Group's business partially depends on a steady increase in registered customers. The Group, while assessing the effects by marketing method, is implementing the measures on an ongoing basis to acquire new customers, to sell additionally to existing customers, and to prevent existing customers from leaving. However, changes in customer needs due to social and economic conditions, to intensifications of competition with other companies, to ineffectiveness of marketing methods the Group's implements, etc. results in lower growth of number of the Group's registered customers and lead to slow down of the sales growth or to higher marketing costs incurred. This could possibly have negative effects on the Group's financial condition and operating results.
(5) Inventory Management
The Group's balance of inventory is ¥11,445 million in the consolidated balance sheet for the fiscal year ended on December 31, 2020, and the ratio to total assets is 14.1%. The Group uses the order forecasting system to determine the appropriate inventory level. The Group regularly identifies the products that have not been ordered for a certain period of time and strives to reduce such unutilized inventory. When the Group purchases relatively large amounts, such as when the group imports products or adopts private brand products, careful considerations are given to implementation. However, despite these actions, the actual sales of products in Group's inventory deviates from the plan, and, through lowering product prices or devaluation of the inventory products, this could possibly have a negative impact on the Group's financial condition and operating results.
(6) Congestion and Dependence on Distribution Bases
A series of business functions from receipts through deliveries of products is handled mainly at the two distribution centers: the Amagasaki Distribution Center and the Kasama Distribution Center. 70% or more of distributions are handled at these two distribution centers, and there exist the risks concerning congestion of business functions. Actions to such risks are constantly developed; however, if a catastrophic event exceeds the Group’s capacity, such the event may negatively affect the Group's financial conditions and business results.
(7) Failure of System and the Internet
Over 90% of the Group's order comes through the Internet.
In conjunction with the rapid spread of the Internet in recent years, the ratio of the Group’s sales through the Internet tends to increase. There is the possibility that the service through Internet stops due to natural disasters, to accidents and to unauthorized access from outside. In addition, backbone systems and networks are subject to increased volumes of transactions, exposed to the risk of various obstacles. Close attentions are paid just in case at the Group by setting backup system and by strengthening the securities of system and network. It is, however, difficult to realize complete prevention of system and network failures, and, if the unlikely event that a failure occurs, the financial condition and operating results are negatively affected.
(8) Business Reliance on Using the Internet
The Group publishes its products in catalogs on the Group’s website and mainly uses the Internet for orders and purchase management. In addition, regarding sales promotion activities, posting advertisements through the Internet, sending e-mails as direct mails, etc. are conducted as the main approach to customers.
As mentioned above, the Group mainly uses the Internet to conduct business. If the reliability of commerce through the Internet is lost or if the convenience of commerce through the Internet is not fully accepted by customers, the Group's financial condition and operating results would be negatively affected.
(9) Fluctuation of Foreign Exchange Rate
Some of the products handled by the Group are imported from overseas, and the ratio of imported products to purchased products is 7.4% in the fiscal year ended on December 31, 2020. Currently, more than half of the payments are settled in foreign currency, such as US dollars, and fluctuations in foreign exchange rates may possibly result in profit or loss. The Group basically does not make forward exchange contracts to reduce risks, and if the yen depreciates, it will increase product procurement costs. Exchange rate fluctuations may possibly negatively affect the Group's financial condition and operating results.
(10) Customer Information Protection
The Group has a lot of customer information including payment information because the customers are required to register the necessary information in the Group’s sales sites. Also, the Group's customers include individual business owners, and customer information includes personal information. Regarding the protection of customer information, the information is managed fairly and strictly and close attention is paid; however, in the event that customer information is leaked, including the situation where Act on the Protection of Personal Information is violated, the Group’s social credibility declines, and this may possibly negatively affect the Group's business activities, financial conditions and operating results.
(11) Legal Regulation
The business of the Group is e-commerce business regulated by Act on Specified Commercial Transactions. The product information appeared in catalogs and web site that the Group handles is regulated by Act against Unjustifiable Premiums and Misleading Representations and by Unfair Competition Prevention Act. Some products the Group sells are regulated by Product Liability Law. While the main service the Group provides is to business users, sales to individual customers started in June 2006, and this business is regulated by Consumer Protection Act. In addition to the legal regulations above, some parts of the Group's business are regulated by trade-related laws and by regulations related to intellectual property rights such as trademark rights and design rights.
The Group conducts thorough employee educations, establishes compliance systems, establishes the sales management system, and receives advice from consulting lawyers when needed. In cases where complaints and troubles emerge, where actions violating the acts and laws above mentioned are conducted, and where the acts and laws are revised or new laws are enacted, the Group's business activities, financial conditions and operating results may possibly be negatively affected.
(12) Lawsuit
The Group promotes the businesses, consulting with lawyers. It is very difficult to fully understand the legal situation in all business areas, and the Group cannot make the complete denial of the possibility of infringing laws; therefore, lawsuits are filed in connection with related laws and acts including Unfair Competition Prevention Act, Product Liability Law, and other laws and rights, and compensations for damages or suspensions of sales may possibly be claimed against the Group, in which case the Group's financial conditions and business results are negatively affected.
(13) Impact of Domestic Economic Condition
The Group is targeting small and medium-sized manufacturers in Japan as main customers and selling about 18 million items of indirect materials for factories by the e-commerce sales system. In recent years, the number of registered customers (companies) of the Group has been expanding, and, in addition, the demands for replacement parts and consumables continue even during economic downturns. For these reasons, the Group's business performance is relatively unlikely to be affected by economic fluctuations.
However, due to changes in economic trends in Japan, the business performances of small and medium-sized manufacturers may possibly deteriorate rapidly, and, in such cases, the Group may not be able to respond promptly and sufficiently to such the deteriorations. In this case, the Group's financial conditions and operating results could possibly be negatively affected.
(14) Overseas Expansion
Currently, the Group operates businesses in South Korea, Indonesia, and India, and plans to expand overseas in the future. Social turmoil caused by political and economic instability, revision of laws and regulations, adverse taxation, terrorism, etc. may possibly happen. In such case, the Group's financial positions and operating results may possibly be negatively affected.

2. Relationship with Major Shareholder

The Company's parent company is W. W. Grainger, Inc. (hereinafter "Grainger") and, through its wholly owned subsidiaries, Grainger International, Inc. (hereinafter “Grainger International”) and Grainger Global Holdings, Inc. (hereinafter “Grainger Global Holdings”), Grainger holds 50.35% of the Company's voting rights. Grainger International and Grainger Global Holdings are investment companies of Grainger Group, and Grainger substantially makes decisions on the exercise of these voting of the Company's common stock. Grainger is the core company of the Grainger Group, which is listed on the New York Stock Exchange (as of the end of the year, the capital is USD 54,830 thousand). Grainger operates MRO distributing business to business users in the United States. Besides the business in the United States, Grainger operates the same business in other areas including Canada, United Kingdom, Mexico, etc. through its affiliated companies. The Company has a position to operate MRO distributing business in Japan in Grainger Group and recognizes no other entities holding the policy to operate the same business in Japan in the Group. Grainger also exports and sells some products overseas, and some products may be exported to Japan; however, Grainger's sales in Japan are limited to U.S. companies. Therefore, there is no competition between the Grainger and the Group. However, in the future, if there is any change in the management policy or business strategy of Grainger or the Grainger Group, the business development, financial conditions, business performances, etc. of the Group may possibly be negatively affected.
(1) Personnel Relationship
One director has been appointed from the Grainger Group. The reason for the appointment is possession of experience and knowledge in the global supply chain, and ability to present useful opinions to the management of the Group.
On February 1, 2020, Masaya Suzuki, President and Chief Executive Officer of the Company was appointed as Managing Director responsible for Grainger's online business management.
Name
Position with the Company
Position with the Parent Company
Barry Greenhouse Director W. W. Grainger, Inc.
Senior Vice President, Global Supply Chain & Customer Experience
Masaya Suzuki President & CEO W. W. Grainger, Inc.
Managing Director, Endless Assortment Business

(2) Business relationship
The Group purchases some products from Grainger and sells some products to Grainger Group companies.