KOKUYO Sustainability Message from the CSO

Message from the CSO Dynamically investing in projects with bright growth prospects

Director, Corporate Officer and CSO Toshio Naito

Acquiring KOKUYO Hong Kong Limited set the way for overseas expansion

With KOKUYO pressing on with CCC 2030 and Field Expansion 2024, let me tell you about our investment-centered financial strategy. First, let’s review how our furniture business fared in FY2022. While new orders were a little low, we were inundated with orders for office renovation work, making for some hectic days. In response to this situation, we laid organizational groundwork and made a start in boosting productivity, meaning that we are ready for growth in 2023 and beyond. We were particularly keen to boost profitability in our domestic businesses, and so we intensified efforts to restore these businesses to growth.

As for our overseas furniture business, for some time we felt that this business lacked a competitive edge because it had no production sites. However, in 2022, we acquired HNI Hong Kong Limited (now KOKUYO Hong Kong Limited). This acquisition has paved the way for expansion in China and South East Asia. Our customer base has very little overlap with that of KOKUYO Hong Kong Limited. Whereas we target the upper market, KOKUYO Hong Kong Limited has a strong presence in the middle market. This situation means that we have great potential for cross-selling each other’s products. This foundation for global development counts as a key accomplishment in 2022.

In the past, our overseas strategy focused on optimizing distribution channels. However, focusing on sales functions alone proved insufficient to build competitive edge overseas. By welcoming KOKUYO Hong Kong Limited into our group, we could suddenly increase our range of products and save a fortune in procurement costs. Another important benefit is that, by using the KOKUYO brand in its sales, KOKUYO Hong Kong Limited can command higher sales prices, thus creating higher profit growth. Our M&A investment promises to pay excellent returns. The initial outcomes will be expansion in the Chinese market. Later on, we’ll see expansion in other markets such as Singapore, Malaysia, and Indonesia.

Gearing up for field expansion

The stationery businesses have made important progress too. The domestic business is now much leaner. Overseas, the business was adversely affected by China’s zero-Covid policy, but the business entered a recovery path in the second half of 2022. One major change alongside this is that the teams in Japan and China started cooperating in product development, so that our competitive power in Japan can be redirected into expanding in China. As part of this, we reorganized stationery operations into the Global Stationery Business Division to provide an organizational basis for expanding the business in 2023 and beyond.

As for Kaunet’s e-commerce and mail order business, Kaunet’s products remain popular among its existing customers, but Kaunet has struggled to win new customers. In particular, Kaunet has a limited online presence compared to its competitors, which is partly due to weak digital marketing. Kaunet will step up efforts to address this issue with advice from outside experts. In this way, the business will hasten its return to growth.

Thus, all of our businesses are now equipped for fresh growth. In previous years, our strategy focused on building sales growth in our existing businesses, meaning that we could devote little attention to expanding the business fields into new areas. By contrast, we now view our businesses differently, and employee attitudes have transformed too. Already, we’re seeing new ideas emerge for expanding the business fields.

New businesses generated from a culture of experimentation

Our lifeblood is our culture of experimentation. We’ve organizationally embedded this culture, and we’re now seeing new ideas emerge. One example is The Campus Flats Togoshi, which is a new project of The Campus, a lab for experimenting with new ideas for work and life. The Campus Flats Togoshi is a concept for a new kind of co-living space. The idea is that residents dwell together and experiment with ideas that they’d been wanting to try for a long time. In July 2023, we’ll open the first such residence, in Togoshi, Shinagawa. If we determine that the project has strong prospects for profit, we’ll open a second and then a third residence.

Another example involves a content business. In March 2023, we launched a series for facilitating communication between parents and children. The series is called Hello! Family. The idea is to support communication in the families of the future in a way that reflects their diversified workstyles and lifestyles. The brand includes a range of content. One example is an eponymous app, which allows you to keep an eye on family members. Another example is Hello! Coco an IoT-driven device that uses GPS. Another is Hello! Tag, which helps users keep track of their child’s belongings. One other example is Hello! Moni, a monitoring services that can exchange messages with your smartphone. We’ll focus on attracting users with a view to growing the content business. Using our medium-term growth CapEx budget, we’ll keep generating new businesses with a view to steadily expanding the fields.

Deploying the growth CapEx budget to build a model of growth

For our financial strategy, we remain committed to returning profits to our shareholders in a stable manner, with a payout ratio of 40%, while also strengthening investment in our growth strategy. In 2023, we launched the Growth Strategy Council. This council will clarify how the growth budget of 30 billion yen will be spent. We’ve already spent about 10 billion yen of this budget. Some of the money was spent on acquiring KOKUYO Hong Kong Limited and some on acquiring Origin, a company that manufactures and sells furniture in Japan. The remaining 20 billion yen should be used to gain partnerships in Australia that will help us expand in that market. We also need to find the right partnerships for our global stationery business. At any rate, M&As remain the top spending priority in our global strategy. Alongside the 30 billion yen growth CapEx budget, we have earmarked 20 billion yen for regular/ maintenance CapEx. This is to be spent on updating our facilities and other assets and on an information system.

Where will our spending priorities lie in the future? Given that the Japanese market has little prospect of growing, we should be focusing not on boosting production capacity but on shifting to an approach that adds high value to our products. We produce around 30% of our products in-house. The remaining 70% are produced by subcontracted manufacturers. These manufacturers can meet the requirements for quality and lead times, so deploying this supply network effectively is key to delivering products with high added value. While product development and design are likely to remain in-house, production will be entrusted to the right subcontracted manufacturers.

The other thing we must do in order to expand the fields is to strengthen our talent. Right now, the workforce is too small. The composition is also problematic, with employees aged 50 or older making up as much as 20% of the workforce. We’ll therefore increase the number of new hires so that we can build the talent that can take our growth strategy into tomorrow.