KOKUYO Sustainability Message from the CSO

Japanese furniture business enjoys tailwinds from office renovation demand

The year 2023 was the middle year in our third medium-term plan, Field Expansion 2024 (FE 2024). FE 2024 commits us to improving the profitability of our Japanese businesses, expanding the reach of our businesses, pressing ahead with a global expansion, and incubating new business ideas. In 2023, we made headway with these strategies, largely in line with expectations. Our progress is reflected in our results for net sales and operating income.

As for the results for each business, let me begin with our Japanese furniture business. In Japan, demand for new office builds and office renovations remained brisk, giving us an opportunity to apply our prowess in interior design. Our integrated office designs won acclaim, culminating in pleasing net sales and operating income and driving growth for our organization as a whole. To unlock further growth for this business, we’ll focus on talent acquisition and hire more fresh graduates and mid-career talent. We’ll also press ahead with a digital transformation program for streamlining business flows. These measures will increase the market share and make the business more profitable.

Our overseas furniture businesses faced greater challenges than expected amidst the ongoing economic malaise in China. However, the prospects are bright. Kokuyo Hong Kong Limited, which we acquired in 2022, is playing a pivotal role in efforts to streamline business flows, including consolidating products and transferring production. Such streamlining, along with changes in sales prices and a cross-selling strategy, will increase the profitability of the overseas furniture businesses. With Kokuyo Hong Kong’s post-merger integration proceeding as planned, the overseas furniture businesses should be able to achieve their medium-term growth targets once the Chinese economy starts showing signs of recovery.

In our business-supplies business, we’re seeing the continued rise of e-commerce with the post-pandemic economic recovery and the return to offices. The competition is heating up here, but I’m pleased by the performance of Benri-net, Kaunet’s solutions system for large-scale corporate clients. We’ll further strengthen the system to expand the customer base.

Growth in the overseas stationery businesses

In our overseas stationery businesses, we’ve been working with local subsidiaries on global product development projects that will expand our market presence. For example, we’ve worked with our Indian subsidiary, Kokuyo Camlin Limited, on a rebranding project. This project involves revamping product lines and their packaging to add more value to the products. This project culminated in sharp revenue growth in 2023—14% more than in 2022—and has given us the confidence in the potential for making India our next big overseas market following China. We've also organized pop-up shops in Thailand, Malaysia, and the USA to test the global demand for value-added stationery, which proved to be a hit with locals. In Japan, our stationery business continued to face a tough environment, forcing us to reallocate resources and optimize costs. By contrast, we’re confident of further global growth in our value-added stationery. In 2024, we expect that overseas stationery sales will account for 39% of our total stationery revenue for that year, 3.7 points up from the previous year.

Expanding the reach of our businesses and going global

Our current medium-term plan defines four strategic priorities for expanding the reach of our businesses and expanding globally: dynamic investment, empowered talent, active innovation, and delivering both social and business value.

For dynamic investment, we’ve focused on M&As. On the belief that we needed a tougher M&A strategy, we established the Growth Strategy Council to provide an organizational structure for deliberating on our growth strategy for the medium and long term. As we build a track record in overseas M&A deals, our M&As are becoming more effective and our vetting process is becoming more streamlined. In the months and years ahead, we’ll be building our M&A experience and pursuing overseas M&As more proactively.

For the empowered talent theme, we’ve started exploring ways to provide every employee with growth opportunities, including holding a talent development committee in each business division and focusing on employee transfers, promotion, and assignment. We’ve also established a talent management policy and launched an internal talent development organization called the Kokuyo Academy as part of a systematic approach to talent development.

One example of what we’ve done in the active innovation theme is The Campus Flats Togoshi, which we opened in September 2023 in the Togoshi area of Shinagawa, Tokyo. The Campus Flats Togoshi is Kokuyo’s first “share house” (a residential property with shared spaces separate from private rooms). The units have been filling up fast, and we’re now mulling a second building. That’s not the only example. In the second half of 2023, we launched Pandoor, a service that supports parallel work. We have also begun our experiment with Study with Campus, a private study area for middle school and high school students. These examples demonstrate our increased activity and innovation in our entrepreneurial endeavors.

Focusing on cash flow as we head toward further growth

We recognize that our growth prospects will be limited if we just focus on enhancing our existing businesses. Accordingly, as well as expanding the reach of our existing businesses, we’re focusing on nurturing ventures that tap into new needs, as part of a shift to discontinuous growth. In 2023, we witnessed a genuine transformation in our employees' mindset, marking a successful transition towards growth.

We want people to see Kokuyo as an organization of sustained growth, and they will only do so if we have a robust capital policy. To that end, we’ll be focusing a lot more on cash flow and profitability of capital.

We continue to offload our cross-held shares. As of the end of 2023, cross-held shares accounted for 12.2% of our consolidated net assets. We’re on course to reduce this figure to below 10% by the end of 2024.

Regarding shareholder returns, we’ve previously committed to a payout ratio of 40% in our dividend payments. However, having launched a share buyback program that runs from 2023 to 2024, the total payout ratio for 2023 and 2024 is likely to top 50%.

For ROE, our current benchmark is 8% or more. We’re set to meet that target in FY2024, the final fiscal year of our current medium-term plan. Thus, we’re making headway in our initiatives that focus on profitability of capital.

We’ll disclose further developments in our capital policy in our fourth medium-term plan, which we plan to announce later in 2024.