Approach to Brands and Value

Transcription

1 The Approach to Brands and Value 2 Annual Report For the year ended April 3, 2

2 ITO EN, LTD. A D E V O T I O N T O N U T R I T I O N A N D H E A L T H Ito En was founded in August 1966 to produce and sell green tea, a traditional Japanese beverage. Today, Ito En is firmly positioned as the world s leading supplier of green tea leaves and beverages, developing a steady stream of new products that address customer needs. Through the years, Ito En has established a reputation as a trend-setter in the beverage industry. Following a 1979 agreement to import oolong tea from China, Ito En took the lead in making this one of Japan s most popular beverages. In 1981, the company pioneered the sugar-free, ready-to-drink beverage market by launching canned oolong tea. Then, in 1985, it produced a canned green tea beverage, a feat many had considered technologically impossible. This opened up an entirely new market segment for green tea. And by adding fruit and vegetable beverages and coffee to the existing lineup of green tea, oolong tea and black tea products, Ito En continues to consolidate its position as a comprehensive beverage maker. Committed to growth, Ito En has posted increases in net income every year since its establishment. After an initial public offering in 1992, its shares were listed on the Second Section of the Tokyo Stock Exchange in September 1996 and on the First Section in October C O N T E N T S 1. ITO EN AND JAPAN S BEVERAGE MARKET 2. CONSOLIDATED FINANCIAL HIGHLIGHTS 3. MESSAGE FROM THE MANAGEMENT 6. THE BASIC STRATEGIES UNDERLYING ITO EN S HIGH GROWTH RATE 7. CHANGE FOR STABILITY 8. ENVIRONMENTAL PRESERVATION 9. RESEARCH & DEVELOPMENT 1. REVIEW OF OPERATIONS 16. FINANCIAL SECTION O N T H E C O V E R The 3 1/2 Leaf Rule Traditionally, the highest quality green teas were produced by using only three and a half leaves: half of the budding leaf at the very tip of the plant and three of the newest leaves at the top. Today s mechanized harvesting makes this impractical. Nevertheless, Ito En retains the same devotion to quality as have green tea producers in centuries past.

3 annual report 2 I T O E N A N D J A P A N S B E V E R A G E M A R K E T (BY) 3,5 1, , ,77.5 3,1.2 3,488. Total 3, Others 2,5 Fruit & Vegetable 2, Coffee 1,5 1, Carbonated (Forecast) Tea Japan s market for non-alcoholic beverages is immense and extremely diverse. Consumers can choose from among many types of products. Suppliers can reach consumers through numerous sales channels, including a large number of vending machines. Annual production of these beverages exceeds 3 trillion. Annual sales growth has averaged 2.2% over the past five years, more than the expansion of the food industry as a whole. And there is still great potential. Japan s annual per capita soft drink consumption was 354 liters in In Europe and North America, this figure is mostly between 55 and 6 liters, a clear indication of just how much growth potential remains in Japan. Recent trends show that this potential is slowly materializing, supported by Ito En s efforts in green and oolong teas. Growth in the tea market has been particularly noticeable, some 6.% annually over the last five years. And green tea ranks first in this category. But green tea is really just beginning to blossom. Ready-to-drink green tea accounts for only 6.6% of total green tea consumption. This compares with 5.7% for oolong tea, 35.1% for black tea, and 29.5% for coffee, according to 1999 estimates. Ito En projects that canned and bottled green tea will rise to about 1% of Japan s total green tea consumption by 22. And with recent research highlighting its various beneficial pharmacological properties, green tea is likely to retain its place among the fastest growing categories of Japan s beverage market for many more years. 1

4 ITO EN, LTD. C O N S O L I D A T E D F I N A N C I A L H I G H L I G H T S Thousands of Millions of yen U.S. dollars % change /1999 Years ended April 3 Net sales 137,32 156, ,967 $1,63, % Operating income 1,54 12,569 14, , Income before income taxes 7,963 11,2 11, , Net income 3,45 5,325 6,53 61, Research and development expenses 1,12 1,19 1, Depreciation and amortization 1,57 1,129 1,96 1, Gross cash flow 4,463 6,454 7,626 71, As of April 3 Total assets 77,234 83,328 82,386 $ 772, % Stockholders equity 34,841 39,322 4, , Return on equity (%) 11.4% 14.4% 16.3% 16.3% 2 Yen U.S. dollars Per-share amounts Net income (primary) $ % Notes: 1. All dollar figures above and elsewhere in this report refer to U.S. currency. Yen amounts have been translated into U.S. dollars, for the convenience of the reader, at 16.7=US$1. Billion is used in the American sense of one thousand million. 2. Foreign statements translation adjustments were recorded under assets up until and including the fiscal year ended April They have been recorded under stockholders equity for the fiscal years ended April 1999 and April 2. Net Sales ( billions) Net Income ( billions) Gross Cash Flow ( billions) Stockholders Equity ( billions)

5 annual report 2 M E S S A G E F R O M T H E M A N A G E M E N T Our Management Stance Ever since Ito En was established in 1966, we have worked to develop products of character, and expand our sales and services network. These activities take place under the guidance of the key management principle of customers first, and these customers include all those who come into contact with Ito En in any way. Stockholders, retailers handling Ito En products, financial institutions customers first is equally as applicable to these groups as to consumers themselves. Ito En considers valuing contacts with each of these vital groups to be the path to attaining top class management. Medium-Term Management Plan Our medium-term management plan calls for net sales of 2 billion, ROE of 17% and 2 sales branches in the fiscal year ending April 22. The fiscal year ended April 2 saw net sales of billion, ROE of 15.5%, and a total of 156 sales branches. In addition, net sales have grown at an average annual rate of 12.% over the last five years. It is fair to say that we are well on the way to achieving our goals. Furthermore, in the non-consolidated long-term management plan that we devised over this past fiscal year, we set up new targets of net sales of 26 billion, ROA of 9.%, and 23 sales branches. All are to be achieved by the fiscal year ending April 25. We are confident that the same clear management concepts and effective strategies that have supported our high growth rate in the past will enable us to meet these ambitious goals. Growth Potential of the Green Tea Market In the past fiscal year, the green tea market heated up with the arrival of new competition. Significant expansion is predicted for this market. The volume of nonalcoholic beverages consumed per person per year in Japan is low compared to other industrial nations. In addition, the ratio of green tea used to produce canned and bottled beverages still has much room for expansion. We were the pioneers in this market, and the entry of new competitors is testament to the growth potential that this market holds. This potential will become all the evident now, with the rapid expansion that the new competition will surely bring about. Here at Ito En, where this market originated, we will make optimal use of the knowledge and leadership we have gained over the years. This position will serve us well as we work to maintain our dominance in this market, while playing a leading role in its expansion. Our Dominance in Green Tea Markets Ito En s dominance in green tea is most clearly demonstrated by its strengths in tea leaf procurement. The bonds of trust formed with growers over many years combine with superlative production systems to put our company in an unrivalled position. Future growth in demand for green tea will not take us by surprise. We have already expanded our chain of production bases. Moreover, we frequently introduce our growers to new cultivation and processing techniques to maintain stable supplies of the highest quality tea leafs, which ties back into honing our competitive edge. 3

6 ITO EN, LTD. 4 The second area in which our dominance is evident is in the unique blending technologies we use when developing products sold in cans and plastic bottles. This technology is completely different from that used in tea leaf production, and is another way in which we distinguish ourselves from our competitors. The third area that sets us apart is the production technology used in the manufacture of the green teas themselves. The T-N (Tea and Natural) Blow production process which first made possible canned green teas is one example of our superiority. The patented Natural Clear production method, perfectly suited to PET bottles, is another. Our marketing prowess is the fourth area. We tie production and retail directly together through our own route sales marketing structure, which allows our sales activities to cater to customers needs with speed and precision. Our chain of approximately 61, vending machines across Japan is kept fully stocked with beverages by our own staff. This allows us to maintain a full range of products at all times. Our corporate culture of striving for cutting-edge innovation is our final advantage. Refusing to just be satisfied with past achievements, we continually develop new products to match changes in the marketplace. This spirit of inventing new markets is what gave rise to canned oolong tea and green tea in cans and plastic bottles. Research into green tea and the development of new production techniques continues as a key part of our efforts to keep in touch with customer needs. This day-to-day search for new ways to improve what we do is what has earned us the trust and respect of our customers, and has underpinned our growth from our very first day of operations. Overseas Strategies Developing the North American and European markets must be a key theme in our overseas activities. Many factors make prospects for success good. Widespread recognition is one. Green tea was already a widely-known beverage in the U.S. before the outbreak of World War II. Add to this the wealth of active ingredients it contains, such as catechin, tannin (an amino acid), saponin and flavonoids, and it is clear that green tea is in a perfect position to benefit from the heightening health-consciousness around the world. In order to grow overseas, however, it is essential for us to reinforce our domestic operating base. Accordingly, full-scale overseas expansion will have to wait until we have achieved the goals set forth in our medium-term management plan, but preparations for this expansion are well under way. We already sell beverages in Hawaii, and in June 2, we began marketing research in New York. Providing Appropriate Returns to Stockholders Providing a steady return on stockholders investments is a central theme for Ito En. Dividends per share for the past fiscal year were set at 35. This brought the dividend payout ratio to 25.3% and the dividend to stockholders equity ratio to 3.9%. Return on equity rose.9% to 15.5%. Conforming to Global Standards The importance of conforming to global standards is interwoven with the goals set down in the mediumterm management plans due to end in the fiscal year ending April 22. We have made steady progress in

7 annual report 2 doing what we set out to in this area. The entire Ito En Group is involved in amalgamating subsidiaries operating in similar fields and enhancing its management base through the optimal use of resources. This in turn is tying into new profitability. Disclosure of financial information is another area where we are making notable progress. Since the fiscal year ended April 1998, we have been including statements of cash flows in our financial reports. In addition, we have been holding information meetings aimed at potential stockholders overseas in addition to our domestic investor relations program. These conferences are perfect opportunities to set forth our management principles. In the past fiscal year, Ito En wrote off a shortfall in retirement and severance benefit funding, which, along with other steps, significantly boosted the strength of the balance sheet. Improving the transparency of assets was another concern and led to the adoption of market valuations of land used for business operations. In order to allow closer communication with our stockholders, we are actively expanding our investor relations activities. At the same time, we also plan to develop a system whereby stockholders opinions can be directly reflected in management decisions. We ask for your continued support and guidance. July 27, 2 Masanori Honjo Chairman of the Board Hachiro Honjo President 5

8 ITO EN, LTD. THE BASIC STRATEGIES UNDERLYING ITO EN S HIGH GROWTH RATE Safe People can enjoy Ito En beverages with the knowledge that they have been exhaustively tested for quality and safety. Healthy Care is taken in the development of every Ito En beverage to use ingredients that promote the health of customers. ITO EN S PRODUCT DEVELOPMENT CONCEPTS Natural Ito En ensures that its customers always receive the benefits of nature, from tea beverages made with top-quality leaves to 1% fruit. Delicious The excellent Flavor of Ito En products combines with their health-promoting properties to keep customers coming back for more. Well-Designed Ito En s product development professionals design product packages to be memorable and pleasing to the eye. 6 Ito En s Basic Strategies Two things make Ito En stand out: growth, which has averaged an impressive 12.% during the past five years, and the relentless pursuit of greater efficiency. The key to further success on both fronts is maintaining the proper balance among marketing, sales, manufacturing, and research activities. Marketing Quickly Translating Needs Into Products Distinguishing Ito En s efforts in this area is its unique VOICE system. This provides a means for employees, members of their families, and even people not directly related to the company to offer suggestions related to products and advertising. In the past fiscal year, 4,149 proposals were received under this system, which plays an integral role in helping Ito En ensure that its marketing activities reflect what customers really want. Sales Expansion of a Self-Reliant Sales Organization A unique system coined route sales is the secret ingredient here. This refers to the direct link that is maintained between factories and retailers. Route sales underpins the Ito En drive to establish a nationwide network of sales offices and vending machines, and to tailor marketing activities to match the particular requirements of each region in Japan. While working to enhance this system, the very backbone of sales activities, Ito En will strive for balance in sales routes, to allow it to better cater to customer needs. Manufacturing Aligned for High Returns Except for its tea leaf products, Ito En outsources all of its product manufacturing. This allows significant cost reductions associated with investments in equipment and distribution. In turn, this frees more resources for the vital planning, product development, marketing, and sales functions. Ito En s slim structure gives it more flexibility in responding to shifts in consumer needs and market trends as well. Development A Long-Term Perspective Research and development is concentrated at Ito En s Central Research Institute, which carries out the basic research essential to maintaining the highest levels of product development expertise. April 21 is scheduled to see the addition of another new building to the Shizuoka-based Central Research Institute, which will accelerate research into the active ingredients of green tea and related mechanisms. As one more part of its research chain, Ito En has provided support to the M.D. Anderson Cancer Center at the University of Texas for research into the cancer-prevention properties of green tea. Brand Strength From General to Specific The Ito En brand is already firmly established. Individual brands such as Oi Ocha, Jujitsu Yasai, Kin no Oolong Tea, Kaori Kirei Jasmine Tea, and Kaori Kaoru Barley Tea will be the subject of efforts to build brand equity of a similar scale. Raising awareness of these brands supports a virtuous cycle, directly into boosting sales while further enhancing the core Ito En brand.

9 annual report 2 C H A N G E F O R S T A B I L I T Y Modern lifestyles are diversifying at a terrific rate. In the midst of these changes, green tea is moving out of the traditional tea room and into all aspects of the lives of those who drink it. With the continuing global trend toward healthconsciousness, green tea s many active ingredients have been attracting increasing attention. This is one more factor in the unprecedented vibrancy of the green tea market at present. Ito En s continuing drive for innovation since its establishment, a stance firmly rooted in its customer first policy, has been indispensable in allowing the company to engage with this and other trends. Ever since its establishment in 1966, Ito En has been creating corporate value by providing customers with delicious beverages through cutting edge innovation. The first innovation was in distribution. Devising an entirely new route sales system, extending from grower to consumer, Ito En enabled the delivery of fresher products at an unprecedented pace. In 1972, an automated high-speed packaging machine was introduced. New vacuum packing technology allowed huge gains in preserving the freshness of tea leaves, making it possible for grocery stores and supermarkets to stock these products. Stable supplies of tea leaves are essential to producing Ito En s beverages. Ito En makes use of a contract-grower system to ensure access to this vital resource. In 1982, it complemented this system by developing organic green tea leaf production methods. This constituted further progress with regards to procuring tea leaves that excel in terms of both quality and nutritional value. Ito En is also constructing new production bases both domestically and overseas to keep up with future growth in demand. Continuing to guide and support the efforts of growers is another link in Ito En s comprehensive supply chain. Technological breakthroughs have also been instrumental to Ito En s growth. The first advance involved catechin, the key active ingredient in green tea. Since this ingredient is prone to oxidization, it was originally considered impossible to supply green tea in a canned form. However, with Ito En s development of T-N Blow technology, which removes oxygen from cans, this problem was overcome. As a result, 1985 saw the debut of canned sencha, the first ever canned green tea. In 1996, Ito En developed and patented the Natural Clear production method, allowing green tea to be manufactured and sold in PET bottles. This product went on to become a huge hit with consumers, opening up a whole new market for green tea. These events were followed by the development of the Super T-N Blow technology and a new method for maintaining transparency in teas. Ito En simply refuses to let up on its focus and pace in product-oriented research and development. Investigations into the pharmacological effects of green tea, spurred on by rising health-consciousness, are another area in which Ito En has led from the beginning. Ito En has constantly redefined itself over time, as it has relentlessly pursued both the great taste and unique fascination green tea brings to bear on those who enjoy it. Making optimal use of the experience and the expertise gained so far in this, its key area, Ito En will continue to be a beverage maker committed to producing beverages that contribute to healthy lifestyles. The green tea market has much room left for expansion and Ito En intends to continue to lead the way. 7

10 ITO EN, LTD. E N V I R O N M E N T A L P R E S E R V A T I O N 8 In the 21 st century, environmental issues can no longer be thought of as being separate from our daily lives. The destruction of the ozone layer, the encroachment of the desert into forested areas, deteriorating water and soil quality, atmospheric pollution, illegal waste disposal, and all the other issues mankind faces an awareness of these problems as farreaching lifestyle issues with implications for the health and safety of us all is commonplace these days. For corporations too, environmental protection measures have become an important management theme by which a company s stance toward society is judged. Accordingly, these issues have come to play an integral role in the formation of corporate strategies. Moving into line with the demands of the times, Ito En aims to minimize its environmental impact by considering all stages of the product lifecycle. From development and manufacture to distribution, sales, and disposal the entire company focuses on environmental preservation in all aspects of its business. The May 1998 establishment of the Environmental Committee was a manifestation of Ito En s resolve in this respect. There are three sub-committees operating under its auspices, one each for production, head office, and operations, that are responsible for putting the proposals of the Environmental Committee into action. In this way, all Ito En employees are involved in the solution of any problems that may arise. Ito En is constantly devising new and improved ways to deal with the industrial waste generated by its production activities. Among them are recycling processes allowing the reuse of these waste products in recycled paper, solid fuels, and organic fertilizers. Particularly notable was the achievement of a 1% recycling rate at the Sagara plant in Shizuoka, one of Ito En s major production locations. The facility is also aiming to obtain ISO141 certification as one more step in systemizing its environmental preservation activities. Complacency in environmental issues is not an option at Ito En. Ito En s Central Research Institute has been working on joint research projects with Kobe University. One of these projects has produced evidence of the anti-dioxin properties of the catechin found in green tea, a finding that has been announced at academic conferences. This discovery is expected to benefit green tea sales and has great environmental significance as well. On a different note, a proposal has been put forward to recycle the green PET bottles used for Ito En s Oi Ocha for use ITO EN S PRODUCT DEVELOPMENT CONCEPTS Finishing process Packaging process Raw material tea Raw beans Loading Orthopedics Classification Grinding Firing Drying Roast Metal detection Blending Finished products Loading Packaging Inspection Shipping Tea Leaves Coffee Industrial waste Paper storage bags Aluminum lining Paper coils Wooden boxes Cardboard boxes Hemp bags Powdered tea Stem tea Floor sweepings Coffee powder Dregs Bean husks Foreign matter Floor sweeping Cardboard boxes Paper storage bags Aluminum lining Paper coils Wooden boxes Craft Paper Floor sweeping Faulty materials Foreign matter Wrapping film Cardboard boxes Recycling Solid fuel Recycled paper Packing material Organic fertilizer Special organic fertilizer Soil improvement material Recycled iron/ steel Special organic fertilizer Recycled paper Solid fuel Paper strings/ cord/lace Special organic fertilizer Solid fuel Recycled paper in waste disposal containers at vending machines. The first of these containers should begin to appear sometime during the fiscal year ending April 21. Along with utilizing recycled PET bottles to produce uniforms for salespersons, this is one more way in which Ito En is helping to create a recycling society. Furthermore, Ito En is mixing a silica-based compound oxide with its plastic beverage can liners, thus reducing unpleasant odors during this stage of production. Reduction of CO2 emissions is another area currently undergoing notable efforts. Ito En is attacking the CO2 problem from a variety of angles including the introduction of low-emission natural gas vehicles and the promotion of eco-friendly driving, a system that promotes the elimination of unnecessary idling. Ito En is endeavoring to become a company where all employees work together to solve environmental problems, as prescribed by its environmental policies.

11 annual report 2 R E S E A R C H & D E V E L O P M E N T These capsules containing an extract of green tea are being analyzed for possible cancer-preventing properties at the M. D. Anderson Cancer Center in the United States. The Central Research Institute carries out research into longterm R&D themes, centered on the theme of green tea. These include research into food products and ingredients essential to maintaining good health, the latest food production techniques and processes, the effects and functions of the active ingredients in green and other teas, safety testing, and any and all new technologies related to the soft drinks industry. The development division, the other side of Ito En s R&D operations, carries out research projects aimed to bring benefits in the near future, either through developing new products, or improving existing ones. Production and agricultural technologies account for the bulk of research here. Naturally, Ito En s main interest lies in the potential benefits of the major components of green tea, an area it has been involved in from the very beginning. Research in this field includes joint projects with universities in Japan, including Nippon University, Ehime University, and Gifu University. In the United States, Ito En provides support for the clinical tests conducted at the M.D. Anderson Cancer Center to determine the possible cancer-preventing properties of green tea. Ito En is also carrying out joint research with the Neurology Department of Tokyo University into tannin s anti-senility properties. Research into countering the toxicity of dioxins is another active project. During the fiscal year ended April 3, 2, Ito En s R&D expenditures were roughly 1.1 billion. Significant events during the year included the following: Research into the active ingredients of tea leaves Ito En is carrying out research into the beneficial effects tea leaves can bring to those who consume tea leaf-derived products over many years. Using the latest technology to determine new applications in which active ingredients in teas can be utilized, Ito En has succeeded in developing original products, both in foodstuffs and in other areas. Development of new technology Ito En is always looking for ways to develop new products and improve existing ones. To this end, a steady stream of research projects are currently under way in such varied fields as raw material processing, blending methods, production technologies, and product quality control. Knowledge gained through these activities is certain to lead to more innovative teas as well as fruit and vegetable juices. New advances in agricultural technology Advanced cultivation and harvesting techniques are essential to Ito En s business, providing it with a stable supply of high quality tea leaves. To stay ahead in this area, research into new agricultural technologies and onsite development at tea plantations are integral elements of Ito En s R&D activities. Work in this area is not limited to tea either; the development of various types of grasses is another focus of activity. The Central Research Institute at the Sagara Plant in Shizuoka Prefecture with research into the active ingredients of tea being a central theme, this facility plays a vital role in Ito En s R&D activities. 9

12 ITO EN, LTD. R E V I E W O F O P E R A T I O N S TEA LEAVES Ito En provides a range of different tea leaf products suited to a variety of palates. The highly popular Oi Ocha is particularly well renowned, with its full flavor and earthy aroma. Tea bags and instant tea powder add breadth to this category, providing customers with more ways of enjoying Ito En green tea. JAPANESE TEA BEVERAGES 1 The Oi Ocha series of beverages covers green tea, hoji tea, genmai tea and premium-grade gyokuro tea. The latest addition is Kaori Kaoru Mugi Cha (Aromatic Barley Tea). All of these products are sold in conveniently sized cans and PET bottles. OOLONG AND JASMINE TEA BEVERAGES As the first company to succeed in producing canned oolong tea, Ito En went on to produce the rich-tasting Kin no Uron Cha (Golden Oolong Tea), made from rare, high-quality ingredients and with unique production methods. Ito En also offers Kaori Kirei Jasumin Cha (Aromatic Jasmine Tea), a pleasant, flowery tasting tea.

13 annual report 2 FRUIT AND VEGETABLE BEVERAGES This category includes Jujitsu Yasai (Vegetables Galore), bringing the taste of real carrots to the customer in a more flavorful form; Midori no Yasai (Green Vegetables), a nutritious mixed vegetable juice with a hint of fruit; and Gyutto Shibotta Lemon Sui, a lemon fruit drink that has the taste of freshly squeezed lemons. COFFEE BEVERAGES 11 Ito En sells the bulk of its coffee beverages in vending machines. Premium Mocha, made using a flannel drip method, and Cappuccino, with a hint of cinnamon, are central products in this category. Demitasse Coffee is another noteworthy beverage, offering a richer taste than standard coffees. BLACK TEA BEVERAGES & OTHER PRODUCTS Ito En offers its refreshing Lemon Tea and Apple Tea as well as many other black tea beverages. Ito En also offers a line of carbonated beverages that includes Tennensui Saida, a cider refreshingly enriched with natural mineral water. Nata de Coco Plain, Ringo Su Suki (Fresh Apple Sour), and Catechin Water (an isotonic drink enriched with green tea catechins), also contribute to this category s diverse lineup.

14 ITO EN, LTD. Tea Leaves 12 Net Sales Share (2) 16.2% Net Sales ( billions) R E S U L T S Sales in the tea leaves segment increased 1.2% to 27.9 billion. Domestic green tea production, unusually low in 1998 (82,6 tons), rose 7% in 1999 to 88,5 tons. This increase was due to favorable weather for second-round tea crops, which more than offset the poor weather that adversely affected the first-round crops earlier in the year during the budding season. Results were also supported by higher prices of tea leaves. Demand increased along with progress in research into green tea s pharmacological benefits. Green tea was thus able to benefit from heightening interest in healthy lifestyles on the part of consumers. However, the increasing use of canned and PET bottles along with generally soft consumer spending prevented significant growth in demand for tea leaves. Against this background, Ito En insisted on the very best at all levels of its operations in this area, from research to tea leaf selection, and from production to distribution. The unremitting pursuit of quality allowed the creation of products that found favor with customers. Oi Ocha, the main brand in this category, was the focus of particular efforts to raise sales. Extra care in tea leaf selection, the adoption of the enriched steaming and finishing roast production techniques, attention to packaging, and matching product lineups with each sales route helped this strong performer maintain the No. 1 position throughout Japan. For tea leaves packed and shipped by growers, Ito En has made renewed efforts to ensure that quality products are delivered to customers at affordable prices. Ito En is working to cut the time required to package these leaves and deliver them to stores. In gift products, Ito En has made its catalogues more user-friendly. Customers can easily choose from among varieties and production techniques to obtain the desired flavor or aroma. The product lineup matches well known brands with their respective regions of origin in Japan. Nevertheless, Japan s soft consumer spending continued to hold back gift product sales. Other tea leaves saw expansion of sales, supported largely by the increasing consumer insistence on authenticity in oolong tea products. Sales of barley teas also rose, following promotion campaigns that included the integration of product names with those in the canned and bottled barley tea categories. S T R A T E G Y Tea lies at the very heart of the Japanese lifestyle. Ito En s core strategy consists of finding new ways to bring tea s wholesomeness to people, ways suited both to peoples tastes and to the variety of situations tea is served in. This strategy underlies accomplishments to date in understanding customer requirements and creating new products accordingly. In more specific terms, Ito En intends to manage all aspects of its products to match customer expectations, from flavor and aroma to color and outward appearance. Regional and seasonal considerations will be thought through more carefully than in the past when devising new product concepts. One example is the introduction of gift teas able to cater to the varied preferences of different regions of Japan. These teas offer a taste straight off the tea plantations that growers themselves might enjoy in their own homes. Ito En is also reevaluating its existing product line, which relies mainly on Yabukita green tea. This has led to the introduction of a new tea, Megami, to the market, offering a quality born of specially grown tea leaves and Ito En s unique technology. More of these types of teas will be introduced. Tea bags and instant tea powders for making hot or cold teas are also available. Both offer the same quality and reasonable prices that are characteristic of all Ito En s products. Strengthening flagship products while continuing to expand strategic product lines will allow Ito En to enhance awareness of its brands. At the same time, reducing the total number of items sold will bring rewards on the efficiency front.

15 annual report 2 Japanese Tea Beverages Net Sales Share (2) Net Sales ( billions) 7 6 before is the secret, a technique that allows barley to be roasted without fear of burning the husks. This yields a tea with a robust aroma and no bitterness. 39.1% R E S U L T S Sales of tea beverages soared 17.3% to 67.1 billion. The mainstay Oi Ocha brand of green teas performed strongly, with volume rising 14.8% to 33,365 thousand cases and sales climbing 13.5% to 6. billion. Propelling demand for green tea was increasing awareness of the pharmacological benefits of its active ingredients. And catering to this demand were Ito En s superior technologies; tea leaf selection and blending technologies. Particularly valuable are such exclusive techniques as low temperature long time extraction, the T-N Blow technique for canned green tea production, and Ito En s patented Natural Clear method for bottled green teas. Diversity in containers is another point that Ito En stresses. This focus gave rise to the introduction of a 35ml PET bottle, which is convenient to carry and easy to recap. Sales by container type saw both small and large PET bottles gaining new ground, making valuable contributions to total sales. The rising popularity of large bottles appears to be evidence that people are increasingly enjoying green tea beverages at home as well as outdoors. Awareness of the Oi Ocha brand name reached new heights thanks to dedicated advertising campaigns. Domestically, the name has become practically synonymous with green tea, and this reflects the popularity of the product it represents. Kaori Kaoru Mugi Cha went on sale in March A vastly improved form of its predecessor, Oi Ocha Mugi Cha, it posted sales of 7.2 billion, an increase of 168.2% over the previous year, and firmly established itself as a new brand in the process. Its popularity is due in no small part to a new production method that roasts barley ( mugi ) to the core. This generates richer flavors and aromas than were previously attainable. Pretreating the barley with 1.4 times more steam than S T R A T E G Y Ito En aims to make tea beverages that customers can enjoy anytime and anyplace. It is the foremost company in all aspects of the Japanese tea business, from upstream to downstream, and including research, tea leaf procurement, planning, production, and sales. In order to impress upon customers the flavor, nutritional benefits and authenticity of products in this area, best represented by the Oi Ocha line, Ito En makes full use of TV commercials, specially-arranged events, and other promotional methods. Through selecting only the finest tea leaves as part of an exhaustive quality control management system and making optimal use of advanced extraction technology, Ito En is able to keep in touch with even the subtlest of changes in customer preferences. Green tea has long been one of the beverages closest to the Japanese heart, but even this long-term favorite has witnessed changes in customer tastes. Most notably, aroma has come to attain a greater importance. Preferred types of green tea are also diversifying along regional lines, and preferences for drinking green tea are increasingly based on the occasion at hand. These are the factors underlying the addition to the Oi Ocha line of genmai, hoji, and premium-grade gyokuro teas. Introducing newly designed containers for beverages is another way in which Ito En is ensuring that its products can be enjoyed anytime and anyplace. 13

16 ITO EN, LTD. Oolong and Jasmine Tea Beverages 14 Net Sales Share (2) 8.7% Net Sales ( billions) R E S U L T S Sales in this segment fell.1% to 15. billion. Oolong tea is considered a mature product, but last year s results appear to be an indication that sales have stopped falling. Ito En has succeeded in opening up a new market for this product through Kin no Uron Cha, which overcame customers dissatisfaction with oolong tea by combining new quality in tea leaves and production methods. However, in the past fiscal year, even a strong performance in the second half of Fruit and Vegetable Beverages the year failed to prevent a small decline in sales over the entire period. On a brighter note, jasmine teas have undergone a complete repositioning. The resulting Kaori Kirei Jasumin Cha gave rise to climbing sales, largely due to growing popularity with women. S T R A T E G Y Having pioneered the growth of Japan s oolong tea market, Ito En continues to pursue a distinctive product development strategy. Through the use of rare varieties of tea and production methods that draw flavor from the leaves in a manner unrivalled by competitors, Kin no Uron Cha has distinguished itself since it was first released in Not content with this feat however, Ito En will increase efforts to make its oolong tea match changing consumer preferences. Kaori Kirei Jasumin Cha is also continuing to consolidate its reputation among tea drinkers, a trend that will be further reinforced by enhanced advertising campaigns centered on this jasmine tea product. Fruit Vegetable Net Sales Share (2) 5.4% 14.% Net Sales ( billions) R E S U L T S Sales in this segment rose 8.8% to 33.3 billion. Vegetables beverages posted an increase in sales of 11.3% to 24. billion, with fruit beverages climbing 3.% to 9.3 billion. These successes are largely attributable to increasing health-awareness on the part of consumers. In terms of specific products, the Jujitsu Yasai and Midori no Yasai lines continued to perform strongly. Ito En commenced sales of several new beverages during the year. Midori no Jujitsu (Abundant Green), which presents customers with vegetables like cabbage and molokheiya Fruit Beverages Vegetable Beverages in an easily drinkable form, was one. Another is Aka no Jujitsu (Abundant Red), which is made from various red vegetables that are rich in nutrients. Both drew favorable receptions from consumers. In fruit juices, Gyutto Shibotta Lemon Sui and Shakitto Natsu Mikan (Crisp Summer Orange), both containing fruit pulp, posted increased sales. Blueberry Yogurt Fumi, a yogurt-type blend of whole blueberries, also performed strongly. S T R A T E G Y Vegetable beverages continue to perform strongly on the back of consumers steadily growing demand for healthy foods. As the pioneer in this field and as a leading power in the market today, Ito En continues to increase its efforts to align product quality, diversity in containers, and new product development with shifting consumer preferences. The Jujitsu Yasai series, the key earner in this segment, will be reinforced by new marketing strategies featuring container design revisions and free sample campaigns. TV commercials and campaigns that give customers the opportunity to win prizes will also play a part in boosting sales in this category even further.

17 annual report 2 Coffee Beverages Net Sales Share (2) 6.8% Net Sales ( billions) R E S U L T S This segment posted sales growth of 8.3%, with total sales of 11.6 billion. Growth in the Japanese coffee beverage market stayed at 1.5% in With all competitors in this area competing fiercely for market share, Ito En continued to emphasize product quality rather than allocating a large amount of funds to advertising campaigns. Expanding product lines and increasing the number of vending machines also contributed to its success in realizing growth above the industry average. The rich-tasting Demitasse Coffee, on the market since September 1998, showed particularly notable growth in sales from the beginning of the year, making significant contributions to total sales. Black Coffee and Semi-Black Coffee were devised to match customer demand for non-sweetened products. Both performed well throughout the year. Other key products also surpassed expectations. These included Drip Coffee, with its perfect balance of bitterness, acidity, richness and aroma; Cappuccino, with its distinctive aroma; Premium Mocha, made from pure mocha; and Milk Coffee, perfectly balancing coffee and milk. S T R A T E G Y Ito En s basic strategy regarding this segment is to develop the high quality products needed to distinguish itself from its competitors. All products are conceived to satisfy customers demands for authenticity and excel in terms of ingredients and production methods. Selection of only the best coffee beans will remain a high priority. And by roasting beans at its own plants, Ito En is striving to bring to market beverages of unprecedented quality. Sales growth will be achieved primarily through expansion of the vending machine network. This network is due to increase by 7,935 units in the current fiscal year to some 69,1 units, and steps will be taken to increase average sales per machine. 15 Black Tea Beverages & Other Products Net Sales Share (2) 9.8% Net Sales ( billions) factor in total sales of carbonated beverages climbing 17.3% to 2.3 billion. Nata de Coco Plain grew in popularity due to its delicious combination of Nata de Coco and fermented milk. Ringo Su Suki (Fresh Apple Sour), having come onto the market in September 1999, has been well received by customers as an apple vinegarbased beverage rich in nutrients and with a flavor unmatched by any of its rivals. Backed by these popular products, other product sales increased 25.5% to 6.3 billion. R E S U L T S Sales in this segment rose 3.1% to 16.7 billion. Japan s market for black tea beverages is still in decline. This is a sector in which Ito En sets itself apart from competitors through products such as Lemon Tea and Apple Tea, both made from high quality, highaltitude grown Ceylon tea. Shifting focus to these teas resulted in net sales increasing 4.6% to 4.5 billion. Carbonated drinks saw the mainstay product Tennensui Saida continue to perform strongly. The introduction of Vitamin C 2 in 5ml PET bottles, a drink with the vitamin C content of a hundred lemons, was another S T R A T E G Y Ringo Su Suki will see its role as a functional health beverage enhanced by stressing clearly defined marketing concepts. The entire segment will see the addition of new products and containers to make the most of the growth potential it offers. Black tea and carbonated beverages are an area in which Ito En will continue to build on its supremacy. This will be achieved through the development of high quality products and an increase in vending machines, which will allow tailoring the product lineup to each location.

18 ITO EN, LTD. F I N A N C I A L S E C T I O N 16 C O N T E N T S 17. Financial Data 23. Consolidated Six-Year Summary 24. Consolidated Financial Review 26. Consolidated Balance Sheets 28. Consolidated Statements of Income 29. Consolidated Statements of Stockholders Equity 3. Consolidated Statements of Cash Flows 31. Notes to Consolidated Financial Statements 41. Report of Independent Certified Public Accountants 42. Non-Consolidated Balance Sheets 44. Non-Consolidated Statements of Income 45. Non-Consolidated Statements of Stockholders Equity 46. Non-Consolidated Statements of Cash Flows 47. Notes to Non-Consolidated Financial Statements 51. Report of Independent Certified Public Accountants 52. Board of Directors and Corporate Auditors 53. Ito-En The History of History Our Innovation of Our Innovation 54. Investor Information 55. Corporate Data

19 annual report 2 F INANCIAL D ATA Operating Income & Operating Profit Ratio ( millions) (%) 15, 15 Ordinary Income & Ordinary Profit Ratio ( millions) (%) 15, 15 1, 1 1, 1 5, 5 5, Operating Income (Consolidated) Operating Income (Non-Consolidated) Operating Profit Ratio (Consolidated) Operating Profit Ratio (Non-Consolidated) Ordinary Income (Consolidated) Ordinary Income (Non-Consolidated) Ordinary Profit Ratio (Consolidated) Ordinary Profit Ratio (Non-Consolidated) Net Income & Return on Sales ( millions) (%) 8, 8 Cost of Sales & Ratio of Cost of Sales ( millions) (%) 1, 1 6, 6 8, 8 4, 4 6, 4, , 2 2, Net Income (Consolidated) Net Income (Non-Consolidated) Return on Sales (Consolidated) Return on Sales (Non-Consolidated) Cost of Sales (Consolidated) Cost of Sales (Non-Consolidated) Ratio of Cost of Sales (Consolidated) Ratio of Cost of Sales (Non-Consolidated) millions/% Operating Income (Consolidated) 7,418 8,46 1,54 12,569 14,267 (Non-Consolidated) 7,259 7,89 9,958 12,57 13,788 Operating Profit Ratio (Consolidated) 6.9% 6.6% 7.3% 8.% 8.2% (Non-Consolidated) 6.9% 6.6% 7.4% 8.1% 8.% Ordinary Income (Consolidated) 6,78 7,356 9,252 11,668 13,791 (Non-Consolidated) 6,648 7,22 9,21 11,678 13,318 Ordinary Profit Ratio (Consolidated) 6.3% 6.% 6.7% 7.5% 7.9% (Non-Consolidated) 6.3% 6.1% 6.8% 7.6% 7.8% Net Income (Consolidated) 2,739 2,433 3,45 5,325 6,53 (Non-Consolidated) 2,657 2,441 3,117 5,445 6,32 Return on Sales (Consolidated) 2.5% 2.% 2.5% 3.4% 3.8% (Non-Consolidated) 2.5% 2.1% 2.3% 3.5% 3.7% Cost of Sales (Consolidated) 6,546 68,37 75,276 83,226 9,594 (Non-Consolidated) 59,125 66,753 73,834 81,884 89,739 Ratio of Cost of Sales (Consolidated) 55.9% 56.2% 54.8% 53.2% 52.1% (Non-Consolidated) 56.% 56.2% 54.8% 53.2% 52.3%

20 ITO EN, LTD. Sales Compound Growth Rate (%) 15 Operating Income Compound Growth Rate (%) year 2 years 3 years 4 years 5 years 1 year 2 years 3 years 4 years 5 years Sales Compound Growth Rate (Consolidated) Sales Compound Growth Rate (Non-Consolidated) Operating Income Compound Growth Rate (Consolidated) Operating Income Compound Growth Rate (Non-Consolidated) Ordinary Income Compound Growth Rate (%) 3 Gross Cash Flow Compound Growth Rate (%) year 2 years 3 years 4 years 5 years 1 year 2 years 3 years 4 years 5 years Ordinary Income Compound Growth Rate (Consolidated) Ordinary Income Compound Growth Rate (Non-Consolidated) Gross Cash Flow Compound Growth Rate (Consolidated) Gross Cash Flow Compound Growth Rate (Non-Consolidated) % 1 year 2 years 3 years 4 years 5 years Sales Compound (Consolidated) 11.1% 12.6% 12.7% 12.6% 11.7% Growth Rate (Non-Consolidated) 11.5% 12.9% 13.% 12.9% 12.% Operating Income (Consolidated) 13.5% 19.1% 21.% 17.8% 15.4% Compound Growth Rate (Non-Consolidated) 1.2% 17.7% 2.5% 17.4% 15.4% Ordinary Income (Consolidated) 18.2% 22.1% 23.3% 19.4% 18.5% Compound Growth Rate (Non-Consolidated) 14.% 2.3% 22.6% 19.% 18.5% Gross Cash Flow (Consolidated) 18.2% 3.7% 29.3% 19.5% 2.6% Compound Growth Rate (Non-Consolidated) 13.3% 34.5% 28.8% 19.2% 21.4%

21 annual report 2 Total Assets & Asset Turnover ( millions) (times) 1, 5 Inventories & Inventory Turnover ( millions) (times) 15, 3 8, 4 6, 3 1, 2 4, 2 5, 1 2, Total Assets (Consolidated) Total Assets (Non-Consolidated) Asset Turnover (Consolidated) Asset Turnover (Non-Consolidated) Inventories (Consolidated) Inventories (Non-Consolidated) Inventory Turnover (Consolidated) Inventory Turnover (Non-Consolidated) Total Stockholders' Equity & Equity Ratio ( millions) (%) 6, 6 Current Assets & Current Ratio ( millions) (%) 6, 3 4, 4 4, , 2 2, Total Stockholders Equity (Consolidated) Total Stockholders Equity (Non-Consolidated) Equity Ratio (Consolidated) Equity Ratio (Non-Consolidated) Current Assets (Consolidated) Current Assets (Non-Consolidated) Current Ratio (Consolidated) Current Ratio (Non-Consolidated) millions/times/% Total Assets (Consolidated) 7,853 7,546 77,234 83,328 82,386 (Non-Consolidated) 7,344 7,168 76,584 83,6 82,681 Asset Turnover (Consolidated) (Non-Consolidated) Inventories (Consolidated) 9,434 11,933 11,86 12,831 12,866 (Non-Consolidated) 8,852 11,182 11,14 12,235 12,328 Inventory Turnover (Consolidated) (Non-Consolidated) Total Stockholders (Consolidated) 23,795 25,3 34,841 39,322 4,783 Equity (Non-Consolidated) 23,847 25,13 34,56 39,945 41,458 Equity Ratio (Consolidated) 33.6% 35.4% 45.1% 47.2% 49.5% (Non-Consolidated) 33.9% 35.6% 45.1% 47.8% 5.1% Current Assets (Consolidated) 37,22 38,721 45,42 5,49 5,14 (Non-Consolidated) 36,35 37,933 44,287 49,919 49,177 Current Ratio (Consolidated) 126.8% 113.5% 118.4% 162.7% 174.2% (Non-Consolidated) 126.4% 111.6% 116.2% 162.5% 172.6%