A summary of the material risks identified during the Reporting Period are presented in the table below. The Management Board in place during the 2017 Reporting Period determined that the Group’s business, its financial condition and/or the results of operations could have been materially and adversely affected by the material risks identified below. The mitigating actions and context of the risks are based on the Reporting Period and the information available during that period.
Strategic risks
Economic slowdown/slow recovery During the Reporting Period, the Group identified that its ability to increase sales, maintain or increase prices and/or to recover fixed costs may have been adversely affected by volatile economic conditions. Historically, the household goods, general merchandise and automotive industries have been cyclical, fluctuating with economic cycles and conditions. Demand was deemed to be sensitive to general economic conditions, including housing activity, interest rate levels, current economic growth, credit availability, unemployment and other factors that affect consumer spending habits. Due to the discretionary nature of most household goods, general merchandise and automotive purchases, and the fact that they often represent a significant expenditure to the
average consumer, such purchases may be deferred during times of economic uncertainty.
These general economic factors affected not only the ultimate consumer, but also impacted the Group’s owned and third-party mass and specialty retailers, which are the Group’s primary customers for wholesale and distribution of its manufactured and sourced products.
Low-growth consumer markets existed despite growth in the world economy. A low-demand growth environment remained prevalent in the developed world and retailing in Europe was viewed as a zero-sum game where one player’s gain is another’s loss. Similarly, economic growth forecasts remained weak and were below 1% and 2%
respectively for Southern African countries.
Risk mitigation activities during the Reporting Period:
(i) Achieving efficiencies and reducing costs by optimising operations without compromising quality of goods or service delivery. Ongoing initiatives include standardising processes, centralising procurement, and efficiently deploying staff.
(ii) Leveraging the Group integrated supply chain activities to accelerate productivity, efficiency and innovation including the automation of key administrative and financial processes.
(iii) Regular supplier negotiations in order to leverage Group buying power and achieve economies of scale.
The medium risk rating has been adversely affected by the events of December 2017.
The risk remains significant and continues to impact operating companies post the Reporting Period.
No MATERIAL GROUP RISKS (2017) RISK CLASSIFICATION RISK RATING*
1 Economic slowdown/slow recovery External: strategic risk Medium
2 Failure to execute acquisition growth plans Internal: strategic risk High 3 Loss of leadership/ attracting and retaining quality of skills Internal: operational risk Low
4 Regulatory/legislative changes External: compliance risk Medium
5 Liquidity, financing and cash flow risk External: financial risk Low
6 Increasing competition External: strategic risk Low
7 Technology failure/cyber threat External: information technology risk Medium
8 Damage to reputation and brand External: operational risk Low
9 Failure to innovate and meet customer needs External: strategic risk Medium
10 Supply chain risk External and internal: operational risk Low
*The Risk Rating is an indication of the residual risk remaining after mitigating controls are taken into account.
Failure to execute acquisition growth plans The Group identified that its growth objectives could have been adversely affected if it was unable to execute and integrate acquisitions effectively.
The Group completed several strategic acquisitions and joint-venture arrangements over the preceding years, which have historically contributed to the expansion of its business and operations. During the Reporting Period, the Group identified that its ability to continue to grow in new markets was dependent on its success in identifying and concluding appropriate acquisitions and joint-venture arrangements. Moreover, the Group’s future operating results were deemed to be largely dependent upon its ability to manage and integrate acquisitions effectively.
The inability to successfully integrate acquisitions could have negatively impacted the profitability of the acquired businesses, as well as resulted in the impairment of the Group’s intangible assets, including goodwill.
Successfully integrating new acquisitions was deemed to be critical to the Group’s brand and reputation and if unsuccessful, the Group may not have been able to manage the continuing expansion of its business effectively. The Group’s management structures, systems, procedures or controls may not have been adequate or sufficiently developed to support the continued expansion of its operations. Furthermore, management may not have been able to allocate the time and resources necessary to effectively manage this expansion.
Risk mitigation activities during the Reporting Period:
(i) Implementation of an effective business growth strategy and leveraging best practices to ensure optimised operational process for efficiency and cost management.
(ii) Performance delivery plans that cover growth across all divisions / territories.
(iii) Regular review of divisional development plans.
(iv) Investing in capital projects focused on new revenue generation.
The control environment has been highlighted as poor by the events of December 2017. This risk is significant and continues to impact operating companies post the Reporting Period.
Increasing competition
The household goods, general merchandise and automotive retail markets are generally fragmented and highly competitive and consist of a large number of manufacturers and retailers that produce and distribute products similar to those of the Group.
Notwithstanding the Group’s own sourcing abilities, the added competition and flexibility of competitors (and customers) that are able to supply a mix of sourced and manufactured products placed, additional pressure on the Group’s operations and competitive advantages. The Group also faced intensified competition in the e-commerce sector due to lower barriers of entry and the development of the online market for certain classes of products.
Competition is generally based on product quality, timing of delivery, product design, product availability, brand name recognition, price and customer service. In certain of the Group’s markets, the Group competed with a limited number of large companies that may have greater financial and other resources at their disposal. Additionally, the Group also faced competition in the multiple geographic markets it competes in including the general merchandise, household goods and automotive retail. The Group identified that its success in these markets, and across these product categories, depended largely on its ability to identify customer preferences and translate such demand into appropriately priced, saleable merchandise in a timely manner. If the Group did not correctly interpret trends and respond appropriately, there was a risk of losing its target customers to competing retailers. As a result, the Group may have been exposed to a loss of market share or be left with excess or slow-moving inventory, in which case it would have been forced to rely on markdowns or promotional sales, thereby reducing its revenue and margins.
Risk mitigation activities during the Reporting Period:
(i) Expanding core businesses into areas where there is increased demand and less competition.
(ii) Attract the appropriate merchandisers (iii) Store expansion plans.
(iv) E-commerce growth initiatives.
(v) Factors that influence decisions to invest include population demographics, existing competitors, return on investment.
The low Risk Rating has been adversely affected by the events of December 2017.
The risk has increased significantly and will continues to impact operating companies post the Reporting Period.
Failure to innovate/meet customer needs Failure to innovate and/or meet customer needs was deemed to be a significant risk due to the changes in consumer behaviour, and constant innovation of products and service offerings required from retailers.
Emerging trends indicated that there was an increasing use of mobile technology among the emerging generation of people who would rather browse products on a mobile device than visit traditional brick and mortar stores. Distribution channels and volume sales are required to make this alternative business model profitable. During the Reporting Period, consumers reduced consumption, cut back on spending, and increasingly used online price-comparison sites. Despite the urgency and massive investment of time and money, innovation remained a frustrating pursuit.
Innovation initiatives often fail but successful innovations can lead to
competitive advantages, allowing for unique brand positioning and differentiation, establishing brand reputation equity, and increased profitability.
is intense, and the Group could not be certain that it would have been successful in managing, attracting and retaining the personnel required to successfully conduct its operations. The Group determined that competition for available skills will continue to intensify.
Risk mitigation activities during the Reporting Period:
(i) Identifying succession candidates and ensuring effective knowledge transfer to future leadership candidates.
(ii) Competitively and appropriately remunerating employees, including appropriate incentive and award schemes.
(iii) Motivating employees through training, talent management and career development.
The risk rating has been adversely affected by the events of December 2017. This is a significant risk and continues to impact operating companies post the Reporting Period.
Damage to reputation / brand
Unforeseen disasters, circumstances or actions of directors, officers, employees or peripheral parties, such as suppliers or joint venture partners was identified as a risk that could do untold damage to the Group’s reputation.
From occurrences such as fraud, product recall or supply issues, public perception can cause a company’s value to drop dramatically. The Group determined that it operates in highly competitive markets and may have been unable to conclude transactions to expand its business with a damaged reputation.
Investor confidence and the ability to secure lending facilities may have been impacted by a significant damage to reputation. A damaged brand/reputation could have resulted in the Group facing increased competition from other leading retailers for market share growth opportunities, and an inability to take advantage of perceived consolidation opportunities. Either event would have adversely affect the Group’s ability to successfully maintain and grow its market share.
The Group considered its potential exposure to product liability claims that could have result in loss of reputation. The packaging, marketing, distribution and sale of the Group’s products entail an inherent risk of product liability, product recall and resultant adverse publicity. Products may contain contaminants or be of inferior quality, which could result in illness, injury or death.
As a consequence, the Group identified its exposure to product liability claims. If a product liability claim was successful, the Group’s insurance may not have been adequate to cover all liabilities that it may have incurred and the Group may not have been able to continue to maintain such insurance or obtain comparable insurance cover at a reasonable cost, if at all. In addition, even if a product liability claim was unsuccessful or not fully pursued, the negative publicity surrounding any assertion that the Group’s products caused injury could have adversely affect the Group’s reputation and, consequently, its business, results of operations or financial condition.
Risk mitigation activities during the Reporting Period:
(i) Proactive management of issues that arise, with key managers providing accurate and balanced responses to adverse press coverage.
(ii) Development of plans which focus on the Group’s responses to specific incidents.
The low risk rating has been adversely affected by the events of December 2017.
This risk is significant and continues to impact operating companies post the Reporting Period.
Supply chain risk
The failure of the supply chain was deemed to be a significant risk due to the Group’s dependency on the efficiency of its logistics networks, which include the movement of raw materials and finished goods primarily by way of road, rail and sea, and the delivery of final products to end users.
Risk mitigation activities during the Reporting Period:
(i) Constant review of the competitor landscape to identify trends and possible acquisitions.
(ii) Active investment in IT to remain aligned with consumer requirements.
(iii) Investment by operations into a multichannel approach to sales that seeks to provide customers with a seamless shopping experience, whether they are shopping online from a desktop or mobile device, by telephone, or in a brick-and-mortar store.
The medium risk rating has been adversely affected by the events of December 2017.
This risk remains significant and continues to impact operating companies post the Reporting Period.
Operational risks
Loss of leadership/attracting and retaining quality of skills
The CEO, executive management and management of operational entities were regarded as key to the long-term sustainability of the business. A lack of clear succession planning and training could have adversely impacted on investor confidence in the short term and disrupted strategic initiatives in the long term. The Group depended on the skills and experience of the CEO and the senior executive officers.
The Group identified that its strategic development depended, in part, on the continued contributions of the CEO who was experienced in the markets and business in which the Group operates. The loss of the services of the CEO and/or certain senior executive officers would negatively impact the Group’s operations and its ability to develop the business.
The Group’s success was identified as being dependent on its ability to manage, attract and retain skilled and qualified personnel as management worked to continue the development and expansion of the business.
Competition for skilled employees in the industries in which the Group operates
The following supply chain risks were specifically highlighted:
(i) The primary means by which the Group transports its goods is via ocean-borne containers and road transport. The Group contracts with third parties to ship cargos by ocean-borne container. Transport by ocean-borne container involves particular risks, including the risk of delay in transport and loss of and/or damage to the cargo due to factors beyond the Group’s control.
These factors include adverse natural conditions, such as violent storms, tidal waves and tsunamis, as well as terrorist attacks and piracy, which has increased in frequency. The occurrence of these events could have a material adverse impact on the Group’s cost of operations.
(ii) Damage to central warehouse and distribution centres could have resulted in business interruptions and loss of income which was a significant risk to the Group.
(iii) Despite ongoing investment in the Group’s logistics network, the Group remained vulnerable to external risks beyond its control, such as the failure of third-party suppliers to ensure that the appropriate quality and quantity of goods are shipped, as well as possible delays to delivery that could be caused by disruption to the Group’s distribution networks. The risk of delay in the delivery of goods was deemed to be particularly significant in instances where large amounts of goods were shipped ahead of peak trading seasons, a prolonged delay in delivery could significantly impact the Group’s profitability for that period. The delivery of goods from suppliers may be delayed by customs, labour issues, changes in political, economic and social conditions, laws and regulations.
Unfavourable fluctuations in the availability of products could negatively affect the Group’s ability to meet the demands of its customers and have a negative impact on product margin.
Moreover, while the Group strategically targeted its investment in its own warehousing and logistics technologies, no assurances could have been given
that the Group’s focused investment would earn a sufficient return on such investments in its fulfilment facilities.
(iv) The Group sourced various types of raw materials for the production of the furniture and household goods sold in its retail outlets and to third-party retailers, including wood, fabrics, leathers, glass, upholstered filling material, steel and other commodities, on a global and regional basis. The sources and prices of these materials and components were deemed to be susceptible to significant price fluctuations due to supply and demand trends, transportation costs, government regulations and tariffs, the economic climate and other circumstances beyond the Group’s control. In particular, volatility in oil markets led to significant fluctuations in the price of petroleum-based products, which affects the cost of the Group’s polyurethane foam, polyester, polyethylene foam and steel innerspring component parts.
(v) The Group’s suppliers of raw materials and finished goods could have chosen to discontinue business with the Group or change the terms under which they are willing to do business, such as price, minimum quantities, required lead times or payment terms. Fluctuations in the price, availability or quality of (i) the raw materials the Group used in manufacturing its products or (ii) the products it sourced could have resulted in a negative impact on the Group’s cost of sales and its ability to meet the demands of its customers. In the event of a significant disruption in the Group’s supply of raw materials or sourced products, the Group may not have been able to locate alternative sources at an acceptable price or in a timely manner.
In addition, if the price of raw materials increased, the Group determined that it may not have been able to pass on to customers all or a portion of the higher costs, due to competitive and market pressures.
Risk mitigation activities during the Reporting Period:
(i) Vertical and horizontal supply chain integration.
(ii) Strict service delivery agreements with suppliers.
(iii) Use of multiple suppliers in
multijurisdictional parts of the world.
(iv) Adequate insurance coverage for marine transit globally.
(v) Adequate insurance coverage for business interruption.
The low risk rating has been adversely affected by the events of December 2017.
This risk rating has increased significantly and continues to impact operating companies post the Reporting Period.
Compliance risks Regulatory Compliance
During the Reporting Period, the Group’s operations remained subject to various laws and regulations in the jurisdictions in which it operated, relating to inter alia such matters as health and safety, employment and environmental issues. Historically, compliance with these laws and regulations has been high as it has not resulted in material costs or had any material adverse effect on the Group’s operations. However, if the Group failed to comply with any such laws or regulations, it could have resulted in exposure to liability, including, but not limited to, mandatory shutdowns, damages, criminal prosecutions, and financial penalties, loss of trade agreements and contracts, and injunctive action.
Changes to the industry legislative landscape and compliance environment could have an adverse impact on operations and, in severe cases, result in prosecution due to non-compliance. Potential anti-competitive conduct was considered as a risk due to the risk of broader enforcement action by multiple authorities and the risk of follow-on damages claims in any number of jurisdictions. The Group’s operations were subject to certain anti-competition legislation and regulatory oversight.
Expansions of its operations through acquisitions may require regulatory approval.
While, to date, all acquisitions have been approved by regulatory authorities, it is possible that, in the future, the Group may not receive approval to make additional acquisitions or that such approval may be subject to various conditions which could affect its ability to expand its operations in that market. From an acquisitive growth perspective, any of the foregoing occurrences could have a material adverse
While, to date, all acquisitions have been approved by regulatory authorities, it is possible that, in the future, the Group may not receive approval to make additional acquisitions or that such approval may be subject to various conditions which could affect its ability to expand its operations in that market. From an acquisitive growth perspective, any of the foregoing occurrences could have a material adverse