Risk Management Report

Risk management philosophy

New Clicks strives to achieve an appropriate balance between risk and reward, recognising that certain risks need to be taken to grow revenue and improve returns to investors while consciously protecting the group and its stakeholders against avoidable risks.

Business risks will always be evaluated and appropriate strategies developed to manage or mitigate the risk.

The group’s medium-term financial objective of achieving a return on equity of 35% to 40% is achievable through a clear focus on sustained organic growth and asset management of the existing businesses within an appropriate level of debt. The directors believe that the pursuit of this goal will not increase the group’s level of risk.

Responsibility for risk management

The group has adopted the risk management principles outlined in the King ll Report. While the board has overall accountability for risk management, the risk committee assists the board in discharging its responsibilities. Operating under written terms of reference, the risk committee reports to the board and elevates any risks which it deems necessary for discussion and evaluation by all directors.

The role, functions and composition of the risk committee are detailed in the Corporate Governance Report.

Identifying risks

A formal process of identifying risks is conducted regularly by executive management who are responsible for the identification and management of risks. This includes evaluating the status of major risks, the likelihood of occurrence and the potential impact of the risk on the business. Emerging risks, such as legislative changes and the general economic environment, are also identified. This ensures that senior management in each business unit formally review risks and this process is aligned with the business planning cycle.

It is also recognised that in a dynamic business environment new risks and opportunities need to be identified and managed on an ongoing basis. The major risks and related mitigation strategies are contained in the accompanying table.

Short-term operational risks

The group also faces short-term operational risks, some of which are specific to the retail industry:

  • Impact of economic downturn on retail sales owing to lower consumer spending following multiple interest rate rises, escalating energy and food prices, and increased crime-related losses;
  • Inflationary cost pressures owing to rising electricity and fuel costs;
  • Disruptions to power supply which results in shopping malls being closed for the duration of the power outage; and
  • Increasing competitor activity.

These risks are managed on an ongoing basis within each of the operating businesses.

Financial risk

The group has a comprehensive financial risk management programme which focuses on the unpredictability of financial markets and seeks to minimise the potential adverse effects on the group’s financial performance. It is recognised that the failure to manage financial risks could impact negatively on profitability and ultimately lead to the destruction of shareholder value.

Through its business activities the group is exposed to a variety of financial risks, including market risk (currency risk, interest rate risk and price risk), credit risk and liquidity risk. The group’s exposure to these risks and the policies for measuring and managing the risk are included in notes 29 and 30.

While the group is largely debt free it has a need for short-term funding facilities on an ongoing basis. The recent turmoil in global financial markets has raised issues on the continued availability of these funding arrangements which are generally subject to review or cancellation at short notice. The majority of the group’s funding lines are provided by six major South African financial institutions, with limited facilities provided by one international bank.

Insurance

Insurance forms a key element of the risk management process to protect the group against the adverse consequences of risk. The group recognises that although insurance is a means of mitigating the impact of certain identified risks, management has responsibility to manage these risks with the purpose of limiting their occurrence and their impact.

The risk committee approves the annual insurance renewal, cover levels and the schedule of uninsured and uninsurable risks. It is the policy of the group to insure assets to replacement value, carry appropriate levels of self-insurance and only contract with reputable insurance companies.

Risk Implications for business Management and mitigation of risk
Healthcare legislation Lack of clarity on the implementation of the dispensing fee for retail pharmacy and logistics fee and benchmark pricing for wholesale distribution has a potential impact on revenue and profitability, as well as creating investor uncertainty
  • Ongoing engagement with industry stakeholders, including Department of Health
  • Diversification of UPD income base
  • Strong focus on growing volumes in Clicks and UPD and increasing market share
 
Attraction and retention of pharmacy professionals in Clicks Shortage of healthcare professionals remains an industry challenge and limits business growth and increases costs Clicks is being positioned as an employer of choice through
  • Continuous professional development
  • Code of ethical practices
  • Training initiatives with educational bodies, including funding studies for pharmacy students and learners
 
Attraction and retention of key talent Inability to attract and retain people in key positions can ultimately compromise service delivery
  • Increased focus on employee development, performance management and career path planning
  • Short and long-term incentive schemes in place
 
Environment Adopting environmentally-friendly business practices and complying with regulations will assist with sustainability of business and reduce reputational risk
  • Ensuring regulatory compliance
  • Focus on reducing electricity usage
  • Group-wide recycling programme
  • Commissioned audit of carbon footprint
  • Participation in carbon disclosure project
 
Transformation Compliance with BEE regulations is fundamental to the sustainability of the business
  • External rating conducted in 2008
  • Transformation strategy developed with defined three-year targets and integrated into operations
  • Targeting 100% BBBEE compliance by 2010
 
Crime High levels of crime result in loss of revenue, assets and stock, risk to staff and increase costs relating to crime detection and prevention
  • Target high levels of operational compliance>
  • Appropriate levels of insurance cover
  • Adopt zero tolerance policy on crime
  • Processes at distribution centres reviewed to counter syndicated criminal activities
  • Internal forensic department investigates incidents of crime and fraud
  • Subscribe to Tip-Offs Anonymous
 
Disruption of distribution and support centres Incidents including industrial action could result in the disruption of the Clicks and UPD distribution centres and the head office which could affect supply and service levels to customers
  • Disaster recovery plans developed and regularly reviewed
  • Business continuity plans developed for head office
  • Management of risk areas in distribution facilities
  • Appropriate levels of insurance cover
 
Impact of technology on entertainment industry Musica is exposed to the impact of rapidly changing technology in the entertainment industry which can affect the product offering and profitability. This is both a risk and an opportunity.
  • Shifting business model and product mix to broader entertainment offering
  • Continual review of international developments
 
HIV/AIDS The group is exposed to the HIV/AIDS risk through employees and customers. The business is affected by a loss of staff and increasing staff-related costs, as well as a potential decline in the customer base
  • External assessment and impact study undertaken
  • Employee wellness programme offered to staff
  • HIV/AIDS testing and counselling provided by Clicks clinics
 
Damage to reputation An event or management action could compromise the group’s reputation and result in a loss of confidence by shareholders, customers and staff, with adverse financial implications
  • Policies to ensure operational and professional compliance, particularly in healthcare businesses
  • Strengthened in-house legal department
  • Crisis communications plan developed