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26 Risks Kingfi sher plc Annual Report and Accounts 2009/10 Given the scale and diversity of our businesses, the Board of Directors recognises that the nature, scope and potential impact of our key business and strategic risks is subject to constant change. As such, the Board has implemented the necessary framework to ensure that it has suffi cient visibility of the Group’s key risks and the opportunity to regularly review the adequacy and effectiveness of our mitigating controls and strategies. The Corporate governance report on pages 35 to 40 describes the systems and processes through which the directors manage and mitigate risks. The Board considers that the principal risks to achieving its objectives are set out below. Risk Action 1: China fails to deliver the desired return We have made solid progress with the turnaround programme in our operations in China and have implemented a number of key actions Although the Company has established a signifi cant market share and including: measures to strengthen the management team, a stock brand presence in our key Chinese consumer markets the business clearance plan to release working capital and a store re-organisation plan has not delivered the desired return on invested capital. to ensure that our store locations are appropriate. 2: The fragility of economic recovery continues to undermine consumer confi dence and restricts opportunities for growth. Uncertainty surrounding the resilience of the global economy and the ongoing effectiveness of fi scal stimulus and monetary measures continue to impact consumer confi dence and present a diffi cult trading outlook across the retail sector, particularly in terms of delivering opportunities for growth. 3: We fail to take advantage of our combined buying power synergies and economies of scale There is a risk that we fail to ‘unlock’ the potential to generate further shareholder value through the optimisation of combined purchasing and commercial synergies. 4: Our systems and supply chain infrastructures lack the fl exibility and capability to support the delivery of our strategic plans Our ability to deliver the targets set by our seven step ‘Delivering Value’ strategy will undoubtedly place increasing demands on our existing supply chain and systems infrastructure and technologies. There is a risk that our infrastructure will lack the necessary scalability, fl exibility and resilience to support its successful execution. This is particularly relevant to our operating companies in developing markets which may not yet have the necessary logistics infrastructure and capabilities in place to accommodate our direct sourcing plans. We are now currently evaluating a new format and product ranges to ensure that the B&Q China proposition is aligned with our customers’ needs in order to provide a sustainable and long-term return. We remain committed to the measures implemented throughout 2009 to ensure the Group is appropriately managed in a tough economic environment. Strong cash generation throughout 2009 has enabled the Group to reduce fi nancial net debt from £1 billion at the end of 2008/09 to £250 million at the end of 2009/10. Given the robust health of our balance sheet, the ongoing availability of undrawn bank facilities and the recovery of the bond markets, we are confi dent that we have suffi cient fi nancial fl exibility to manage the business through any worsening of the economic climate. We have introduced challenging targets across our major operating companies to ensure we have identifi ed those categories that will benefi t most, in terms of optimising cash margin gains, from a more collective approach to both international contract negotiations and own-brand opportunities. Increased alignment of products, sourcing, and packaging strategies for our major own-brand products continue to drive cost price reduction opportunities. The Kingfi sher Sourcing Organisation has also been enhanced to ensure it has the appropriate structures to deliver improved direct sourcing opportunities across the Group. We have plans to make the necessary information technology investment to maintain or extend the useful lives of our existing technologies and developing solutions that directly support our Delivering Value plans. Where possible, we are also seeking to eliminate complex or heavily bespoke technologies that may hold back new and innovative customer offers. We remain committed to ensuring that we invest in the right supply chain infrastructures to support our growth plans and allow us to maximise synergies and effi ciency opportunities.
Kingfi sher plc Annual Report and Accounts 2009/10 Risk Action 5: We fail to adopt our formats and models to meet ongoing changes in consumer trends, particularly given the impact of developments in the multi-channel sphere. Across our businesses we operate in increasingly sophisticated and changing markets. Our customers are becoming increasingly comfortable with the idea of shopping online and are using the internet more interactively, not just to make purchases, but also to research and seek inspiration and ideas for their homes and families. The ability to offer our customers a full and compelling multi-channel offering in terms of products, ideas, delivery options, services and innovations is becoming increasingly important and there is a risk that if we fail to capitalise on the continued growth of the internet and invest in multi-channel technologies we will lose market share to both traditional home improvement and new online competitors. 6: Impact of a major health and safety failure affects our reputation and results in harm to our employees, penalties or prosecution There is a risk that repeated health and safety failures could result in a major incident or fatality that is directly attributable to either a systematic or institutionalised failure in our health and safety management systems. This would result in damage to our reputation through adverse publicity, prosecution and censure. 7: We do not make the necessary investment in our people to ensure that we have the appropriate calibre of staff, skills and experiences across the Group Retail is fundamentally a people business and there is a risk that we fail to make the necessary investment in our people to ensure that we have the appropriate calibre of staff for specifi c roles and that skills and experiences are deployed in the best interests of the individual, the operating company and the Group. 27 Improving our multi-channel offer forms a core component of how we develop our customer proposition and we are investing to ensure we fully exploit our multi-channel capabilities. We are also investing in improvements to both the quality and depth of our knowledge and understanding of customer insight and market trends. With around 78,000 employees and six million customers visiting our stores each week, robust health and safety systems are a priority. The Board is committed to creating and sustaining a safe environment for both our staff and customers and regularly review and challenge health and safety performance, standards and targets across our businesses. Kingfi sher’s Corporate Centre is also responsible for facilitating the sharing of health and safety best practice between the Group’s businesses and the development of minimum Group standards, which in some cases will be stricter than local regulatory requirements. While regulatory requirements vary from country to country, each operating company is required to designate a director with specifi c responsibility for health and safety. This person is then responsible for ensuring that a written health and safety policy is communicated to all staff, that appropriate health and safety arrangements are in place to protect our employees and that we comply with local regulatory requirements. The ultimate responsibility within each operating company remains with the local Managing Director. We continue to invest in our people via effective staff training programmes. For example, in the UK, we have partnered with City & Guilds to deliver nationally accredited and recognised qualifi cations and apprenticeship schemes. We remain committed to the ongoing assessment and measurement of our people’s engagement with the business. We invest in Group wide engagement surveys and dedicate time and resource to improving engagement. We have also introduced new elements to our share-based long-term incentive plans across our business, to ensure that senior management rewards are aligned with our targeted performance and earnings growth.
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