Annual Report 2009 - British American Tobacco

ILLICIT TRADE
KEY GROUP RISK FACTORS
This section identifies the main risk factors
that may affect the British American Tobacco
Group’s business. The following table provides
a brief description of the key risks to which the
Group’s operations are exposed and identifies,
in each case, their potential impact on the
Group and the principal activities in place to
manage the risk. Each risk is considered in the
context of the Group strategy by identifying
the principal strategic element to which it
relates, although other elements may also
be relevant. The Group strategy is discussed
in detail in the preceding pages of this
Business review.
It is not the intention to provide an extensive
analysis of all risks affecting the Group. Not
all of the factors listed are within the control
of the Group and other factors besides those
listed may affect the performance of its
businesses. Some risks may be unknown
at present and other risks, currently regarded
as immaterial, could turn out to be material
in the future.
The risk factors listed in this section and the
specific activities in place to manage them
should be considered in the context of the
Group’s internal control framework, which
is addressed in detail in the statement on
internal control in the Corporate governance
statement. This section should also be read
in the context of the cautionary statement
regarding forward-looking statements at the
end of this section.
Risk registers are used at Group, regional, area
and individual market levels. The Group risk
register is reviewed by the Audit Committee
at six-monthly intervals and provides the
basis for the assessment of the key Group
risk factors identified below.
Illicit trade in the form of counterfeit products, smuggled genuine products and locally manufactured products on which applicable taxes are
evaded, represents a significant and growing threat to the legitimate tobacco industry. Increasing excise rates can encourage more consumers to
switch to illegal cheaper tobacco products and provide greater rewards for smugglers. The risk is exacerbated by the current economic downturn.
Competition from illicit trade
Principal relevance to Group strategy: Potential impact on Growth (organic revenue growth)
Principal potential causes
– sudden and disproportionate excise
increases and widening excise differentials
between markets;
– ineffective regulatory environment;
– lack of law enforcement and weak border
controls.
Potential impact on Group
– erosion of brand equity;
– investment in trade marketing
and distribution is undermined;
– product is commoditised;
– lower volumes and reduced profits.
Principal activities in place to address risk
– dedicated Anti-Illicit Trade (AIT) teams
operating at global, regional, area and
key market levels;
– active engagement with key stakeholders;
– global AIT strategy development supported
by a research programme to further the
understanding of the size and scope of
the problem;
– AIT Intelligence Unit (including a dedicated
analytical laboratory) cooperates with law
enforcement agencies in pursuit of priority
targets and capacity building;
– strong internal business conduct and
customer approval policies.
32 British American Tobacco Annual Report 2009 Directors’ report: Business review