Managing our risk

As part of the annual risk reporting process, the Divisions’ Risk Officers report any major risk incidents that occurred during the year to the Risk Committee. These incidents are defined in the Group Risk Policy as ones that directly or indirectly impact annual Divisional earnings before interest and tax or total assets by 5% or more (quantitative); or have significant qualitative dimensions that may include:

  • A major concern to Massmart Holdings’ public shareholders;
  • Serious damage to the reputations of the Division and/or its executives and management;
  • Affecting a major portion of the Division’s customer base;
  • A large fraud or theft;
  • A legal matter that may result in major financial or reputational risk;
  • A material ethical or compliance breach, whether qualitative or quantitative;
  • A major breakdown in the control environment;
  • Significant IT system failure;
  • Nationwide media coverage and/or public concern; or
  • Affecting the Division’s or Group’s ability to implement or execute its strategy and business objectives.

The Risk Committee considers there to be two categories of Group risk that can broadly be described as Strategic/environmental risks and Operational risks.

Strategic/environmental risks
Strategic/environmental risks tend to be longer term and more material in nature and can, in most cases, only be monitored, managed and partially mitigated through longer-term strategic or tactical business responses. These risks, which, for example, include Executive talent retention and succession, transformation and supply chain, are the primary focus of the Group’s Risk Management process.
Operational risks
Operational risks by their nature can be immediately addressed or mitigated by local management actions. These risks – which include in-store health, safety and security, compliance, fire prevention and detection, IT systems and food safety, amongst others – are therefore the direct responsibility of each Divisional executive Committee where a Loss Prevention or Risk Officer has line-responsibility for overseeing these risks.
Below are the key risks facing the Group:
Risk
Definition
Mitigation
1
Non-adherence to business model or inability to adapt our strategy to changing market conditions
Massmart’s ability to successfully and sustainably execute our strategy is dependent on adherence to the Group’s business model. Non-adherence could impact the Group’s longer-term financial performance, and our competitive positioning could be severely compromised.
The Group insists on strategic clarity at the Divisions and Massmart Corporate. Divisional and Group strategies are formally documented and reviewed annually. Divisional strategies dictate management’s operational priorities and progress against these strategies is monitored on a monthly and quarterly basis.
2
Talent retention and succession
Given the scarcity of retail-specific skills, there is a need to develop and retain sufficient business and leadership skills. There may be an over-dependence on key leaders in the Group, and therefore there is a need for a managed leadership succession pipeline.
In 2016, in response to this risk we increased the breadth and depth of an ongoing talent retention and development project. The Executive Committee annually formally reviews the employees within the talent and succession pipeline. We recently reviewed the Massmart Corporate University’s agenda to ensure that it underpins the development of critical skills and adds to our employee value-proposition. Our remuneration policy incorporates short- and long-term incentives and is designed to reward performance and provides an opportunity for staff to accumulate wealth. The Share Scheme also acts as a retention mechanism.
3
Inability to innovate in response to a changing competitive landscape
The impact of an inadequate response to the digitalisation of all things retail, or the sustained competitive attacks aimed at one or more of the Group’s major categories.
We maintain a relevant and competitive offering that provides our customers with affordable value. This is possible through our low-cost and efficient operations. We are careful about our new store locations and ensure regular store refurbishments. Our investments in our omnichannel capabilities will ensure that we are the preferred online destination call for our customers.
4
Insufficient progress with transformation
Inadequate racial transformation across Massmart may result in adverse reputational and commercial risk (e.g. access to B2B/commercial business opportunities).
There are targets and plans for an improved Group BBBEE score, including an emphasis on executive management and supplier and enterprise development. In 2017, a portion of Executive incentivisation was linked to improving this score.
5
Threat of a cyber security breach
Lost data and compromised IT systems may pose a risk to the business, with the associated reputational damage and the possible contravention of applicable legislation.
The CIO oversees all IT systems and draws on resources and methodologies from external sources including Walmart’s IT Security Division. IT intrusion detection and prevention systems have been implemented and penetration tests are conducted continuously. Payment Card Industry (PCI) audits are also conducted on a regular basis.
6
Volatile economic conditions impact our growth potential
Significant adverse changes in economic factors such as inflation, interest rates and exchange rates may impact our business. Some of these factors may also impact profitability as they cause cost- and supply-disruption in the sourcing of retail products.
Key economic indicators in all our markets are monitored. We remain focused on our low cost business model. All direct foreign exchange import liabilities are forward covered. We closely monitor and adjust our interest-bearing debt profile and bank facilities. Our lease escalation rates are negotiated recognising likely future economic trends.

We minimise the asset base of our African operations thereby reducing the translation effect of any currency movement. We repatriate cash profits as frequently and settle cross-border liabilities timeously.
7
Failure to address health and safety issues across all our facilities
We aim to provide safe, healthy and good quality products to our customers. The health, safety and wellbeing of our employees is paramount.

Due to the significant size of many of our stores and DCs, we are cognisant of the negative impact fire could have on those operational sites.
To ensure product safety, regular supplier compliance audits are conducted. Reputable third parties audit our food safety management systems to ensure compliance. We also have external specialists monitoring our compliance to legislated and regulatory in-store health and safety practices.

To minimise our risk of fire we have in place safety measures including replacing roof insulation with fire retardant insulation in many stores, ensuring the safe location of power-generators and the safe storage of flammable products. We also work with external risk assessors and insurance providers.
8
Information technology failure
The very significant IT implementations underway may present a major risk to operational continuity if any of these were delayed or failed. Any lengthy downtime may impact the ability of the businesses to transact and operate, particularly in the omnichannel environment. An over-reliance on external service providers may also impact operations.
All major IT projects are approved by the CIO after review by the Technology, Information and Process Forum, the Group’s IT community. It is critical that these important IT systems are seamlessly implemented, support the achievement of our business strategy, and that they drive and improve our omnichannel strategy. We are minimising our dependence on external service providers by creating an internal SAP centre of excellence.
9
Increase in cost of product and our operating expenses may undermine our low-cost foundation
Our business model is premised on high-volumes with low operating costs, thereby enabling the sale of merchandise at the lowest possible price. High cost-inflation and inefficiency are potential threats to this approach.
We have an intense focus on cost control, supported by monitoring and benchmarking our costs, and through innovation. Other means of achieving this include labour-scheduling, new store opening decisions, focusing on lowering the capital cost of new stores, and tightly managed capital expenditure programmes.
10
Inefficient or ineffective supply chain or a failure in the supply chain
It is essential that we have the lowest possible cost to serve for the movement and storage of our inventory, and with the appropriate stock availability. An ineffective or inefficient supply chain may result in sub-optimal inventory management, with cost inefficiencies and/or over-or under-stocking affecting holding costs and sales. Operationally, a failure in the supply could cause out of stocks and therefore loss of sales and reputational damage.
We continually improve processes and systems to ensure our supply chain operates optimally. Our supply chain team engages across the disciplines of planning, buying, replenishment, logistics and store operations. We continually optimise the utilisation of our regional distribution centres by increasing product volumes through the supply chain network. We also have put in place business continuity plans for regional distribution centres, transport and systems.