Managing our risks
In determining the key risks and opportunities facing Massmart, consideration is given to the Group’s long-term strategy, its operating context and the key resources and relationships on which it relies.

Risk is defined as any issue that could impact Massmart’s ability to achieve its objectives of protecting shareholder value, protecting business reputation, ensuring compliance, and safeguarding its operations. We aim to deal with our operating uncertainty by not only minimising the downside, but by seeking to capitalise the upside potential to achieve our strategy.

Risk management is an integral part of the Board’s decision-making process and is applied in strategy setting. The Risk Committee assesses Massmart’s risk appetite and tolerance on a bi-annual basis. The Board, through the Risk Committee, defines risk appetite as the nature and extent of risk that Massmart is willing to take in order to meet its strategic objectives. In reviewing Massmart’s risk appetite and tolerance, the Risk Committee considers the severity of the potential impact of key risks and the controls or management actions in place to mitigate such impacts within appropriate tolerance levels.

The Risk Committee is responsible to the Board for overseeing the Group’s risk management programme. The day-to-day responsibility for risk management, including maintaining an appropriate loss prevention and internal control framework, remains with Massmart’s Executive Committee and Divisional Executives. Each Division has developed a risk and loss prevention process. The Risk Committee tables a Group risk register to the Board, in February and August, which is aggregated from the risk registers prepared by the Divisions and the Massmart Executive Committee.

Residual risk ratings
The risk movement from prior year for each principal risk has been assessed and is presented as:
NO CHANGE
INCREASED RISK EXPOSURE
DECREASED RISK EXPOSURE
NEW RISK
1 Non-adherence to business model or inability to adapt our strategy to changing market conditions
2 Talent retention and succession
3 Threat of cyber security breach
4 Insufficient progress with transformation
5 Inability to innovate in response to a changing competitive landscape
6 Poor consumer environment impact on potential growth
7 Failure to address health and safety issues across our facilities
8 IT systems’ capability and capacity to support operations and future growth
9 Increase in cost of goods and operating expenses undermining the low-cost foundation of the business
10 Inefficient or ineffective supply chain or a failure in the supply chain
Below are the key risks facing the Group:
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1
Non-adherence to business model or inability to adapt our strategy to changing market conditions
Context
The current economic environment has resulted in an increasingly competitive retail environment with intensified price and promotional activity. Massmart’s ability to successfully and sustainably execute on 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 compromised.
Mitigation
The Group insists on strategic clarity at the Divisions and at 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.
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2
Talent retention and succession
Context
Given the scarcity of retail-specific skills, there is a risk of an inadequate pipeline of the skills required to sustain current operations and achieve Massmart’s long-term strategic objectives. Further, there may be an over-dependence on key leaders in the Group. There is therefore a need for a managed leadership succession pipeline. This creates a need to develop and retain sufficient business and leadership skills.
Mitigation
As part of the ongoing talent retention and development project, we have implemented quarterly Group talent risk reviews focusing on succession planning for mission critical roles.
This includes the identification of emerging/next generation talent and clarifying the Massmart DNA and the competencies relevant to Massmart’s strategy.
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3
Threat of cyber security breach
Context
As cyber threats evolve and become more difficult to detect and defend, failure to maintain the security information could damage our reputation, result in litigation or other legal action causing substantial costs. Given that we receive and store customers', employees' and suppliers' personal information in our systems there is reputational risk associated with lost data and compromised systems. In addition, our online operations depend on the secure transmission of confidential information over public networks.
Mitigation
Chief Technology Officer and Chief Security Officer roles have been created to address and manage information security risks, including cyber security risks. We draw on resources and methodologies from Walmart’s IT Security Division. In addition, cyber security assessments have been undertaken and intrusion detection and prevention systems have been implemented.
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4
Insufficient progress with transformation
Context
In the broader national context, it is clear that retailers need to be invested in impactful initiatives that improve economic inclusivity in both supply chain and management. Inadequate transformation across Massmart may result in adverse reputational and commercial risk. This may include limited access to business-tobusiness (B2B)/commercial business opportunities.
Mitigation
Clear quantitative and qualitative targets exist for BBBEE performance. Emphasis has been placed on management and Executive succession planning and supplier and enterprise development. Part of the Executive incentivisation is linked to transformation. Our active Employment Equity Committee has representation from all organisational levels in order to identify barriers to employment equity and to determine initiatives in support of diversity and inclusion.
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5
Inability to innovate in response to a changing competitive landscape
Context
The digitalisation of retail means that we operate in an ever-changing competitive environment. We face strong competition from other retailers in terms of price, merchandise selection and availability, and our store formats and locations. A failure to respond effectively to competitive pressures and changes in retail could adversely affect our financial performance.
Mitigation
Through our low cost and efficient operations, we maintain a relevant and competitive offering that provides our customers with affordable value. We are careful about our new store locations and ensure regular store refurbishments and format renewal. Our investments in our omnichannel capabilities ensure that we are the preferred online destination for our customers.
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6
Poor consumer environment impact on potential growth
Context
The business continues to feel the impact of low South African GDP growth, low consumer confidence, volatile exchange rates, higher inflation and increased fuel prices. Policy and political uncertainty in the runup to the May 2019 national elections will compound this situation. Our ex-SA businesses expose Massmart to currency volatility, in-country currency regulation and availability of currency which may result in material forex gains/losses.
Mitigation
We continue to monitor key economic indicators in all our markets. We focus intensely on operating efficiency in an effort to ensure that operating cost growth is below sales growth. We work closely with key suppliers to ensure that we invest energy and resources into areas of common interest, including supply chain efficiency, to ensure their products reach our target markets cost-effectively. All direct foreign exchange import liabilities are forward covered. We repatriate cash profits frequently and settle cross-border liabilities timeously.
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7
Failure to address health and safety issues across our facilities
Context
Concerns around the safety of Food and non-food products that we source or that we prepare and then sell, could result in reputational damage. Lost confidence would be difficult and costly to re-establish. Failure to comply with the Occupational Health and Safety Act, regulations and by-laws relating to store fires, poses a risk to the business and the safety of its employees and customers and could impact our reputation and/or have legal consequences. The significant size of our stores and DCs means potentially large insurance claims in the case of fire damage. Unsafe storage or racking of product increases the risk of injury.
Mitigation
The Food Safety Management and Health and Safety programmes are continuously reviewed and improved by the Massmart Group Subject Matter Expert. We measure the effectiveness of our programmes by tracking and measuring key performance indicators and by relying on independent ongoing monitoring by external service providers and Massmart Audit Services.
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8
IT systems’ capability and capacity to support operations and future growth
Context
The significant IT implementations underway may present a major risk to operational continuity if any of these were delayed or failed. Lengthy downtime may impact the ability of the businesses to transact and operate, particularly in the omnichannel environment. Failure to integrate and update our information systems and processes timeously may result in us failing to realise the anticipated cost savings from these initiatives. An over-reliance on external service providers may also impact operations. In late 2018, a key IT service provider began its own restructure and this has already impacted its service levels to the Group.
Mitigation
All major IT projects are approved by the Chief Information Officer (CIO) after review by the CIO Forum. It is critical that these important IT systems are seamlessly implemented, support the achievement of our business strategy and drive and improve our omnichannel strategy. We are minimising our dependence on external service providers by establishing an internal SAP centre of excellence and are finding new service providers and hiring key IT staff, in response to the issue mentioned in the context column alongside.
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9
Increase in cost of goods and operating expenses undermining the low-cost foundation of the business
Context
An 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. The success of our business model is dependent on cost of goods sold efficiencies and working capital productivity.
Mitigation
We remain focused on our low-cost business model by reducing store construction and in-store operating costs, effective labour scheduling of our store employees, and negotiating favourable lease renewals. We continue to emphasise maintaining a competitive price gap against our major competitors across KVIs.
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10
Inefficient or ineffective supply chain or a failure in the supply chain
Context
It is essential that we have the lowest possible cost to serve for the movement and storage of our inventory, with the appropriate stock availability. An inefficient supply chain may result in sub-optimal inventory management, with cost inefficiencies and/or over- or under-stocking affecting holding costs and sales. A failure in the supply chain could cause products to be out of stock, which causes a loss in sales and reputational damage. The risk is compounded when there is a slowdown in sales resulting in an over-stock position.
Mitigation
We continually improve processes and systems to ensure the efficiency of our supply chain. Our supply chain team engages across planning, buying, replenishment, logistics and store operations. We optimise the utilisation of our regional DCs by increasing product volumes through the supply chain network. We have business continuity plans for regional DCs,
transport and systems.