Integrated Annual Report 2021
Integrated Annual Report 2021

Managing our risks

The Board assumes responsibility for the governance of risk, sets the direction for how we approach and address risk, and exercises ongoing oversight of enterprise risk management through the Risk Committee. Risk management is an integral part of our Board’s decisionmaking process.

When determining the key risks and opportunities facing Massmart, consideration is given to the Group’s strategy, its operating context and environment, the interests of key stakeholders, media coverage and/or public concern. As part of the risk reporting process, risk incidents are determined in the context of identified material matters and events, which have the potential to significantly affect the Group’s ability to achieve its strategic objectives.

The Risk Committee assesses Massmart’s risk appetite and tolerance three times a year. The Board, through the Risk Committee, defines risk appetite as the nature and extent of risk that Massmart is willing to accept to meet its strategic objectives. When reviewing Massmart’s risk appetite and tolerance, 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 is considered.

Massmart’s Executive Committee and business unit Executives are responsible for day-to-day risk management, including maintaining an appropriate loss prevention and internal control framework. Each business unit has developed a risk and loss prevention process. The Risk Committee tables a Group risk register with the Board, in February, August and November every year, which is aggregated from those prepared by the business units and the Massmart Executive Committee.

Top 10 key risks facing the Group
Residual risks 2021
Potential impact on value
Our mitigating action
1

Poor consumer environment, exacerbated by the impact of Covid-19, limiting growth potential in the geographies we operate in

2020: 1

OPERATIONAL

  • Reduced customer spend resulting in lower sales
  • Higher food inflation and increased operating costs (utilities, etc.) impacting pricing and margins
  • Closure/sale of operations with prolonged negative socio-economic impacts
  • Maintaining a low-cost business model
  • Expanding trading channels through e-commerce
  • All direct foreign exchange import liabilities are covered forward as is the loan from Walmart
  • Close monitoring and adjustment of borrowing portfolio to maintain sustainable financial position
2

Game Brand Relevance (Customer Value Proposition – CVP)

 

OPERATIONAL

  • Loss of sales and customers
  • Reputational damage and brand devaluation
  • Reduced supplier relevance and ability to deliver value to customers
  • Execute Game Reset strategy, including rollout of Stores of Excellence
  • Execute omnichannel strategy
  • Continued dedicated resources in technology, supply chain and finance monitoring stock flows
3

Low or negative growth in rest of African operations

2020: 9

STRATEGIC

  • Under-performing stores in rest of African operations
  • Currency weaknesses and higher effective tax rates decreases the Group’s overall profitability
  • Strategic decisions regarding the divesture of 14 under-performing/non-core Game stores under way
  • Active and regular communication with stakeholders (regulators, officials and landlords)
  • Country risk reviews – with ensuing action plans
  • Treasury function is fully operational and in-country funds are efficiently managed across business units to ensure maximum amounts are frequently repatriated to settle cross-border liabilities
4

Funding risk (Elevated due to the impact of the civil unrest)

2020: 10

FINANCIAL

  • Securing sufficient funding at affordable rates
  • Sufficient cash-flow headroom to service debt and expenses
  • Roll-over of the Walmart USD-denominated loan as well as the issue of the ZAR-denominated perpetual bond to Walmart
  • Maintain focus on various strategies to improve cash generation
  • Smart Spend initiatives targeted to unlock R1.8 billion of value still in progress
5

Infrastructure that is vulnerable to external attacks, system breaches, corruption of records and theft of information (Risk of cyber security breach)

OPERATIONAL

  • Disruptions to our systems impacting our ability to trade or serve our customers effectively
  • Cyber attacks and the impact on the security of confidential information
  • Implemented intrusion detection, prevention and monitoring systems which utilises the Walmart Security Operations Centre
  • Conduct regular penetration tests
  • Conduct regular Payment Card Industry (PCI) audits to maintain our PCI certification
  • Conduct annual cyber security assessments in line with the National Institute of Standards and Technology framework
  • A Group-wide security awareness programme has been implemented
  • Scenario planning conducted with the Executive Committee in August 2021, with frequent review sessions planned
6

Inbound sourcing, manufacturing and Supply Chain constraints resulting in inconsistent stockholding

OPERATIONAL

  • Insufficient in-stocks resulting in lost sales and customer dissatisfaction
  • Ongoing communication with agents, factories, suppliers and shipping lines
  • Sourcing alternate products where possible
  • Sourcing products via alternate ports where possible
  • Engagement with Supply Chain to prioritise deliveries and distribution
7

Covid-19 pandemic: impact to operations

2020: 2

OPERATIONAL

  • Restricted or reduced trading resulting in lost sales
  • Store closures to execute safety protocols resulting in lost sales
  • Increased costs due to implementing Covid-19 protocols and best practice
  • Maintain the focus on trading challenges and respond rapidly
  • Constructive engagement with Government
  • Striving to be best-in-class in creating a safe working environment for our associates and created various support materials, including posters and videos, to reinforce our high standards
  • Create the safest shopping environment we can for our customers. This includes sanitising surfaces, ensuring sufficient sanitisation stations throughout stores and reinforcing social distancing, including limiting the number of customers in our stores
  • Continue efforts to support (and educate) the national vaccination programme (mobile stations at stores, access to digital tools and associate support)
8

Unsettled union relationship arising from Turnaround plan activities

OPERATIONAL

  • Strike action affecting normal business trading
  • Boycotts resulting in lost sales
  • Reputational damage
  • Launched a revised strategy to engage with organised labour from 2022
  • Work with National Union Leadership to setup a national consultation forum with regional representation to resolve any stalemates
  • Line leaders trained on people leadership competencies
  • Continuous assessment of operational decisions regarding labour relation triggers
9

Ensuring a high standard of Data Privacy governance compliance against expected standards

REGULATORY AND COMPLIANCE

  • Penalties/fines relating to non-compliance with the Protection of Personal Information Act (POPIA)
  • Breaches resulting in tampered data
  • Reputational damage
  • Completed POPIA specific store level training
  • Updating Agreements with third parties – includes safeguarding of information, use information for collected purpose only and reporting breaches as well as right to audit
  • Enhancing processes to inform compliance on new third parties in order for a Privacy Risk Assessment to be conducted as part of the on-boarding process
  • Cross Border agreement in place with Data Privacy Clauses
10

Increase in cost of goods and operating expenses, undermining the low-cost foundation of the business

OPERATIONAL

  • Increased costs to customers
  • Reduced profits and returns to shareholders
  • Drive our EDLP objective by launching our cost analytics tool to negotiate better pricing and terms with suppliers across all brands which will assist in driving down our cost of sales and regaining market share
  • GNFR – Identify new approaches and new ways of working to reduce the existing cost structure and move towards ensuring that expense growth does not outpace sales growth. Through our Smart Spend initiative, we have delivered total savings of R1.6 billion against our R1.8 billion three-year objective
  • Implemented e-auctions to support pricing processes with vendors