Managing material issues
Material issues are identified each year which could significantly impact positively or negatively on the group’s ability to create and sustain value.
The material issues are reviewed annually by the board and management where all relevant internal, industry, social and environmental and macro-economic factors are evaluated. The needs, expectations and concerns of the stakeholder groups that are most likely to influence the group’s ability to create sustainable value, notably customers, suppliers, regulators, staff, shareholders and providers of financial capital are central to determining the material issues.
In the review of the material issues for the 2024 financial year, the following changes were made:
- The risk relating to ‘civil unrest’ has been reclassified and expanded to ‘political instability’, to cover government instability, corruption, high levels of crime, riots and civil unrest;
- The ‘global health pandemic’ risk has been excluded as a material issue as the probability of this risk is significantly reduced.
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RISKSRisks relating to each material issue are based on the major risks on the group’s register. The accompanying risk heat map indicates the levels of risk before (inherent risk) and after (residual risk) mitigation plans have been implemented. OPPORTUNITIESOpportunities are presented for each material issue to indicate how the group manages the impacts of the material issues on value creation, preservation and erosion. |
Incidents of government instability, corruption, crime, riots and civil unrest causing physical damage, business interruption or loss of revenues are becoming an increasingly significant risk in the current environment.
Risks
- Increase in riots, demonstrations and vandalism as a form of civil unrest becomes the main political risk exposure for companies, resulting in significant losses and insurance claims.
- Impact of civil and political violence can cause business disruption beyond physical property damage.
- Disruption to the economy, transport networks, companies, distribution centres, malls and stores resulting in possible loss of life, and increased hardship.
- Failure by municipalities and Eskom to provide essential services, including electricity, access to free drinking water, infrastructure maintenance, leading to disruptions in supply chain, increased transport costs and civil unrest.
- Increased cost of doing business as a result of higher insurance premiums and security requirements to safeguard against and recover from incidents of civil unrest.
Opportunities
- Improved business continuity planning that explicitly addresses civil unrest across the distribution centres, transport and store network.
- Increased co-operation with government, civil society groups and the industry to mitigate and manage threats of civil unrest.
- Implementation of improved, tested and coordinated national supply chain capabilities to respond to incidents of civil unrest.
- Enhanced financial cash flow and liquidity facilities to mitigate short-term working capital impacts in the event of disruption.
- Leverage online capability to meet customer needs.
Increasing incidence of global and local cyber and ransomware attacks heightens the risk of unauthorised access to customer and sensitive data. This is compounded by persistent power outages due to ongoing maintenance challenges at Eskom resulting in disruptions to trade.
Risks
- Confidential customer or sensitive internal data compromised as a result of undetected data security breach or cyber attack.
- IT systems and architecture no longer appropriate in an environment of ever-increasing scale and requirement for real-time information.
- Delays and technical challenges with strategic IT projects would negatively impact business operations.
- Inability to restore business operations and IT systems, including UPD automated picking system, in the event of a disaster.
- Power outages impacting the ability to trade and resulting in loss of sales.
Opportunities
- Improved information security practices and compliance as a result of increased online presence.
- Planned implementation roadmap for new IT systems with improved system efficiencies and cost savings that support the organic growth strategy.
- Migration to cloud-based business continuity plan.
- Ensure continued trading during power outages by connecting to mall generators where available and back-up power through uninterrupted power solutions.
- Implementation of a managed cyber security service with fulltime managed security monitoring capability.
Low economic growth, poor economic conditions and the resultant weak consumer sentiment are impacting South Africa’s retail trading environment. Consumer disposable income has been further eroded by rising global inflation, geopolitical factors, utility prices, higher health insurance costs and increased general living costs.
Risks
- Escalating energy, fuel and food prices as well as rising interest rates further eroding consumer spending.
- Criminal activity, including syndicated crime, escalates during times of economic hardship.
- Currency volatility could impact on the cost of direct and indirect imports and result in price increases which cannot be passed on to consumers.
- Increasing use of generic medicines and the added pressure of low single exit price (SEP) increases will continue to impact on UPD’s operating margin.
- Global inflation has a significant knock-on impact, including fuel price hikes and cost pressures for South African consumers.
Opportunities
- Clicks to improve price competitiveness, grow sales volumes and entrench the perception of the brand as a value retailer.
- Focus on differentiators, including an extensive and expanding convenient store and pharmacy network; private label and exclusive ranges; personalised engagement leveraging the Clicks ClubCard loyalty programme and consistently high levels of customer care.
- Grow Clicks online sales and extend online-only product ranges.
- Hedge foreign exchange exposure by purchasing forward cover.
- UPD to continue to drive efficiencies to mitigate the impact of genericisation on the operating margin.
- Increased security at distribution centres and in stores.
Reputational damage to the group, its operating brands and products could result in a loss of brand equity having an adverse financial impact on the business.
Risks
- Breakdown in financial and governance controls and reporting could cause serious reputational damage and impact the company’s rating on the JSE, as well as incurring fines and censure from regulators.
- Poor product quality, product recalls or customer claims could negatively impact trust in the brand.
- Harmful content or imagery being displayed on online platforms or printed marketing material could impact on brand equity.
- Exponential growth in social media usage with its immediacy and reach can seriously damage the image of brands, regardless of the accuracy of the content.
- Increasing consumer activism and potential brand or product boycotts.
- Inability to attract and retain quality employees if the company has suffered reputational damage.
Opportunities
- Robust governance framework and financial controls implemented across the group, with oversight from the board, executive management and internal audit.
- Protocols established to ensure content on group’s social media and online platforms is authorised by the responsible executive to limit the impact of potentially viral comments, images or videos.
- Resources to monitor online and social media to respond rapidly.
- Consultants retained by the group to advise on reputational management.
- Strict quality assurance processes to limit risk of product failure.
- Insurance and indemnity cover for product recalls, customer claims and malicious damage to property.
Clicks faces competition on several fronts, including national food retailers and general merchandise chains, online retailers and other pharmacy businesses.
Risks
- Expansion by corporate pharmacy and retail chains impact on market share growth in Clicks.
- Increasing price competitiveness and promotional activity of retailers, including competing loyalty schemes, could negatively affect sales and margins in Clicks.
- Customers migrating to alternate online retailers and grocers, with fast home delivery service.
Opportunities
- Clicks has an extensive store network and plans to open 40 to 50 stores each year, expanding to over 1 200 stores in the long term.
- Continued expansion of the pharmacy network with the long-term plan to open dispensaries in all stores in South Africa.
- Expanding product offer, including opening further baby stores and extending private label and exclusive brands ranges.
- Expanding Clicks ClubCard membership base, affinity partners and benefits, and migrating members onto the Clicks mobile app.
- Ongoing improvement in pricing, product offer (in store and online) and customer service.
- Increased pharmacy customer convenience through the roll out of smart lockers.
Healthcare markets are highly regulated across the world and approximately 50% of the group’s turnover is in regulated pharmaceutical products. The group supports regulation that advances the government’s healthcare agenda of making medicines more affordable and more accessible but opposes regulation which inhibits access to affordable healthcare and limits customer choice.
Risks
- Healthcare legislative and regulatory changes introduced by the Department of Health (DoH), SA Pharmacy Council (SAPC) and SA Health Products Regulatory Authority (SAHPRA) could impact on Clicks’ and UPD’s turnover and margins.
- Impacts include the ability to obtain pharmacy licences and to launch private label and exclusive scheduled and complementary medicines.
- Introduction of National Health Insurance (NHI) would impact on the private and public healthcare markets.
- Non-compliance with current and emerging legislation including the Companies Act, Consumer Protection Act, Protection of Personal Information Act, labour law, and copyright legislation could result in monetary sanctions.
Opportunities
- Ensure Clicks and UPD are operating efficiently to maintain margins and profitability.
- Continue management engagement with the DoH, SAPC and SAHPRA on legislation and regulation, and to accelerate the granting of pharmacy licences and approval of generic medicines to broaden access to affordable healthcare.
- As the market leaders in retail pharmacy and pharmaceutical wholesaling, position Clicks and UPD to benefit from market consolidation arising from changes in legislation and regulation.
- Partner with government to be a preferred service provider to the NHI scheme.
Retail and healthcare skills are scarce and in high demand locally and internationally. Attracting and retaining talent is therefore critical to the group’s continued success. As the largest employer of pharmacy staff in the private sector in South Africa the group is actively building capacity to address the critical shortage of pharmacists.
Risks
- Inability to recruit, attract and retain talent for core business needs, including merchandise and planning, store management and pharmacy.
- Strike action causing disruption to operations, damage to property and financial loss.
- Inability to attract business as a result of not achieving required transformation targets.
Opportunities
- Salaries and incentives are externally benchmarked to ensure the group remains competitive.
- Bursary and internship programmes to attract pharmacy graduates.
- Retail graduate and IT learnership programmes offered.
- Accredited training programmes for store management, key store roles and merchandise and planning roles.
- Senior leadership development programme strengthens pool of management talent and provides candidates for succession planning.
- Group resourcing function established, including specialist pharmacy team.
- Improved employee engagement to drive enhanced motivation and affiliation.
Extreme weather events and changes in weather patterns can cause disruptions to operations, trading and damage to physical assets.
Risks
- Unpredictable weather patterns can impact the supply chain and the ability to deliver inventory to stores and distribution centres.
- Employees may be restricted from travelling to places of work due to flooding or fires.
- Inability to trade in locations impacted by adverse weather conditions.
- Inability to meet customer demand for environmentally sustainable products, resulting in a loss of market share.
Opportunities
- Reduction in packaging and waste, particularly in private label products, including the use of durable and recyclable bags in stores.
- Increased operational efficiency and environmental friendliness through the use of more energy efficient solutions.
- Alignment with local and international sustainability reporting guidelines to adequately report to shareholders on the company’s response to climate impacts.