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 macroeconomic 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 for the 2025 financial year, a comprehensive evaluation was undertaken of the risks that could impact on the group delivering on its strategy and achieving its business objectives.

Following this review, the risks of ‘supply chain’ and ‘strategy and execution’ have been included as material issues owing to the increasing impact and likelihood of these risks affecting the business.

The scope of other material issues has been extended to align with the changing dynamics in the country, the economy, the retail sector and within the group.

RISKS

Risks 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.

OPPORTUNITIES

Opportunities are presented for each material issue to indicate how the group manages the impacts of the material issues on value creation, preservation and erosion.

Material risks

1
Information technology (IT)
2
Political and social contexts
3
Trading environment
4
Competition
5
Regulation and compliance
6
Brand and reputation
7
Supply chain
8
People and employee value proposition
9
Strategy and execution
10
Environment
1
Information technology (IT)

A modern, responsive, stable and efficient IT infrastructure is required to support business growth objectives and evolving customer and market demands, including processes to ensure security and confidentiality of data.

Risks

  • Failure to enhance and maintain IT infrastructure and capability could lead to operational inefficiencies, business disruptions in supply chain to customers, loss of competitive edge, compromised operational continuity, and the inability to service clients and meet evolving market demands.
  • Confidential customer or sensitive internal data could be compromised by unauthorised access or an information security breach, with increased risks and cyberthreats if systems and infrastructure are outdated.
  • Inability to leverage new technologies and implement system enhancements to support new business initiatives and customer demands.
  • Delays and technical challenges with IT projects could negatively impact business operations.

Opportunities

  • Key systems modernisations have recently been completed and others are in progress, including an updated pharmacy system, upgraded SAP enterprise resource planning (SAP ERP) system and enhancements to existing systems.
  • Further projects include increasing redundancy for network failures, outsourcing IT solutions, and investment in additional skills and capacity.
  • Increased security (training, awareness and penetration tests) is in place, as well as ongoing security of IT systems with appropriate firewalls.
2
Political and social contexts

A stable political and social landscape, together with a supportive South African operating environment, is required to achieve the group’s revenue and growth objectives.

Risks

  • Change and political uncertainty could cause disruptive protest action and result in business disruption beyond physical property damage.
  • Civil protest incidents, whether or not politically motivated, could result in losses and business disruptions, and possible insurance claims.
  • Safeguarding against, and recovering from, incidents of civil unrest, could lead to increased security requirements, higher insurance premiums and a higher cost of doing business.
  • Continued deterioration of key infrastructure, such as roads, electricity and water supply, could increase operational costs, disrupt supply chains, and adversely affect the customer experience and business reputation.

Opportunities

  • Extensive security upgrades completed at all distribution centres (DCs).
  • Ongoing improvement and updates to the business continuity plan (BCP). The BCP addresses the impact of civil unrest across the DCs, transport and store network as well as the impact of infrastructure failure.
  • Co-operation with government, civil society groups, law enforcement and industry bodies to mitigate and manage threats of civil unrest.
  • Cash flow and liquidity facilities are in place to mitigate short-term working capital challenges in the event of disruption.
  • Adequate insurance cover to meet specialist risks of civil and politically motivated violence.
3
Trading environment

Supportive macroeconomic factors are necessary to create a trading environment in which the group can achieve its targets and growth aspirations.

Risks

  • Low economic growth and higher unemployment could reduce disposable income and constrain consumer spending, which will impact revenue growth.
  • The depreciation of the Rand could lead to increased costs of imports, which cannot always be passed on to customers, affecting profitability and financial performance.
  • Global inflation has a significant knock-on impact for South African consumers, including higher fuel prices and cost pressures.
  • Criminal activity, including syndicated crime, escalates during times of economic hardship. In particular, crime syndicates targeting high-value, high-demand, scarce lines can lead to stock loss; inability to service clients; and loss of revenue, damage to assets and business interruption.

Opportunities

  • Clicks will continue to improve price competitiveness, grow sales volumes and entrench the brand as a value retailer.
  • Capitalise on key market differentiators, including an extensive convenient store and pharmacy network, private label and exclusive product ranges, personalised engagement by leveraging the Clicks ClubCard and consistently high standards of customer care.
  • UPD continues to drive efficiencies to mitigate the pressures from higher sales of generic medicines and fuel price increases on profitability.
  • Rand hedging on high-value imports to mitigate currency volatility.
  • Supplier development programme focuses on alternative sources of local supply.
  • Extensive crime detection and prevention activities.
4
Competition

Clicks faces competition on several fronts, including national food retailers and general merchandise chains, online retailers and other pharmacy businesses. Continued growth and shareholder return requires successful competition for existing market share and expansion into new segments and markets.

Risks

  • Aggressive competition could result in loss of market share, the inability to maintain market position, and ultimately threaten the growth and profitability of the business. In particular, the group faces competition risk from the expansion of retail chains into healthcare and medicines, and from online retailers with their fast home delivery models.
  • Ongoing or new aggressive competition in the third-party distribution sector could result in the loss of and inability to recover market share and the inability to maintain market position, threatening sustainable growth and profitability.
  • Increasing price competitiveness and promotional activity of retailers, including competing loyalty schemes, could negatively affect sales and margins in Clicks.

Opportunities

  • Clicks continues to capitalise on its key competitive differentiators: an extensive physical footprint with aggressive expansion plans, extending the pharmacy network and opening dispensaries where possible in South African stores, expanding baby stores and enhancing the online sales infrastructure.
  • Build brand loyalty through ongoing recruitment of new members to the Clicks ClubCard and the Clicks mobile app.
  • Implement measures to increase pharmacy customer convenience through the rollout of alternative delivery models, including smart lockers.
  • Optimise service and cost in UPD to remain competitive while focusing on profitable client segments.
5
Regulation and compliance

Clicks Group requires consistent compliance with numerous regulations and legislation. Healthcare markets are highly regulated across the world and approximately 50% of the group’s turnover is in regulated pharmaceutical products.

Risks

  • Legislative non-compliance could lead to regulatory sanction, including fines, loss of licences or store closure and reputational damage, as well as increased compliance requirements and costs.
  • Growth could be inhibited by challenges in securing suitable retail spaces and the required pharmacy licences, while the ability to launch private label and exclusive scheduled and complementary medicines could also be hampered.
  • Healthcare legislative and regulatory changes could impact on Clicks’ and UPD’s turnover and margins. In particular, the introduction of the National Health Insurance (NHI) Act and its impact on the private and public healthcare markets is yet to be understood and could have a significant impact on the business and operating model.

Opportunities

  • The group’s robust governance framework ensures and monitors compliance with regulations, including undertaking self-audits and the employment of an information officer.
  • Engagement with regulatory authorities on legislation and regulation, and to accelerate the granting of pharmacy licences and approval of generic medicines to broaden access to affordable healthcare.
  • Clicks and UPD will capitalise on opportunities to benefit from market consolidation arising from changes in legislation and regulation. The group continues to partner with government to be a preferred service provider where opportunities arise.
6
Brand and reputation

The group’s ability to achieve its strategic objectives is highly dependent on the continued value of the group brand and the operating brands.

Risks

  • Reputational damage could result in loss of brand equity which will adversely impact financial performance.
  • Pervasive and ubiquitous use of social media with its immediacy and reach can significantly damage the value of brands.
  • Poor product quality, product recalls or customer claims with associated negative media exposure could adversely impact trust in the brand.
  • Harmful content or imagery on online platforms or printed marketing material could impact on brand equity.
  • Breakdown in financial or 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.

Opportunities

  • Protocols are established to ensure that content on the group’s social media and online platforms is authorised by the responsible executive and media review team.
  • Resources are in place to monitor online and social media activities to respond rapidly and consultants have been retained to advise on reputational management where required.
  • Strict quality assurance processes to limit risk of product failure.
  • Insurance and indemnity cover in place for product recalls, customer claims and malicious damage to property.
  • Robust governance frameworks and financial controls are implemented across the group, with oversight from the board, executive management and internal audit.
7
Supply chain

A consistent, stable and predictable supply chain is required for serving customers and generating revenue.

Risks

  • Unavailability of stock in stores or products for distribution, due to disruption in global supply chains, vendor supply chains or disruptions in internal operations and supply chains could result in the inability to fulfil orders, supply customers or operational inefficiencies.
  • Disruptions at warehouses or the DCs could impact the flow of stock to stores, hospitals and customers due to lack of stock and consequent loss of revenue.
  • Customers may be lost due to poor service.
  • Poor stock availability in stores and online could lead to lost sales opportunities and reputational impact.
  • Inability to accurately forecast required peak inventory levels could result in lost sales and customer dissatisfaction.

Opportunities

  • Active measures taken to monitor and manage risk and anticipate possible global and local supply chain disruptions.
  • Alternative suppliers are being identified for key products and more products are being sourced locally where possible.
  • Stock levels are actively managed, balancing costs and customer requirements.
  • Contracts with key suppliers to deliver directly to stores in the event of disruption at a major DC is being explored, as well as the need for additional stock of key inventory items.
  • The commercial and planning departments work closely together to forecast stock requirements.
8
People and employee value proposition

Attracting and retaining talent and a skilled workforce is critical to the group’s continued success, especially in key areas where niche skills are in demand locally and internationally such as IT, healthcare and retail.

Risks

  • Failure to attract and retain sufficiently skilled, educated, competent resources across the group can result in poor quality of output, ineffective technology utilisation, slow digital transformation and poor organisational agility, and loss of competitiveness.
  • Lack of critical skills in key operational areas such as store operations, logistics, merchandising, pharmacy, private label sourcing and development, IT and digital could lead to a loss of revenue, slowing of growth and potential loss of customers.
  • Skills shortages may compromise delivery or ability to improve systems and processes, and delay the implementation of key strategic growth projects.
  • Industrial action could result in disruption to operations, damage to property and financial loss.
  • The ability to retain existing large contracts, or secure additional business, could be compromised by poor progress against transformation targets.

Opportunities

  • Salaries and incentives are externally benchmarked to ensure that the group remains competitive.
  • A senior leadership development programme aims to strengthen the pool of management talent and provide candidates for succession planning.
  • Early talent acquisition programmes through bursary and internship programmes have been entrenched to attract pharmacy graduates.
  • Internal development programmes are in place, such as retail graduate and IT learnership programmes; and accredited training programmes for store management, key store roles, merchandise and planning roles.
  • A group resourcing function is in place and includes a specialist pharmacy team.
9
Strategy and execution

Delivering the group’s strategy and achieving business objectives requires disciplined execution and careful prioritisation of initiatives and investments.

Risks

  • Inconsistent execution of internal operational systems could result in poor customer delivery, compromised quality, inconsistent service, and non-compliance with policies and procedures.
  • Inadequate investment could limit growth through lack of innovation, limited infrastructure upgrades, capacity to execute key initiatives and, ultimately, competitiveness.
  • Large-scale demands for system enhancements, new systems and ongoing maintenance could make it difficult for IT to effectively provide services due to competing business objectives, lack of prioritisation and unexpected demands, leading to resource conflicts, possible delays and staff burnout.
  • Failure to be disciplined in execution of current strategy could result in key objectives not being achieved.

Opportunities

  • Standard operating procedures have been designed and implemented, and are embedded with regular training as well as regular monitoring and independent assurance of adherence.
  • A programme management office and systems development life cycle framework is in place. Regular project, IT and business review meetings are held to prioritise projects with clear strategic direction and decisions on options chosen, and specifically which options are not chosen.
  • A robust planning cycle is in place which includes monthly monitoring and evaluation of the operating results against objectives.
10
Environment

The group is impacted by events in the environment and needs to minimise negative impacts on the environment to ensure long-term sustainability.

Risks

  • Extreme weather events and changes caused by weather patterns could cause disruptions to operations, trading, supply chain, and damage to physical assets and subsequently increased costs.
  • Trade in locations impacted by extreme adverse weather events could be disrupted, or changes in weather patterns may affect the timing and mix of seasonal product sales, resulting in revenue loss.
  • Delivery and storage of key medicine may be impacted by sustained periods of extreme high temperatures.
  • Failure to measure and meet environmental impact targets could result in increased pressure from investors and stakeholders to align to environmental guidelines.
  • The group could suffer a reduction in market share if customers opt for environmentally friendly alternatives.
  • The ability to retain existing large contracts, or secure additional business, could be compromised by poor progress against transformation targets.

Opportunities

  • Business continuity and associated response plans are continually updated to cater for all potential disruptions.
  • Arrangements will be made with suppliers to cover buffer stock levels and turnaround times.
  • Measures are in place to reduce the carbon footprint while plans are being developed to aim for carbon neutrality.
  • Packaging and waste are being reduced, particularly in private label products, and through the use of durable and recyclable bags in stores instead of plastic.
  • The group supports local and international reporting requirements related to climate change.