Tesco 2009 Annual Report Download - page 40

Tesco PLC Annual Report and Financial Statements 2009
REPORT OF THE DIRECTORS
38
Risks and uncertainties
Introduction Risk is an accepted part of doing business. The real
challenge for any business is to identify the principal risks it faces and to
develop and monitor appropriate controls. A successful risk management
process balances risks and rewards and relies on a sound judgement of
their likelihood and consequence.
The Board has overall responsibility for risk management and internal
control within the context of achieving the Group’s objectives. Our process
for identifying and managing risks is set out in more detail from page 47
of the Corporate Governance section of this Annual Report and Financial
Statements. The key risks faced by the Group and relevant mitigating
factors are set out below.
Business strategy If our strategy follows the wrong direction or is not
effectively communicated then the business may suffer. We need to
understand and properly manage strategic risk in order to deliver long-
term growth for the benefit of all our stakeholders. Our strategy is based
on five elements: to become a successful international retailer, to grow the
core UK business, be as strong in non-food as in food, develop retailing
services and put the community at the heart of what we do. Pursuit of this
five-part strategy has allowed the business to diversify and, at a strategic
level, diversification and pursuit of growth in emerging markets have the
effect of reducing overall risk by avoiding reliance on a small number of
business areas. However, by its very nature, diversification also introduces
new risks to be managed in areas of the business that are less mature and
less fully understood.
To ensure the Group continues to pursue the right strategy, the Board
discusses strategic issues at every Board meeting, and dedicates two full
days a year to reviewing the Group’s strategy. The Executive Committee
also holds specific sessions to discuss strategy on a regular basis. We have
structured programmes for engaging with all our stakeholders including
customers, employees, investors, suppliers, government, media and
non-governmental organisations. We also invest significant resources in
ensuring our strategy is communicated well and understood by the parties
who are key to delivering it. The business operates a Steering Wheel –
a balanced scorecard process whereby we set goals for different areas of
the business and assess our overall progress on a quarterly basis – in all
countries and significant business units such as Dotcom to help manage
performance and deliver business strategy.
Financial strategy and Group treasury risk The main financial risks
of the Group relate to the availability of funds to meet business needs,
the risk of default by counterparties to financial transactions, and
fluctuations in interest and foreign exchange rates. The risks associated
with operating Tesco Personal Finance are covered under Financial
services risks below.
The Treasury function is mandated by the Board to manage the financial
risks that arise in relation to underlying business needs. The function has
clear policies and operating parameters, and its activities are routinely
reviewed and audited. The function does not operate as a profit centre
and the undertaking of speculative transactions is not permitted.
A description of the role of the Finance Committee and Internal and
External Audit is set out in the Corporate Governance section on page 48.
Financial services risks Through Tesco Personal Finance PLC (formerly
Tesco Personal Finance Group Limited) (TPF), the Group is subject to
certain risks relating to the personal financial services industry in the UK.
TPF is subject to significant legislative and regulatory oversight. In
particular, TPF is subject to supervision by the Financial Services Authority
(FSA), which has substantial powers of intervention, and is required to
satisfy certain capital adequacy and liquidity ratios. If TPF is unable or fails
to satisfy these ratios in the future, it could lose its licence and, consequently,
its ability to transact business.
TPF is subject to various risks associated with the provision of financial
services. In relation to its insurance business, TPF may experience a
concentration of risks from natural or man-made disasters. In addition,
market conditions may not allow TPF to purchase the amount of
re-insurance it considers necessary on terms it considers acceptable.
Actual claims may exceed the claims provisions that have been made
on the basis of past experience. TPF’s credit card receivables and personal
loan portfolio may be subject to changes in credit quality, due to a general
deterioration in economic conditions or by failures in its credit assessment
process, which could adversely impact its ability to recover amounts due.
Furthermore, there is significant competition in the financial services
industry, which could adversely affect TPF’s market share and profitability.
Legal developments, changes in legal interpretation or precedent, and
changes in public policy may result in new risks emerging in addition to
those anticipated.
Because TPF is an FSA-regulated entity, its treasury function is run
independently from the rest of the Group. TPF’s treasury risks include, in
particular, liquidity risk and interest rate risk (in particular, in the interest rate
margin realised between lending and borrowing costs). TPF is also subject
to the risk of unexpected losses arising from operational failure, whether as
a result of human error, systems failures, fraud or inadequate controls.
Operational threats and performance risk in the business There is a
risk that our business may not deliver the stated strategy in full, particularly
since, like all retailers, the business is susceptible to economic downturn
that could affect consumer spending. The continuing acquisition and
development of property sites also forms an intrinsic part of our strategy
and this carries inherent risks.
We try to deliver what customers want better than our competitors by
understanding and responding to their behaviour. All of our business units
have stretching targets based on the Steering Wheel and the performance
of business units is monitored continually and reported regularly to the
Board. We manage the acquisition and development of our property
assets carefully. We consider and assess in detail every site at each stage
of acquisition and development and ensure that relevant action is taken
to minimise any risks.
Competition and consolidation The retail industry is highly competitive.
The Group competes with a wide variety of retailers of varying sizes and
faces increased competition from UK retailers as well as international
operators in the UK and overseas.
Failure to compete with competitors on areas including price, product
range, quality and service could have an adverse effect on the Group’s
financial results.
We aim to have a broad appeal in price, range and store format in a way
that allows us to compete in different markets. We track performance
against a range of measures that customers tell us are critical to their
shopping trip experience and we constantly monitor customer perceptions
of ourselves and our competitors to ensure we can respond quickly if we
need to.
People capabilities Our greatest asset is our employees. It is critical to
our success to attract, retain, develop and motivate the best people with
the right capabilities at all levels of operations. We review our people
policies regularly and are committed to investing in training and
development and incentives for our people. Our ‘Talent Planning’ process
helps individuals achieve their full potential. We also carry out succession
planning to ensure that the needs of the business going forward are
considered and provided for. There are clear processes for understanding
and responding to employees’ needs through our People Matters Group,
staff surveys, regular performance reviews, involvement of trade unions in
relevant markets and regular communication of business developments.
Reputational risk As the largest retailer in the UK, expectations of the
Group are high. Failure to protect the Group’s reputation and brand could
lead to a loss of trust and confidence. This could result in a decline in the
customer base and affect the ability to recruit and retain good people.
Like other companies we must consider potential threats to our reputation
and the consequences of reputational damage. Emotional loyalty to the
Tesco brand has helped us diversify into new areas like retail services and
non-food and we recognise the commercial imperative to do the right
thing for all our stakeholders and avoid the loss of such loyalty. The ‘Tesco
Values’ are embedded in the way we do business at every level and our
Code of Ethics guides our behaviour in our dealings with customers,
employees and suppliers.