Tesco 2014 Annual Report Download - page 23

A key 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 sound judgement of their likelihood and impact. The Group maintains a Key Risk Register of the
principal risks faced by the Group, including the likelihood and impact of risks and the controls and procedures implemented to mitigate them.
Our process for identifying and managing risks is set out in more detail on page 40 of the Annual Report and Financial Statements 2014.
The table below sets out the principal risks faced by the Group, and examples of relevant key controls and mitigating factors. The Board
considers these to be the most significant risks faced by the Group. They do not comprise all the risks associated with the Group and they
are not set out in any order of priority. Additional risks not presently known to management, or currently deemed to be less material,
may also have an adverse effect on the business.
As customers’ disposable income remains stretched, the competitive intensity of the retail marketplace also continues to grow. It is against
this backdrop that there has been a trend towards increasing net risk during the year.
Whilst the economic situation in our principal market, the UK, is beginning to show some improvement, there are increased levels of
economic, political and regulatory volatility in the wider global marketplace which have increased the assessed level of net risk that the
business faces in these areas. The ongoing austerity programmes in Asia and Europe and the fiscal and regulatory measures that apply to
the retail sector, for example the DIDA Act in South Korea, have continued to challenge the business. An increase in the rating of
economic, political and regulatory risks since last year is principally driven by a revised view of the likely impact of these risks on the
business, particularly in the context of the global marketplace and the financial and trading position of the Group.
The ongoing delivery of our multichannel vision, combined with a growing focus on customer data, has also heightened our sensitivity
to the impact of technology risks. The impact assessment of technology has therefore increased and this remains a key area of focus.
Significant efforts by management to mitigate risks and strengthen controls have reduced the assessment of the likelihood of certain
risks occurring. Notable examples include: product safety and ethical trading, reputation and property. Changes to the Group’s property
strategy in the year have also reduced the overall property net risk rating.
Principal risks Key controls and mitigating factors
Business strategy
If our strategy follows the wrong direction or is
not effectively communicated or implemented,
the business may suffer
The retail industry is undergoing a transformational
change in this digital age. The challenge is in balancing
investment and the emphasis between traditional
and new
Investor support may be impacted if it takes longer than
expected to demonstrate that our strategy is the right
one, or if we cannot make the investments required
An unclear or unsuccessful strategy against the growth
of budget retailers could adversely impact our market
share and profitability
Our ability to operate successfully in international
markets may be restricted if we do not follow the
right strategy in each market, which in turn could
adversely impact the Group’s profitability
• Strategic matters are regularly reviewed by the Board and Executive
Committee; the Board dedicates two full days a year to testing and
challenging Group strategy
• Our plan is clear and focused on our three priorities: a strong UK business;
multichannel leadership; and disciplined international growth
• A disciplined approach is taken with underperforming assets and decisive
action is taken on strategy as appropriate, including the recent decisions
regarding operations in the US, China and India. See the Chairman’s
statement and the Report from the Chief Executive on pages 1 to 7
for more details
• We continue to invest in the customer offer through initiatives such as Price
Promise, which aim to improve customer perception of our relative price position
•The structure of our executive sub-committees is designed to focus
on key risks through the work of the Group Commercial, Compliance,
Multichannel, Technology, People Matters Group, Property Strategy
and Social Responsibility Committees
• Significant resource is invested to communicate strategy effectively to
those delivering it
• Consistent operational plans are developed throughout the Group
to ensure delivery
• A Steering Wheel balanced scorecard system helps to monitor delivery
• Structured stakeholder engagement programmes are conducted; an
investor and analyst seminar was hosted in February 2014 to reiterate
our strategic priorities
Financial strategy
Risks relate to an incorrect or unclear financial strategy
and the failure to achieve financial plans
There are risks that our financial guiderails will not
be achieved, or if achieving them means that the
business is stretched in the short-term at the expense
of investment in our long-term strategy
Weak performance could put pressure on free cash flow
and credit metrics and affect our credit rating
• Financial strategy risks and performance are regularly reviewed by the
Board and Executive Committee, with external advice obtained as required
• We have set clear expectations for the market with our financial disciplines
and guiderails: improving capital discipline; greater focus on balancing
growth with returns; and being more focused on cash rather than
margins. See the Financial review on pages 12 to 15 for more details
•The Balance Sheet Committee regularly reviews gearing and net
debt management
• Consistent operational plans and budgets are developed throughout the
Group to help drive delivery
• A Steering Wheel balanced scorecard system helps to monitor delivery
• Structured stakeholder engagement programmes are conducted so that
expectations are clear
20 Tesco PLC Annual Report and Financial Statements 2014
Principal risks and uncertainties