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corporate governance

risk committee

The board is responsible for the risk management process and is assisted in its responsibilities by the risk committee.

The risk committee consists of four executive directors and three non-executive directors, including the Chairman, Mike Leeming. The presence of a majority of executive directors on this committee ensures that effective risk management remains an important part of the day-to-day operations of the company.

The main responsibilities of the committee include:

• Assisting the directors in fulfilling their responsibility for ensuring that there is an effective and embedded risk management process in place throughout the group;
• assessing whether there are appropriate processes/controls in place to manage the key risks down to an acceptable level, in line with the board’s risk appetite;
• assessing if the risk management process will ensure that emerging risks are identified and managed;
• assessing whether all significant new business opportunities have been appropriately considered from a risk perspective;
• assessing if appropriate processes/controls are in place to ensure regulatory compliance; and
• reviewing the adequacy of the group’s insurance portfolio.

The risk committee meets on a quarterly basis and details of individual attendance at these meetings are set out here. The external auditors attend the risk committee meetings and the Chairman of the board attended the meetings in February and August following the group’s half-year and year-end. On a quarterly basis, the Chairman of the risk committee reports progress on the key risk issues to the board.

The risk committee is of the opinion that, for the year under review, the risk management process was effective in identifying and evaluating the key risks and ensuring that these risks were managed in line with the defined risk appetite. This opinion takes cognisance of the fact that the group operates in a dynamic business environment and, as such, at any point in time there are new risk issues which require attention.

risk management

The board regards risk management as a key business discipline which:

• Balances risk and reward within both existing and new initiatives; and
• protects the group against uncertainties and hazards, which could prevent the achievement of business objectives.

The board is responsible for the risk management process and is assisted in its responsibilities by the risk committee. The day-to-day responsibility for identifying, evaluating and managing risks resides with management.

The risk management process set out below is dynamic and is designed to ensure that management:

• Identifies emerging risks and updates the key risk profile on a regular basis;
• appropriately prioritises the key risks based on their inherent impact and likelihood of occurrence;
• continuously improves the control framework in place to manage the key risks in line with the board’s risk appetite;
• monitors the ongoing risk exposure by reviewing objective metrics, performing control self-assessments and reviewing the reports of independent assurance providers; and
• responds timeously to any significant changes in risk exposure.

The key inherent risk profile sets out the top risks for the group and includes strategic, business, financial and external risks. This risk profile is reviewed and updated by the executive directors throughout the year and is formally revised on an annual basis. The status of the key risks and the management thereof is reported to and discussed at the risk committee on a quarterly basis.

An operational risk report setting out progress in business continuity, occupational health and safety, crime prevention and detection and providing an update on legal compliance is also reported to the risk committee quarterly.

Risk management has become a standard business discipline and is applied consistently throughout the group. The risk management process is integrated with strategic and business planning and is embedded through the management reporting and performance management system.

In the current challenging retail trading conditions within South Africa, the board has recognised the importance of an effective risk management process. During the year there has been a focus on continuing to improve the risk management process, specifically for the key inherent risks. This has resulted in:

• A review to ensure that appropriate measurements and targets are in place for each of the key risks;
• an improvement in risk management reporting to ensure that detailed action plans and deadlines are set out for each key risk. In addition, the divisional directors are required to attend and present their action plans at the risk committee meeting; and
• a review of the talent in place to manage certain of our key risk areas. This has resulted in the appointment of new talent into certain key positions.

our key inherent risks

The current retail trading environment in South Africa is very challenging, given the impact of higher interest rates and the increases in food and fuel prices on consumers. There has been an ongoing deterioration in consumer spending, with the middle and upper income customers being hard hit as household debt burdens have increased materially.

Within the context of the tough trading environment, we have set out our key business risks below.

Ensure the correct product offering: To ensure we develop and maintain life-long relationships with our customers, it is important that we provide the right quality merchandise at the right locations to meet their requirements.

To gain a better understanding of our customer requirements we have used our customer data to develop a customer lifestyle segmentation model. This enables us to purchase a range of merchandise which meets our customers’ requirements and to appropriately catalogue each store based on the customer profile. Within our clothing business we are now able to design and buy a range which meets the requirements of our classic, modern and contemporary customers across each of the three price tiers of good, better and best. The differentiated ranges have been accompanied by a different layout in our stores, which clearly reflect the different lifestyles of our customers.

Ensure the correct pricing strategy: In the current trading environment we need to provide product at the right value for our customers. In the first six months of the financial year, our pricing was not at the required level and plans have been implemented to sharpen our pricing and change our customers’ perception of our value. Within the clothing business, we have lowered our opening price points and have implemented a “great value” pricing position on 25 key lines. This is being supported by clear messaging and ticketing within our stores. For our food business we have implemented 64 “great value” everyday lines where our commitment is that our prices will be in line with our competitors. Our pricing in these areas is independently checked every week so we can ensure we deliver to this commitment. There has also been a focus on increasing sales volumes through promotions with our “this week save” campaigns. The benefit of our sharper prices, supported by our store ticketing, has already been seen through increased sales and positive customer feedback.

Food availability: To attract and retain our customers we need to be able to provide consistent availability of products within our food market. In meeting these availability expectations we need to be able to achieve our food waste targets, as high waste can significantly reduce our gross margins.

There is a significant focus on improving our availability by reviewing our ranges and catalogues for each of our stores, based on the customer profile. In addition, we are reviewing our food planning process to ensure we can appropriately leverage from the new systems which we have invested in.

Credit risk: The implementation of the National Credit Act (NCA), combined with the higher interest rates and food prices, significantly affected the credit environment in the past financial year. This resulted in an increase in our bad debts, albeit our bad debts on the store card are reasonably low compared to our competitors.

The higher bad debts in the first six months were a concern and a number of actions were implemented which stabilised our bad debts in the second half of the year. These actions included increasing the capacity in our debt collections area and reducing the minimum repayment percentage on our Visa card, in line with the standard industry percentages.

The acquisition by Absa of 50% plus one ordinary share of Woolworths Financial services should be concluded during the course of the year. The effect of this acquisition will be to significantly reduce the exposure of Woolworths to credit risk going forward.

Expense management: To deliver the required profitability, expenses need to be tightly controlled to ensure that they increase at a lower rate than sales.

In the first half of the financial year, expenses were too high relative to sales, but in the second half appropriate actions were implemented to restrict expense growth in the South African retail business to below sales. Going forward, appropriate plans have been implemented to control expenses, including a greater focus on employee scheduling and productivity in our stores.

Real estate: The opening of new stores is an important element of the strategy to deliver future growth, however, in the current trading environment there is a higher risk that more marginal stores will not deliver the required profitability.

As a result, there has been a focus on reviewing the real estate plan with a view to opening fewer but larger format, more profitable stores.

Attraction, development and retention of talent: To enable the business to deliver on its strategy, it is important to have the right skills and experience in place, in the right roles. Given this, the executive has undergone a process of reviewing the talent and skills base. This has resulted in the appointment of new senior talent in buying for general merchandise and planning for clothing, general merchandise and food.

There has also been a focus on upskilling with a new merchant academy for buying and planning.

our operational risks

business continuity planning
We need to have business continuity plans in place to ensure we can continue to trade and provide our customers with a credible product offering in the event of a disaster. The key continuity risks which could affect our customers’ shopping experience are set out below:

• the unavailability of a food distribution centre, as we would be unable to receive and distribute perishable food products to all stores within a region;
• the unavailability of a large regional store;
  
• the unavailability of key information systems, specifically our merchandising and financial services systems; and
• power outages.

For each of the above events there are appropriate preventative measures in place. In addition, there are continuity plans which are embedded within the operations and these are reviewed, assessed and updated on an ongoing basis.

occupational health and safety
One of our business priorities is to ensure the health and safety of our employees and customers. To achieve this, we have a comprehensive health and safety framework setting out the required policies and standards for suppliers, distribution centres and stores. Compliance to the policies and standards is monitored by independent specialist assurance providers and our internal audit team.

The health and safety standards throughout our business and supply chain are designed to prevent any health and safety related issues. However, in all likelihood, incidents occur so there are processes in place to deal with these issues as they arise. These include a recall process to remove and, where required, destroy products from our stores and distribution centres. There is also a well-defined process for publicly recalling products.

legal compliance
Regulatory and legal compliance is an important area due to the frequent amendments to the regulatory framework. We have a dedicated legal compliance officer and have implemented and embedded an appropriate, best practice compliance framework within our financial services business.

The compliance framework is being applied to our other business areas. During the year we ensured that appropriate processes were in place to comply with the Corporate Laws Amendment Act, (No. 24 of 2006). We have also been reviewing and assessing the impact of the planned new corporate law reform and the Consumer Protection Bill.

crime prevention and detection
We remain committed to the implementation of effective processes to reduce the levels of crime throughout the business, including shrinkage, burglary, armed robbery, fraud, theft and corruption.

Armed robbery remains a significant risk, particularly in our food stand-alone stores, and represents a real risk to our employee and customer safety. To address this, our aim is to reduce the amount of cash available in our stores, whilst reducing the time available for robberies before the authorities are called. This is achieved through the installation of improved CCTV, offsite independent monitoring of cameras and the installation of cash office alarms. All store managers are required to attend formal armed robbery survival training and where required, a comprehensive trauma counselling process is available for employees and customers.

With respect to fraud and corruption, we have continued to build on our existing processes, which include a rewards-based independent and confidential tip-off service.

information technology governance
Information technology (IT) governance is an increasingly important area, given the dependence of the business on its systems. During the year, a formal assessment of our IT governance processes was performed by an external consulting company and our processes were benchmarked to COBIT (Control Objectives for Information and Information-related Technology), an independent best practice control framework.

The assessment highlighted that our processes were mature when compared to the norm for international retailers, however, areas for improvement were identified and detailed plans have been agreed to achieve the IT governance targets which were set.

insurance
There is a comprehensive asset and liability insurance programme in place. Our insurance cover is provided by A-rated South African and international insurance companies. The completeness of our insurance cover as well as the policy wording are regularly reviewed and benchmarked by external experts.