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Operational and strategic risks

A) Market risks

Axfood works in a competitive and dynamic market that requires a flexible and agile organization to meet new customer needs and behaviours. To stay up to date with competitors’ activities and new trends, Axfood is constantly monitoring the market. For example, the Company conducts customer and consumer surveys on a regular basis, which together with other analyses form the basis of the Company’s strategies.

(B) Acquisition risks

Axfood both acquires and establishes new operations on a regular basis. If the conditions in the operations do not correspond to what was known prior to such decisions, there is a risk for a negative impact on Axfood’s earnings and brand. With respect to acquisitions, it is also important to achieve successful integration and to retain key persons. All new store establishments and acquisitions are preceded by very thorough market analyses of the competition as well as demographics, where every investment calculation stretches over several years. In addition, issues in the external operating environment are analysed from ethical, social and environmental aspects, among other things.

(C) Supplier risks

Axfood conducts extensive quality, safety and sustainability work particularly regarding its private label products, but also for other products in its assortment. Mapping of risks at the supplier level is based on a number of different dimensions such as work environment, water supply, child labour, union rights and animal welfare. Human rights challenges may arise in certain supplier countries. Quality assurance is conducted at several levels before a supplier is approved, and the selection criteria include suppliers’ sustainability work. Purchasing is steered toward suppliers with developed sustainability work or a positive willingness to change. Axfood also makes recurring visits and/or conducts audits at suppliers to discuss product knowledge, product development, compliance with the Code of Conduct and, where applicable, to investigate and follow up any defects. A bankruptcy or serious fire at a critical supplier could result in disruptions in product flows. Therefore, alternative solutions are reviewed on a regular basis at the same time that high demands are put on fire safety and the financial stability of critical counterparties. To maintain and preferably strengthen customers’ trust, it is also important to maintain good control of the supply chain. See also risk (K), Covid-19.

(D) Regulatory risks

For Axfood it is of great importance to comply with laws and other rules and regulations as well as to conduct business in accordance with generally accepted business practice. Violations or negligence in these areas could harm the Company’s reputation and result in sanctions as well as fines. For
risk prevention purposes, a number of policies, a well-working system of internal control and an ethical approach to counter the soliciting or accepting of bribes and corruption have been established in all areas of the Group. Every supplier the Company enters into an agreement with is required to adhere to the Group’s Code of Conduct or to have its own corresponding requirements. The Code of Conduct is an integrated part of the purchasing process and is included in all supplier agreements, except for certain local suppliers, which are handled directly by store managers. In connection with new laws or regulations, measures are decided on well in advance of enactment.

(E) Employee risks

Even a traditional industry like food retail is undergoing a high pace of change and digitalization. Change management, competence development and attracting sought-after competencies are growing increasingly important for the Group. One currently pertinent and major change facing Axfood is that certain of Dagab’s existing warehouses will be replaced by a major, automated logistics centre in Bålsta.

Recruiting, developing and retaining competent and committed employees is highly important for Axfood and necessary for the Group’s expansion and performance. To counter negative effects of key persons leaving the Group, Axfood works continuously with succession planning. Axfood also maintains great focus on diversity and inclusion through the entire Group. All workplaces are to be free from all forms of discrimination and offensive treatment, which is delineated in the Group’s equal treatment policy. Axfood shall be an attractive and sustainable workplace where the focus on a constructive, healthy and inclusive work environment is fundamental.

(F) Risk for disruption in the logistics chain

One of the most serious business risks that the Group must manage is for a disruption in the logistics chain, especially regarding fire in a distribution centre, which would result in property loss and business interruption losses. Axfood has very strong focus on its systematic fire safety work and puts great emphasis maintaining a well-working fire safety organization with preventive measures such as adequate training and pertinent routines, adapted technical fire safety measures and recurring inspections and follow-up. Another aspect that could affect the logistics chain is Axfood’s IT structure; see more information under IT and information security risks (G).

(G) IT and information security risks

Digitalization presents major opportunities that at the same time put greater demands on the ability to protect critical information and ensure stable IT operations. During the year all of society saw an increase in cyber security-related threats. There is a keen awareness in the Group that digitalization and centralization elevates vulnerability and the risk for a major operational disruption. This also applies to the centralized IT structure. Major emphasis is therefore put on preventive work and the surrounding organization as well as on planning for operational continuity in case of unforeseen events. In the event of a major IT disruption, IT operations today are safeguarded through duplicate resources and geographic spread of operations. Parallel with this, Axfood continuously reviews what can be done to further mitigate risks, among other things by adopting new technologies, such as artificial intelligence, to more effectively prevent virus attacks and intrusions. Axfood has implemented a cloud strategy aimed at considering cloud solutions in new projects and constantly monitors developments in the external operating environment. Axfood also works continuously on raising awareness of the risk of losing sensitive data. Information security in general is a priority area.

H) Risk for labour market conflicts

Labour market conflicts, such as a strike or lockout in any area of the business, could result in operational disruptions. Negotiations of collective agreements for Axfood’s operations are conducted through the auspices of the Swedish Trade Federation, in which Axfood is a member.

(I) Liability and trust risks

Axfood is one of the leading companies in the Swedish food retail industry, and its ability to meet stakeholders’ expectations for quality, transparency, compliance with laws and standards as well as social and ethical norms is therefore crucial for trust. Examples of issues the Group deals with daily include food safety, hygiene, the cold chain and product liability for products that could cause property damage or personal injury. Should a serious
defect be discovered in any of these areas, a risk would arise for financial loss as well as damage to the brand. Axfood works actively with these issues, among other ways through extensive internal inspection programmes at stores and quality assurance of private label products. Such an inspection programme entails that stores conduct certain daily arrival controls and temperature controls at the departmental level. Clear routines are in place, such as for handling unpackaged foods to ensure that food hygiene is maintained and to uphold the integrity of the cold chain. Failures in the environmental area, such as having excessively high levels of pesticides in foods or unsuitable chemicals in other products, could undermine trust in Axfood’s brands.

For Axfood’s competitiveness it is important to always develop the assortment according to customers’ needs. This can entail, for example, offering sustainable foods such as organic and plantbased products. Axfood also has a large offering of food with the Från Sverige (“From Sweden”) marking. Weak goal fulfilment in the area of sustainability could, over time, undermine customers’ trust in the Axfood brand and the Group’s various food concepts.

(J) Climate and environmental risks

The risk scenario with respect to environmental matters is multi-faceted and covers brand issues, availability of food ingredients as well as costs that may arise as a result of political decisions. Moreover, the development toward more environmentally conscious customers, combined with an inability to be sufficiently fast at adapting the assortment to customers’ changed expectations, could lead to lower sales. However, risks are also opportunities for those in the industry that are far ahead of their competitors in addressing the risks.

Within Axfood it is not mainly the physical risks for impacts from more extreme weather events that are the dominant risks, even though in connection with e.g., new investments in warehouses, assurances must be made that buildings can withstand such situations. On the other hand, there is a tangible risk that more extreme weather could impede purchasing work. Another risk that should be taken into account is a failure to be sufficiently dynamic and develop the assortment in a high enough pace if customers’ growing awareness about the climate issue were to change their consumption habits. This risk is just as much an opportunity if the Group is adept at developing the assortment in comparison with its peer competitors. Climate change can no longer be entirely prevented through climate policy measures, even though the opportunities to mitigate it is great. This means that the increase in extreme weather is presenting an ever-greater challenge to food production. Drought, extreme heat, storms, floods and extreme cold can significantly reduce agricultural production in critical food producing areas. This can lead both to higher prices that affect sales and difficulties in sourcing volumes to meet customer demand. To meet these challenges it is becoming increasingly important to not be overly dependent on only one region in the world for specific food ingredients. To diversify this risk it is imperative that product supply is based on several geographic areas. Axfood will be gradually giving greater consideration to climate change in its purchasing work, which entails greater diversification of risk.

(K) Covid-19

The spread of Covid-19 in society has exposed Axfood’s operations to a new dimension in its risk work. The risks that the pandemic has given rise to, including the risk for disruptions in the logistics chain, supplier risks and employee risks, have been managed within existing crisis organizations without any significant disruptions in operations. Top priority has been on the health and safety of employees and customers at the same time that the Group is living up to its societal responsibility to supply food and make alternative shopping and delivery opportunities available for people in society’s risk groups. The work on minimizing disruptions over a longer term is continuing, and the respective operations are monitoring and working continuously to deal with the impacts of the pandemic.

The pandemic may have long-term impacts with the risk for higher unemployment and recession. This represents an uncertainty regarding the general level of consumption, which could affect Axfood, on top of the clear impact that the pandemic has had on cross-border shopping and the restaurant market.

(L) Risks related to threats and violence

The trend of increased violence and threats in society is also reflected in the situation for store employees. Within Axfood extensive preventive security work is being conducted, including training, establishment of routines, and deployment of technical and human resources to be able to deal with various situations, such as shoplifting in stores.

(M) Risks for errors in the financial reporting

Axfood continuously analyses and assesses risks that could lead to errors in the Company’s financial reporting. Each year the Board of Directors decides which risks are essential to take into consideration in order to ensure satisfactory internal control over financial reporting. A more detailed description of the work with internal control is included in the Corporate Governance Report in the Annual and Sustainability Report.