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Operational and strategic risks

Operational and strategic risks

(A) Market risks

Axfood operates in a competitive and dynamic market that requires a flexible and agile organisation to meet new customer needs and behaviours. To stay up to date with competitors’ activities and new trends, the market is constantly monitored. For example, customer and consumer surveys are conducted regularly, 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, for example, prior to an acquisition having been carried out, there is a risk that this could have a negative impact on Axfood’s earnings and brand. With respect to acquisitions, a well-executed integration and retaining key persons are also important. 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, the external operating environment as well as the operation’s profile are analysed from ethical, social and environmental aspects, among other things.

In 2021, Axfood acquired the wholesale business Bergendahl Food. A special integration project has been established and integration will be a main focus throughout 2022.

(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, food and product safety, 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 as high demands are placed 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) Handling the Covid-19 pandemic.

(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 Group’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 at the local
level. In connection with new laws or regulations, measures are decided
on well in advance of enactment.

(E) Employee risks

The food retail industry is undergoing a rapid pace of change and digitalisation. Change management, skills development and attracting soughtafter competencies are growing increasingly important. One currently
pertinent and major change facing Axfood is that certain of Dagab’s
existing warehouses will be replaced by a new logistics centre in Bålsta,
outside Stockholm.

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

(F) Risk of disruptions in the logistics chain

One of the most serious business risks that the Group must manage is the risk of disruptions in the logistics chain, especially the risk of fire in its distribution centres, which would result in property loss and business interruption losses. Axfood devotes a great deal of focus to its systematic fire safety work and places considerable emphasis on maintaining a well-working fire safety organisation with preventive measures such as adequate training and pertinent procedures, 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 Risk (G), IT and information security risks.

(G) IT and information security risks

Digitalisation presents major opportunities but at the same time places
greater demands on the ability to protect critical information and ensure
stable IT operations. Information security is therefore a prioritised area
and a natural part of the strategic agenda. Digitalisation increases complexity and the risk of making mistakes when changes are made in the IT
environment. There is also an increased amount of data for processing
and automation. A marked increase in cybercriminal activity has also
been noted in the last few years. Major emphasis is therefore placed on
preventive work and the organisation to detect, handle and protect the
Group’s operations from threats and disruptions as well as on ensuring
operational continuity in case of unforeseen events. During the year, this
work was taken a step further through the introduction of a new cyber
security strategy as a part of the Group’s IT strategy. Axfood works continuously on raising awareness of the risk of operational disruptions or
losing sensitive data.

(H) Risk of labour market conflicts

There is a risk that labour market conflicts, such as a strike or lockout in
any area of the business, could result in operational disruptions. Negotiations of collective bargaining 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 players in the Swedish food retail industry,
and its ability to meet stakeholders’ expectations in terms of quality,
transparency, and compliance with laws and standards as well as social
and ethical norms is therefore crucial for maintaining a high level of credibility. Examples of issues dealt with on a daily basis 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, there is a risk that the Group would be exposed to financial loss as well as damage to the brand. Axfood works actively with these issues, for example, through extensive internal inspection programmes at stores and quality assurance of private label products. As part of the inspection programmes, stores conduct certain daily arrival controls and temperature controls in various parts of the store. Clear procedures 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, private label products and concepts.

For Axfood’s competitiveness, it is important to continually develop the
assortment according to customers’ needs and preferences. This can entail, for example, offering sustainable foods such as organic and plantbased products. Axfood also has a large assortment 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 consumers, combined with an
inability to be sufficiently fast at adapting the assortment to changed
expectations, could lead to lower sales. However, risks are also opportunities for those in the industry that are far ahead of their competitors.

Within Axfood, it is not mainly the physical risks of the impact of more extreme weather events that are the dominant risks, even though assurances must be made in connection with, for example, new investments in warehouses. On the other hand, there is a tangible risk that more extreme weather could impede purchasing work. Another risk taken into account is the failure to be sufficiently dynamic and develop the assortment at a high enough pace as consumers’ growing awareness about climate issues changes their consumption habits. This risk is just as much an opportunity given a cutting-edge assortment development. Climate change can no longer be entirely prevented through climate policy measures, even though the opportunities to mitigate it are considerable. This means that the increase in extreme weather is presenting an ever-greater challenge to food production. There is a risk that drought, extreme heat, storms, floods and extreme cold could considerably reduce agricultural production in critical areas, leading to both higher prices that affect sales and difficulties in sourcing volumes to meet customer demand. To diversify this risk, it is imperative that product supply is sourced from several different geographic areas. Axfood is increasingly taking climate change into account in its purchasing work, which entails greater diversification of risk. Refer to the section on climate-related risks in the Annùal and Sustainability Report.

(K) Handling the Covid-19 pandemic

The ongoing Covid-19 pandemic has led to a new dimension for Axfood in
terms of risk management. The risks that the pandemic has given rise to,
including the risk of disruptions in the logistics chain, supplier risks and
employee risks, have been managed within existing organisations in the
Group without any significant disruptions in operations. The health and
safety of employees and customers is the top priority, and the Group has
also lived up to its societal responsibility. The work on minimising disruptions over the 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 a long-term impact, including a risk of higher
unemployment and recession. This represents an uncertainty regarding the general level of consumption, which could affect Axfood, on top of the clear negative impact that the pandemic has had on cross-border shopping, stores in other locations 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
procedures, and deployment of technical and human resources to deal
with various situations, such as shoplifting.

(M) Risks of 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 material to take into consideration in order to
ensure a high level of 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.