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Operational and strategic risks

(A) 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 on 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 under IT and information security risks (B).

(B) IT and information security risks

There is a keen awareness in the Company that centralization elevates the Group’s 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 monitoring 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.

(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, 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.

(D) Employee risks

Today the pace of change and complexity in society is high and accelerating, and this also affects Axfood. Axfood therefore sees a need to strengthen leaders and employees by offering support in change management in 2020. One currently pertinent and major change facing Axfood is that parts 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 gender equality work within 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 health and a good work environment is fundamental.

(E) 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. Negotiation of collective agreements for Axfood’s operations are conducted through the auspices of the Swedish Trade Federation, in which Axfood is a member.

(F) Liability and trust risks

Axfood is one of the leading food retail companies in Sweden, and therefore its ability to meet stakeholders’ expectations for quality, transparency, compliance with laws and standards as well as social and ethical norms is crucial for earning customers’ trust. Examples of issues the Group must deal 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, which could also have an impact on Axfood’s market capitalization. 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, for example, such as having excessively high levels of pesticides in foods or unsuitable chemicals in other products, could undermine trust in Axfood’s brands and prompt more consumers to do their shopping with competitors. 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 plant-based 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.

(G) 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 trend 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 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 at the forefront in developing the assortment in comparison with its peer competitors. Climate change can no longer be 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 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.

(H) 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.

(I) 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. With respect to suppliers, we require that all agreements include the Code of Conduct, which is described here. In connection with new laws or regulations, measures are decided on well in advance of enactment. Examples of this include the EU’s General Data Protection Regulation (GDPR), Sweden’s complementary Data Protection Act, and Sweden’s video surveillance law. It is important that customers and employees alike hold trust in the Company and in how their personal information is handled. Axfood has therefore actively participated in work being conducted by the Swedish Trade Federation to formulate recommendations for the entire industry. Since the data protection laws took effect, we have a Data Protection Officer plus an additional person who work exclusively with data protection issues. Other measures that have been carried out include training and information for everyone from cashiers and customer service staff to members of management and the Board of Directors. Where necessary, processes have been updated to include, for example, routines for clearing and erasing personal data, and automating these processes as far as possible in IT systems. In addition, we have more clearly stated the terms for the chains’ customer programmes, and have produced and communicated updated information texts on how customers’, employees’ and vendors’ personal data is processed.

(J) Risks for errors in the financial reporting

Axfood continuously updates its risk analysis regarding the gradation of risks that could lead to errors in its 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 the Company’s financial reporting. A more detailed description of Axfood’s work with internal control is included in the section on Corporate Governance.