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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 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 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 business’ 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 was established for the acquisition, and integration efforts were carried out and completed 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. 

(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 some of the Group’s existing warehouses will be replaced in 2023 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 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 information and customer data, as well as ensuring stable IT operations. In the past few years, a continued increase in cybercriminal activity has been observed. Information security is therefore a prioritised area and a natural part of the strategic agenda. Systematic efforts are ongoing at Axfood based on a management system for information security, and the level of protection is continually monitored based on the current threat scenario. Major emphasis is placed on preventive work and the organisation in order to detect, handle and protect the Group’s operations from threats and disruptions as well as on ensuring operational continuity in the event of unforeseen events. This also involves continuously working on raising awareness of the risk of operational disruptions or losing sensitive data. During the year, an updated IT security architecture was developed based on Zero Trust, along with an action plan with concrete activities to achieve this.

(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 the Group’s various concepts. The quality assurance process of private label products involves imposing requirements on food and product safety during the manufacturing of goods. The contents of the products, in the form of ingredients and additives, as well as sensory qualities such as taste experience are reviewed and analysed for every individual product.

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 vegetarian 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 the risk of 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. For more information about climate and environmental risks, see the Annual and Sustainability Report.

(K) Pandemics

For Axfood, the health and safety of its employees and customers is the top priority, at the same time as the company is to live up to its societal responsibility to deliver food. The Covid-19 pandemic provided lessons when it comes to managing the spread of infection with a number of measures and restrictions of different kinds. Together with a high rate of vaccination among the population, this provides a healthy level of preparedness to respond to any new spread of infection in society. 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.

(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 Annual and Sustainability Report.

(N) The war in Ukraine

The share of direct purchases from Ukraine is very low in Axfood’s supply chain. However, Ukraine is a major supplier of grain and fertiliser, and the situation is therefore impacting Axfood’s suppliers. In addition to a raw material shortage, the war has also resulted in increased energy prices, which is also impacting Axfood and Axfood’s suppliers. The war has also led to increased logistics challenges throughout the value chain related to matters such as transportation.