Risks

The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving Kingfisher’s strategic objectives. The Corporate Governance report describes the systems and processes through which the directors manage and mitigate risks. The Board considers that the principal risks to achieving its objectives are set out below. The Board recognises that the nature and scope of risks can change and so regularly reviews the risks faced by the Group as well as the systems and processes to mitigate them.

Economic conditions

The economy is a major influence on consumer spending. The current economic outlook, particularly with regards to trends in employment, inflation, taxation, consumer debt levels and interest rates, is likely to impact consumer demand for discretionary spending on the home and places our business plans and forecasts at risk. Whilst predicting future trends is very difficult, Kingfisher reflects the latest independently-sourced estimates in its internal plans.

International expansion not only provides opportunities for sustainable growth and returns but also economic diversification. The UK now accounts for less than half of Group sales and the international element will continue to grow at a faster pace. This year, Kingfisher accelerated the rate of investment into Russia to take full and timely advantage of this exciting and fast-growing economy.

New and emerging markets

Given current global economic conditions and liquidity constraints there is a risk that we will be unable to exploit new opportunities for entering new and emerging markets. We remain, however, committed to developing our existing investments, particularly in Russia and China.

These markets, which offer opportunities for long-term sustainable growth with superior returns, will continue to present challenges in terms of managing cultural and political nuances and risks.

We will continue our policy of identifying and recruiting strong local management teams, who understand the local culture, market and risks, and, in some cases, collaborating with joint venture partners to mitigate country specific risks.

Kingfisher also provides guidance, policies and procedures to ensure that new investments and initiatives are subject to an appropriate level of due diligence and probity and are supported by a robust process of economic and business appraisal. Where issues do arise, the Group acts quickly to address them and learn from the experience.

Health & Safety

With over 85,000 employees and six million customers visiting Kingfisher stores each week there is always a risk of accidents involving either customers or staff and, as a result, robust health and safety systems are a priority. While regulatory requirements vary from country to country, each operating company is required to designate a director with specific responsibility for health and safety, who is then responsible for ensuring that a written health and safety policy is communicated to all staff, that appropriate health and safety arrangements are in place to protect our employees and that we comply with local regulatory requirements. The ultimate responsibility within each operating company remains with the unit head.

Kingfisher Head Office is responsible for facilitating the sharing of best practice and the development of minimum Group standards, which in some cases will be higher than local regulatory requirements and has this year validated progress through independent third party verification.

Attracting and retaining the best people

Retail is fundamentally a people business and the ability to attract, recruit and retain quality staff is a risk in a highly competitive labour market. We continue to invest in our people, ensuring that we recruit and retain the right calibre of staff with the skills, experience and talent to grow the business. We have introduced appropriate management development programmes to ensure that we assess, manage and develop our people’s leadership skills, talents and experiences from the Board down.

Strategy effectiveness

In retail, change remains the only constant and we continually seek to identify, and anticipate the risks regarding our assumptions and understanding of consumer trends and respond to our customers’ demands for goods and services. In order to ensure that our strategies meet both current and future customer needs, each individual operating company is responsible for implementing the necessary processes and procedures to monitor the efficiency, economy and effectiveness of the delivery of its strategic plans. Similarly, corporate planning processes are in place to ensure that our businesses’ strategies are aligned and contribute to delivering sustainable shareholder value.

Investment opportunities

Investment in the business is fundamental to achieving Kingfisher’s aim of providing shareholders with sustainable returns. Despite difficult economic conditions and concerns regarding prospects for consumer spending throughout 2008, we remain committed to our modernisation programmes at B&Q UK and Castorama France.

We also continue to invest in our growth UK and international businesses. These businesses continue to deliver sustainable growth as well as offering opportunities for economic diversification and offsetting tough trading conditions in our developed markets.

Kingfisher will continue to review the balance of risk between its ability to generate sufficient cash to maintain its investment programme, paying a dividend to shareholders and maintaining a healthy balance sheet in the face of the pressures created by the global “credit crunch” and its associated impact on global liquidity and cash markets.

Kingfisher has also sought to maximise its financial resources through ongoing reviews of its business portfolio, for example the sale of the joint venture in Taiwan and the closure of South Korea, and will continue to initiate programmes to reduce current working capital in order to free up funds to finance investment opportunities.

Group synergies

In ever increasingly competitive and cost-sensitive consumer markets it is imperative that we are able to drive efficiency and promote innovation through the effective leveraging of our Group structure and by taking advantage of the potential economies of scale created by the breadth and range of our operations.

This year has seen the continued development of the benefits derived from Group Commercial, particularly with regards to an increased emphasis on both direct sourcing and collaborative product initiatives, particularly between our two biggest businesses, B&Q UK and Castorama France.

Similarly, the creation of Kingfisher Information Technology Services is driving greater efficiency and benefits of scale for our information technology architectures, hardware and capabilities.

The careful management of formats such as Brico Dépôt, Screwfix and Trade Depot, which complement our more developed businesses, will also continue to drive enhanced overall value for the Kingfisher Group as a whole.

Business continuity

A crisis can come in many different forms and there is a risk that either a single catastrophic loss or a cumulative series of failures will impact our ability to trade or have a major impact on our reputation. Crisis management programmes are established throughout the business and clear communication strategies are in place in order to manage any major crisis.

Our level of crisis readiness is subject to review by both internal and external audit as directed by both local audit committees and the Kingfisher Audit Committee. We are also supported by a comprehensive risk financing programme to ensure we are appropriately insured.

Corporate responsibility

Kingfisher is committed to promoting both ethically sound and sustainable business ethics and practices in addition to promoting products to help our customers make choices regarding their contribution to creating a more sustainable environment.

This commitment is based on an understanding of the risks, to both our brand and our customers’ expectations, of not operating in an ethical manner and is supported by a long-term and demonstrable investment in promoting ethics, social responsibility and environmental sustainability, supported by a clear policy and framework which sets consistent and measurable targets and standards for all of our operating companies.

We also engage with key Non-Governmental Organisations and industry forums (e.g. Forum for the Future, FTSE4Good, Business in the Community) to ensure that we are at the forefront of the environmental debate and assume a leadership position amongst our peers. For more details see the Corporate Responsibility section of the Business review.

Regulatory

The geographic and cultural diversity of the markets in which we operate exposes us to wide-ranging and complex legal and regulatory risks. Individual operating companies, supported where necessary by Group Governance & Corporate Services, are responsible for ensuring that they have access to adequate and sufficient legal and governance resource.

Operational management is also responsible for liaising with either local legal resources or Group Governance & Corporate Services to resolve any potential issues arising from new legislation or any suspected breaches of existing legislation and practices.

Where new operating companies are either acquired or created, formal Group-defined governance structures are established from the outset and, at a minimum provide guidance regarding local capital expenditure sign-off, Board, and Audit Committee processes and procedures, the implementation of which are subject to a review by the Director of Governance as well as Internal Audit.