Business review

Risks

Given the scale and diversity of our businesses, the Board of Directors recognises that the nature, scope and potential impact of our key business and strategic risks is subject to constant change. As such, the Board has implemented the necessary framework to ensure that it has sufficient visibility of the Group’s key risks and the opportunity to regularly review the adequacy and effectiveness of our mitigating controls and strategies.

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.

Risk Description Action

China fails to deliver the desired return

Although the Company has established a significant market share and brand presence in our key Chinese consumer markets the business has not delivered the desired return on invested capital. This has been exacerbated by the slowdown in China’s economic growth and the impact this has had on the domestic property market, both of which have significantly affected trading.

We have completed an in-depth strategic review of our operations in China and implemented a number of key actions including: measures to strengthen the management team, a stock clearance plan to release working capital and a store re-organisation plan to ensure that our store formats are suitably positioned to meet a challenging trading outlook.

The new management team is supported by Peter Hogsted, CEO, International and his colleagues on Kingfisher’s executive team. Peter and the team have finalised, and are in the process of implementing, a comprehensive repositioning plan to ensure that the B&Q China proposition is more aligned with our customers’ needs in order to provide a sustainable and long-term return. See Delivering Value, Conversation with the executive team and Financial review for more information.

Contracting consumer markets, exacerbated by worsening economic conditions, will impact sales

The ongoing global economic crisis will continue to present a difficult trading outlook across the retail sector. Our ability to deliver the desired return in contracting consumer markets will be particularly challenging if the downturn is exacerbated by the stagnation of the housing and construction sectors and the inability of both the retail and commercial banking industry to offer affordable loan facilities to both customers and suppliers.

We have implemented appropriate actions to release value, drive increased sales densities, improve our profit margin and reduce our investment and working capital requirements across the Group.

Similarly, we have completed the necessary scenario and contingency planning initiatives to mitigate the impact of a continued worsening of the economic climate.

We are committed to continued enhancement of our customer offer, through product innovation, improved customer service and store environment, combined with an aggressive commitment to driving cost efficiencies and reducing cost to sales ratio. This will ensure that we continue to consolidate our market share, whilst maintaining a robust balance sheet and healthy cash flows, should we enter a period of potentially prolonged economic recession.

Our systems and supply chain infrastructures lack the flexibility and capability to support the delivery of our strategic plans

Our ability to deliver the targets set by our seven steps to ‘Delivering Value’ strategy will undoubtedly place increasing demands on our existing supply chain and systems infrastructure and technologies. There is a risk that our infrastructure will lack the necessary scalability, flexibility and resilience to support its successful execution.

We have embarked on a programme to ensure that we focus our information technology resources on a combination of making the necessary investment to maintain or extend the useful lives of our existing technologies and developing solutions that directly support revenue generative opportunities. Where possible, we are also seeking to eliminate complex or heavily bespoke technologies that may hold back new and innovative customer offers.

As we consolidate our divisional management structures we are looking to identify and implement efficiencies and opportunities to leverage our capabilities across our supply chain. For example, we are currently integrating fulfilment efficiencies across our home delivery operations in the UK, and investing in direct import logistics solutions for our Eastern European businesses.

We do not implement the measures and disciplines to effectively assess the shareholder value delivered through the ‘Delivering Value’ programme

The successful execution of the ‘Delivering Value’ programme is the basis on which we will assess our progress in delivering our key priorities of managing working capital, cash, costs, investment capital and returns to our shareholders. There is a risk that we do not implement effective criteria against which to monitor, manage and report our progress in achieving the programme’s aims and objectives.

The new divisional management structure is collectively responsible for delivering the Group’s results and implementing Group-wide initiatives.

Appropriate corporate planning processes are in place to ensure that our operating company and divisional strategies are aligned and contribute to the ‘Delivering Value’ programme.

Individual operating companies are responsible for implementing the necessary processes and procedures to monitor the efficiency, economy and effectiveness of the delivery of its strategic plans.

We fail to take advantage of our combined buying power synergies and economies of scale

There is a risk that we fail to ‘unlock’ the potential to generate real shareholder value through the optimisation of combined purchasing and commercial synergies.

We have introduced challenging targets across our major operating companies to ensure we have identified those categories that will benefit most, in terms of optimising cash margin gains, from a more collective approach to both international contract negotiations and own-brand opportunities.

Increased alignment of products, sourcing, and packaging strategies for our major own-brand products continue to drive cost price reduction opportunities, particularly across our MacAllister and Performance Power ranges.

The Kingfisher Sourcing Organisation has been structured to offer significantly improved direct sourcing opportunities for our operating companies located in emerging markets. See the Group buying programmes section for more information.

We are unable to secure external financing at a commercially viable rate

The ongoing scarcity of investment capital, due to the breakdown in the international wholesale money markets, is likely to impact the willingness and ability of the banking sector to offer debt financing facilities at a commercially viable rate. This may impact and restrict our options with regards to investment decisions and funding market entry opportunities in new or emerging markets.

The Board, assisted by the Group’s treasury department and the Treasury Committee, is responsible for the ongoing review and monitoring of our capital structure to ensure that the Group can meet its financing requirements and is compliant with banking covenants.

We have introduced robust measures to ensure the most efficient use of resources. These include higher hurdle rates and enhanced payback periods for capital, a working capital reduction strategy and an increased emphasis on ensuring we optimise and leverage our assets and property portfolio across the Group.

We are also committed to maintaining our debt at, or below, current levels and have committed to use the proceeds from the sale of our Italian business to further reduce debt.

We do not make the necessary investment in our people to ensure that we have the appropriate calibre of staff, skills and experiences across the Group

Retail is fundamentally a people business and there is a risk that, given the economic pressures we are currently facing, we fail to maintain the necessary investment in our people to ensure that we have the appropriate calibre of staff for specific roles and that skills and experiences are deployed in the best interests of the individual, the operating company and the Group.

We continue to invest in our people through an ongoing commitment to maintaining our store standards via effective staff training programmes. For example, in the UK, we have partnered with City & Guilds to deliver nationally accredited and recognised qualifications and apprenticeship schemes.

We remain committed to the ongoing assessment and measurement of our people’s engagement with the business. Engagement surveys are completed bi-annually across the Group.

We have also introduced new elements to our share-based long-term incentive plans across our business, to ensure that senior management rewards are aligned with our targeted performance and earnings growth. See the People section for more information.

The potential impact to Kingfisher’s reputation, arising from a major environmental or ethical failure

As our customers become more knowledgeable about the environmental and social impact of our businesses, we are increasingly being asked to provide both products and product information that support our intent to operate an environmentally sustainable and ethically responsible business. As a result, the risks to our reputation, arising from a major environmental or ethical failure, increase exponentially.

Kingfisher is committed to a long-term investment in promoting ethics, social responsibility and environmental sustainability.

Kingfisher’s Future Homes strategy sets out a policy and framework for integrating sustainability into the business, and includes specific standards and targets for all operating companies.

A CR risk assessment tool has been developed to help our operating companies identify and manage CR risks and opportunities.

We also engage with key non-governmental organisations and industry forums (e.g. Forum for the Future, FTSE4Good and 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.

The risk of penalties or punitive damages arising from failure to comply with new legislative or regulatory requirements

The geographic, political and cultural diversity of the markets in which we operate exposes us to wide ranging and complex legal and regulatory frameworks. There is a danger that we do not understand the risks associated with either existing or proposed changes to legislative requirements across the jurisdictions in which we operate.

Individual operating companies, supported where necessary by the corporate affairs department, are responsible for ensuring that they have access to sufficient legal and governance resource.

Operational management is also responsible for liaising with either local legal resources or the corporate affairs department to resolve any potential issues arising from new legislation or any suspected breaches of existing legislation or Group policies.

Where new operating companies are either acquired or created, formal Group defined governance structures are established from the outset. At a minimum, these provide guidance regarding Board, and Audit Committee processes and procedures, the implementation of which are subject to a review by the Director of Corporate Affairs and the internal audit department.

Impact of a major health and safety failure affects our reputation and results in harm to our employees, penalties or prosecution

There is a risk that repeated health and safety failures could result in a major incident or fatality that is directly attributable to either a systematic or institutionalised failure in our health and safety management systems. This would result in damage to our reputation through adverse publicity, prosecution and censure.

With over 80,000 employees and six million customers visiting our stores each week, 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. This person 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 local Managing Director.

Kingfisher’s Corporate Centre is responsible for facilitating the sharing of best practice and the development of minimum Group standards, which in some cases will be stricter than local regulatory requirements. Progress this year has been validated by an independent third party.