Overview
Principal risks and uncertainties
We manage risk to help us achieve our strategic objectives and protect our reputation.
The Audit Committee is responsible for oversight of the Group’s risk management processes and the Board is responsible for the appropriate identification of risks and the effective implementation of mitigating activities. During the year, as part of its regular review of internal controls, the Audit Committee reviewed the processes used to build and refresh the Group’s risk registers. It sought to enhance risk management systems and improve how risk registers are used in the business.
The Group’s Risk Register is compiled through a combination of business unit risk registers and Board input. The Board formally reviews the Group Risk Register when the annual budget is set and at each of the two forecast reviews throughout the year. The Company Secretary & General Counsel is responsible for highlighting to the Board any changes to the Group’s risk registers identified during the intervening periods. The process review conducted during the year helps to ensure that a model of continued risk appraisal is embedded in the Group.
The principal risks and uncertainties facing the Group are set out in the table below. This is not intended to be an exhaustive analysis of all risks facing the Group.
Risk area and potential impact |
Mitigating controls |
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Commercial risksLoss of key customerThere is strong competition between suppliers to our key customers. We face competition on both our branded and retailer branded products. To compete we have to purchase raw materials effectively, operate the supply chain efficiently, market and sell our products well and continually innovate. If we fail to do this we could lose sales. |
No one customer accounts for more than 10% of our total revenues and we continue to seek to widen our customer base. We have increased our investment in marketing and innovation and have also announced a new capital expenditure programme for our liquid dairies which will drive further efficiencies in our milk supply chain. We closely monitor the service levels we provide to our customers. The Executive Board is involved in major customer negotiations. | |
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Reduced demand from consumers Consumers could move away from dairy products for economic, health or other reasons leading to lower sales and profits. |
Consumers are at the heart of our business and we regularly monitor consumer trends. We continue to promote the health benefits provided by dairy products and develop healthier products. We react to other consumer trends - for example with more environmentally-friendly packaging and the increase in the use of the internet with milk&more. Dairy products are staple purchases for most households and we have responded to tougher economic conditions by promoting our key brands more. | |
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Input cost inflation Higher milk and non-milk costs (vegetable oils, diesel, electricity, gas and packaging) will reduce margins unless we can recover them from customers. For more information refer to: Chief Executive’s review Segmental reviews Milk Procurement Note 31 to the accounts |
This area is closely reviewed by the Executive Board which has established a risk committee to monitor and hedge forward non-milk commodity prices if possible and appropriate. The risks associated with purchasing large volumes of milk have been reduced by establishing milk pools linked to major customers and longer-term fixed price milk contracts. We seek to absorb short term cost movements through supply chain efficiencies. Our purchasing and commercial teams have clear lines of communication between them to ensure customers are kept aware of changes to our cost base and requests for price increases can be fully justified. | |
Operational risksRestricted milk supplyRestricted milk supply due to economic factors, weather or an epidemic which affects dairy cows could restrict milk supply. This in turn could lead to lower sales and profits. Consumer confidence in dairy products could also be adversely affected. For more information refer to: Milk Procurement |
We have a strong relationship with our milk suppliers and contracts which include a notice period of at least one year. Our experienced milk procurement team understand milk production and are alert to changes in supply. We closely monitor the milk price we pay to suppliers in order to ensure we can purchase the right quantity of milk to meet demand forecasts and have established procedures for allocating milk between our businesses if a short-term shortfall in supply does arise. We have contingency plans established for major incidents and work closely with DEFRA and industry bodies to ensure these are appropriate. These plans are regularly tested and reviewed with the Executive Board. We carry insurance against the risk of business interruption. | |
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Other operational risks An accident, the failure of equipment or systems or deliberate act could disrupt production, affect food safety, and/or cause reputational damage with adverse consequences. We are also exposed to losses in the event that information technology systems fail. |
Dairy Crest takes product quality very seriously and has rigorous quality controls in place to minimise potential risks. All of our manufacturing sites have a trained engineering resource, are supported by our major equipment suppliers and hold appropriate stocks of spare parts. They also all have fire protection systems and regular fire drills. Our information technology systems are regularly backed up and key computer and network functions are duplicated. We have procedures in place to help us deal with major incidents and insurance cover for property damage and business interruption risks. | |
People risksRecruitment and retentionWe need high quality employees to provide customers and consumers with safe, high quality products and services. For more information refer to: Our people |
We carry out rigorous selection procedures and benchmark pay and benefits to ensure we can attract and retain the best people. We have a wide bonus scheme and a range of other incentives to reward good performance and a performance review and talent management schemes to identify and develop our own people. We undertake regular surveys to monitor our relationship with our employees. | |
Financial risksLiquidityWe have to ensure that we have the appropriate capital structure in place to allow us to run the business. For more information refer to: Financial review Note 31 to the accounts |
We are comfortably within our debt headroom and covenants and have a good mixture of long term credit facilities with supportive banks who know our business. Increased funding requirements into the defined benefit pension scheme could reduce liquidity, but we have closed the scheme to future accrual and have taken out insurance to meet the liabilities associated with many of our retired members. | |
Legal and compliance risksOur sector is subject to a number of complex statutory requirements. There is a risk of fines or lawsuits and reputational damage if we fail to comply. |
We have a strong in-house legal function supported by external advisors. We have undertaken company-wide training in respect of competition law and actively monitor and adjust to ongoing legal and regulatory changes. |
Not all of the risks listed are within the Group’s control and others may be unknown or may currently be considered immaterial but could turn out to be material in the future. The risks set out in this section, together with their associated mitigation activities, should be considered in the context of the Group’s risk management and internal control framework, details of which are set out in the Corporate Governance Report and the Cautionary Statement regarding forward looking statements at the start of the Directors’ Report here;