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| Risk Factors |
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Any business undertaking will involve risk. Many risk factors are common to any business, no matter what sector it operates in. The Group’s approach to Financial Risk Management is set out in the Notes to the Group Accounts.
The Directors consider that certain key risks and uncertainties however are more germane to Woolworths Group and the markets in which its various businesses operate.
As part of the Business Review, an assessment of such factors is set out below:
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| 1. |
Competition
The Group operates in highly competitive markets. In particular, in recent years the retail landscape has seen significant changes and trends in retail and consumer behaviour and spending which are challenging for Woolworths Retail. The Group has faced and expects to face increased competition from existing UK general and specialist retailers, food retailers that have expanded and are further expanding into general merchandising, foreign retailers entering the UK market and newly formed competitors.
Further, the growth of internet retailing and out-of-town shopping has required and will require the Group to adopt and invest in new strategies to remain competitive.
The Directors believe that where Woolworths offers customers product innovation, exclusivity and value-for-money, it can continue to combat these pressures. However, actions taken by competitors as well as action taken by the Group to maintain its competitiveness and its reputation for value, have placed and will continue to place pressure on the Group’s merchandise pricing, margins and profitability, which have had in the past and could have in the future, an adverse effect on the Group’s business and financial condition. |
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| 2. |
Growth of the Digital Entertainment Market
A key driver of footfall and sales within Woolworths stores and the core stock-in-trade for Entertainment UK, Bertrams | THE and 2 entertain is physical entertainment media ie CD’s, DVD’s, Books and Games.
In recent years, technological advances and changing consumer preferences have given rise to new markets providing delivery of music, films, games and books to portable players and to the home via digital delivery, bypassing the purchase of traditional physical media platforms. This trend may result in decreased demand for such products in stores. Decreased sales of home entertainment products at retail or wholesale level may have an adverse effect on the Group’s business and financial condition.
The Directors believe that digital entertainment also offers opportunities for the Group and it has developed strategies to participate, including in Woolworths, a multichannel retail offer and investment in digital rights and online delivery technology within Entertainment Wholesale and Publishing.
However, the growth of digital markets and the increasing uptake of Broadband access will continue to place pressure on the Group’s participation in traditional entertainment retail and distribution channels. |
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| 3. |
Seasonality
The Group’s business is highly seasonal. Historically, the Group’s most important trading period in terms of sales, profitability and cash flow has been the Christmas season. Lower than expected performance in this period may have an adverse impact on results for the full-year which may also result in excess inventory, especially in seasonal merchandise that is difficult to liquidate.
To a lesser extent a lower than expected turnover over the Easter period may also have an adverse effect on the Group’s business and financial condition. |
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| 4. |
Damage to Reputation or Brands
The Woolworths name is a key asset of the business and maintaining the reputation of the brand is key to the success of the Group. The many separate product lines of general merchandise handled by the Group means the supply chain is complex and is subject to increasingly stringent laws and regulations governing issues of health and safety, packaging and labelling, pollution and other environmental factors.
The Group has a Quality Assurance team and legal and regulatory control processes both in-house and externally to advise and take action on existing and emerging risk management issues. However, these systems cannot guarantee compliance or fully protect against quality, regulatory, safety and environmental risk in the supply chain. The Group is therefore potentially vulnerable to an event or circumstances adversely affecting the supply chain or merchandise which gives rise to liability claims and/or reputational damage. Substantial erosion in the value of the Woolworths name could have an adverse effect on the Group’s business and financial condition. |
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