Material Sustainability Issues and Risks

Risk management is embedded in the group’s annual business planning cycle. A disciplined approach is followed in evaluating risks and developing appropriate strategies to mitigate and manage risk.

Through this risk management process the board and management identify the material sustainability issues and risks that could adversely impact on the performance and sustainability of the business. These material sustainability risks are reviewed annually to ensure all relevant internal, industry and macroeconomic factors are considered. Three of the material issues identified last year have been removed from the register of material sustainability risks as management believe the probability of these risks affecting the business has been sufficiently mitigated or reduced in the past financial year.

These risks are “Non-compliance with policies, procedures and processes”, “Acquiring suitable store premises with dispensing licences for Clicks” and “Availability of information technology systems”.

The risks that have been included for the first time for the 2013 financial year are the risks of “Loss of distribution clients”, “Failure to achieve BBBEE targets” and “Non-compliance with current and emerging legislation”.

The following table details the material issues for the year ahead, the implications for the business and the strategies that have been implemented to mitigate and manage the impact of these risks. For further detail on the group’s risk management process, refer to the Corporate Governance Report.

     
Implications   Mitigation plans
The current trading environment is characterised by low selling price inflation, continuing cost increases and subdued consumer spending. Low inflation could negatively impact profitability as volume increases are required to maintain revenue growth. This also creates pressure to remain price competitive. Cost growth ahead of inflation could place pressure on maintaining margins.  
  • Focus on growing sales volumes profitably
  • Continued aggressive promotions strategy to entrench
    Clicks as a value retailer
  • Ongoing review of expenses and cost structures across all businesses
     
     
Implications   Mitigation plans
Aggressive expansion by corporate pharmacy and retail chains, new entrants into the local retail sector and increasing price competitiveness of retailers could negatively affect sales, profitability and market share growth in Clicks.  
  • Clicks has a store footprint of 420 and plans to grow to 500 stores by opening 20 – 30 stores each year
  • Continued opening of pharmacies, with 30 – 40 planned for 2013
  • Long-term plan to open dispensaries in all Clicks stores (currently 306 out of 420 stores)
  • Continued recruitment of new members to the Clicks ClubCard loyalty programme
  • Ongoing improvement in pricing, product offer and customer service
     
     
Implications   Mitigation plans
The group is the largest employer of pharmacists in the private sector and employs over 2 370 permanent and locum pharmacists in Clicks, UPD and Clicks Direct Medicines. The shortage of healthcare professionals is an industry challenge, with South Africa having approximately half of the number of required pharmacists, based on World Health Organisation standards. The shortage of pharmacists could limit the growth of Clicks, increase costs and impact on margins.

 

  • Pharmacy salaries externally benchmarked to ensure Clicks remains competitive in the employment market
  • An employee share ownership scheme aims to attract and retain scarce skills, with a higher allocation of shares to pharmacists
  • Specialist pharmacy recruitment team established
  • Group collaborates with pharmacy schools at universities to increase capacity
  • 80 bursaries to be granted for trainee pharmacists for 2013
  • Plan to increase the number of pharmacy interns employed in the group to 60 in 2013
  • In-house Pharmacy Healthcare Academy trained 423 learners in past financial year
  • Revised employment model adopted to increase ratio of pharmacy assistants to pharmacists to 3:1
     
     
     
Implications   Mitigation plans
Legislative and regulatory changes proposed by the Department of Health (DoH) could impact on medicine pricing. These changes include draft regulations to cap the maximum logistics fees that can be earned by pharmaceutical wholesalers, the introduction of international benchmark pricing and changes to the marketing code for retail pharmacy. These changes could reduce turnover, margins and profitability in Clicks and UPD.

 

  • Continued management engagement with the DoH on proposed changes
  • Formal written and oral submissions to the DoH in response to draft legislation or regulations
  • Ensure Clicks and UPD are operating efficiently to maintain margins and profitability, and to benefit from market consolidation should fees or turnover be negatively impacted by legislation
     
     
Implications   Mitigation plans
Private label scheduled medicines and front shop products represent a major growth opportunity for Clicks, and account for 18.4% of sales. The failure to secure quality products that meet regulatory requirements at the appropriate margin could negatively impact both profitability and reputation. The registration process is also impacted by delays within the Medicines Control Council.

 

  • Dedicated department in Clicks focuses on quality front shop private label products
  • Unicorn business established to source scheduled private label products and ensure regulatory compliance
     
     
Implications   Mitigation plans
An inability to service UPD’s current distribution clients according to defined standards and service level agreements (SLAs) could result in the contracts being terminated. This could result in a loss of revenue, financial penalties and reputational risk to the group.

 

  • Measurable key performance indicators and SLAs in place for each contract to ensure service delivery
  • Service offering standardised to ensure robust and
    practical processes
  • Invested R7.9 million on IT functionality to improve automation and monitoring
  • Regular meetings are held with senior management at key clients to ensure any service-related issues are addressed
     
     
Implications   Mitigation plans
An inability to attract and retain scarce talent in core areas of the business, particularly in general management, merchandise and planning, could ultimately compromise service delivery.  
  • Merchandise Academy launched to train new and existing buyers and planners
  • Leadership development programme to be initiated
  • Improved performance management process
  • Total rewards remuneration strategy across the group ensures market competitiveness in terms of cash and benefits
  • Employee share ownership scheme introduced as a means of incentivising and retaining staff
     
     
     
Implications   Mitigation plans
The group is committed to sustainable transformation. Failure to make meaningful progress towards achieving BBBEE targets could impact on the group’s reputation and also limit the ability to secure distribution contracts in UPD.

 

  • A transformation plan, which is aligned to the BBBEE codes of good practice, guides the implementation of the transformation strategy
  • Board social and ethics committee reviews BBBEE scorecards
  • BBBEE principles are embedded within each business unit
  • Business unit transformation forums responsible for BBBEE implementation
  • Independent assessment of BBBEE undertaken annually
  • Achieved level 3 BBBEE compliance in 2012
     
     
     
Implications   Mitigation plans
Sanction by the Pharmacy Council or Medicine Control Council for non-compliance could result in fines, penalties or restrictions being imposed on trading, as well as reputational damage.

 

  • Pharmacy practice compliance reviews are conducted by the professional services team in Clicks
  • Monitoring by group legal compliance officer
  • Insurance cover for professional risk of dispensing errors
     
     
Implications   Mitigation plans
Sanction for non-compliance could result in fines and penalties, criminal implications for directors, as well as reputational damage.

 

  • Compliance officer monitors existing and proposed legislation, and identifies potential impacts on the business
  • Training and compliance programmes put in place for all relevant legislation