Integrated Annual Report 2017

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Managing material issues

Material issues have been identified which could significantly impact positively or negatively on the group’s ability to create and sustain value. These material issues are reviewed annually by the board and management where all relevant internal, industry and macroeconomic factors are evaluated. The needs, expectations and concerns of the stakeholder groups that are most likely to influence the group’s ability to create sustainable value, notably customers, suppliers, regulators, staff, shareholders and providers of financial capital, are central to determining the material issues.

Following the review for the 2018 financial year, the directors have included information technology as a material issue owing to the increasing relevance of data security, and the need for our IT systems and architecture to remain relevant in a world with an ever-increasing demand for real-time IT systems.

1

Trading environment

2

Competition

3

Regulation

4

Information Technology

5

People

Risks relating to each material issue are based on the major risks on the group’s register. The accompanying risk heat map indicates the levels of risk before (inherent risk) and after (residual risk) mitigation plans have been implemented.

Opportunities are presented for each material issue to indicate how the group is using its competitive advantage to manage the impacts of the material issues on value creation.

Risk Map

“The needs, expectations and concerns of stakeholders that influence our ability to create sustainable value are central to identifying the material issues.”

1

Trading
environment

2

Competition

3

Regulation

Why material?

Economic conditions, political uncertainty, sovereign credit rating downgrades and the resultant negative consumer sentiment are impacting South Africa’s already constrained retail trading environment. Consumer disposable income is being further eroded by higher health insurance costs, increased tax rates, rising energy and general living costs.

Why material?

Clicks faces competition on several fronts, including national food retailers and general merchandise chains, and other pharmacy businesses.

Why material?

Healthcare markets are highly regulated across the world and approximately 50% of the group’s turnover is in regulated pharmaceutical products. The group supports regulation that advances the government’s healthcare agenda of making medicines more affordable and more accessible but opposes regulation which inhibits access to affordable healthcare and limits customer choice.

Risks

  • Further deterioration in the economic environment will depress consumer spending which is already under severe pressure.
  • Criminal activity, including syndicated crime, escalates during times of economic hardship.

Risks

  • Expansion by corporate pharmacy and retail chains impacting on market share growth in Clicks.
  • Increasing price competitiveness of retailers could negatively affect sales and profitability in Clicks.

Risks

  • Legislative and regulatory changes introduced by the Department of Health (DoH), SA Pharmacy Council (SAPC) and SA Health Products Regulatory Agency (SAHPRA, formerly the Medicines Control Council) could impact on Clicks’ and UPD’s turnover and margins.
  • Impacts include the ability to obtain pharmacy licences and to launch private label and exclusive scheduled and complementary medicines.

Opportunities

  • Clicks will continue to pursue a strategy to improve price competitiveness, grow sales volumes and entrench Clicks as a value retailer.
  • Focus on differentiators, including extensive and convenient store and pharmacy network; private label and exclusive ranges; Clicks ClubCard loyalty and consistently high levels of customer care.

Opportunities

  • Clicks has an extensive store network and plans to open 25 to 30 new stores each year, expanding to 900 stores in the long term.
  • Continued expansion of the pharmacy network with the long-term plan to open pharmacies in all Clicks stores in South Africa.
  • Continued recruitment of new members to the Clicks ClubCard.
  • Ongoing improvements in pricing, product offer and customer service.

Opportunities

  • Ensure Clicks and UPD are operating efficiently to maintain margins and profitability.
  • Continue management engagement with the DoH, SAPC and SAHPRA on legislation and regulation.
  • Formal written and oral submissions to DoH, SAPC and SAHPRA in response to draft legislation or regulations.
  • As the market leaders in retail pharmacy and pharmaceutical wholesaling, position Clicks and UPD to benefit from market consolidation arising from changes in legislation and regulation.
4

Information
technology

5

People

Why material?

Real-time, uninterrupted IT systems are essential in today’s technology-driven business environment while robust IT security and governance processes are required to limit breaches of customer privacy and loss of data to avoid legal liability and reputational damage.

Why material?

Retail and healthcare skills are scarce and in high demand locally and internationally. Attracting and retaining talent is therefore critical to the group’s continued success. As the largest employer of pharmacy staff in the private sector in South Africa the group is actively building capacity to address the critical shortage of pharmacists which is a challenge the world over.

Risks

  • Confidential customer or sensitive internal data could be compromised as a result of an undetected data security breach or cyberattack.
  • IT systems and architecture no longer appropriate in an environment of ever-increasing scale and requirement for real-time IT systems.
  • Inability to restore business operations and IT systems in the event of a disaster.

Risk

  • Inability to recruit, attract and retain talent for core business needs, including merchandise and planning, store management and pharmacy.

Opportunities

  • Improved information security practices and compliance as a result of increased online presence.
  • Planned implementation of a new IT platform roadmap with improved system efficiencies and cost savings that supports the organic growth strategy.

Opportunities

  • Salaries and incentives externally benchmarked to ensure the group remains competitive.
  • Group resourcing function established, including specialist pharmacy team.
  • Bursary and internship programmes to attract pharmacy graduates.
  • Retail graduate programme offered.
  • Accredited training programmes for store management, key store roles, and merchandise and planning being developed.
  • Senior leadership development programme strengthens pool of management talent and provides succession plan.