Risk management and risks
Risk management is part of Tokmanni’s management system and internal control. The purpose of Tokmanni’s risk management is to support the company’s values and strategy and the continuity of its business operations by anticipating and managing any risks associated with its operations. The goal is to assess risks systematically to promote thorough planning and decision-making.
Risk management at Tokmanni has the following targets:
- Stressing the importance of risk awareness and proactive risk management;
- Maintaining the company’s competitiveness and gaining a competitive edge;
- Ensuring sufficient risk management at Group level in line with Tokmanni’s risk tolerance and risk appetite;
- Managing risks as part of business operations, planning and decision-making in line with predetermined duties and responsibilities.
Risk management includes all parts of the organisation and all risk types, from strategic to operational. Risk management supports the management and the Board in order to ensure that the company can implement its strategy efficiently. Tokmanni operates in line with the risk management profile approved by the Board of Directors.
Risks are assessed regularly and reported to the CEO, the Executive Group, the Financial and Audit Committee and the Board of Directors in accordance with Tokmanni’s risk management policy. Risks that may affect Tokmanni are divided into strategic, operational, financial and hazard risks.
Strategic risks threaten the Group’s achievement of its strategic targets. These risks are typically related to e.g. changes in the operating environment, competitors’ actions and the planning and organisation of the Group’s business operations.
Operational risks are related to losses arising from the deficiency or failure of internal processes, personnel resources or systems. These risks typically concern operational decision-making, the allocation of resources, the quality of operational processes or products, the functionality of information systems, agreements and compliance with laws and regulations, as well as employees’ knowledge and skills.
Financial risks include liquidity and credit risks and market risks, which include currency and interest rate risks, for example.
Hazard risks cause damage to people, property or the environment. They arise from external or internal events, such as accidents, safety failures or natural phenomena.
Below is a description of the risks and uncertainties that are considered significant for Tokmanni.
Weakened demand due to inflation, rising interest rates and the economic downturn
Inflation, rising interest rates, high energy prices, weaker employment situation and economic uncertainty are affecting consumers’ purchasing power. A decline in purchasing power typically means that sales of non-grocery products slow down and discounts and campaign sales account for a larger share of total sales, which in turn reduces the gross margin. Rising interest rates and inflation can increase costs, especially those of lease agreements and properties. Inflation increases consumers’ price awareness, which is why discount store chains like Tokmanni and Dollarstore tend to do relatively better than store chains with a higher price image in times of high inflation.
Economic fluctuation
Changes taking place in the global economy and the Finnish economy could raise the costs of transportation, components, energy, and materials and potentially result in shortages in these. Prolonged high prices, shortages of components, problems in the distribution of electricity and disturbances in logistics chains could, for example, delay deliveries and otherwise weaken the availability of products as well as result in additional costs that we are unable to pass along fully to customer prices. Economic slumps have a clear impact on the retail sector, although they are likely to have less of an impact on variety discount retailers.
Geopolitical changes and political country risk in sourcing
There are direct and indirect risks involved in the uncertain global economic conditions and in geopolitical developments, including slower economic growth and potential unexpected political decisions. These factors may have an adverse effect on Tokmanni Group’s business and on demand for the company’s products. Moreover, the Group’s sourcing market is constantly undergoing changes that are beyond the company’s control. China’s changing environmental legislation and the impact of the country’s political decisions on its economic development and legislation as well as political instability in such sourcing countries as Turkey, Bangladesh, Myanmar and Pakistan could increase sourcing prices or cause supply problems. Risks are assessed continuously by monitoring changes in the geopolitical situation, and the necessary plans and measures are prepared in order to react to changes that might take place. Tokmanni Group also focuses increasingly on developing its sourcing models, which enables it to adjust its sourcing flexibly in the event that risks materialise.
Data system and data security risks
Dependence on data systems, data traffic and external service providers has grown. The interconnectedness of networks, the outsourcing of services and online retail mean that companies are required to carry out more effective monitoring of data security. Prolonged disturbances in data systems, payment transmission or elsewhere in the supply chain, or other exceptional situations such as a cyber-attack, could paralyse the company’s operations or halt the flow of goods within the Group, causing significant losses in sales and a weakening of customers’ trust in the company. Tokmanni Group is focusing increasingly on identifying data security risks and increasing its data security capabilities. In addition, Tokmanni Group is investing in the latest device infrastructure and back-up systems as well as keeping preparedness and recovery plans up to date.
Market risk
Tokmanni Group’s profitability and profit from operations as well as sales growth are dependent on the behaviour of consumers and competitors operating in the Nordic retail market. New international market forces and online stores are transforming the sector and its market dynamics, creating pressure in the market and further intensifying competition. If Tokmanni Group is unable to correctly judge the direction of the market trend and the changes that it demands, it could have an adverse effect on Tokmanni Group’s business. To manage market risks, Tokmanni Group tracks the market as part of its day-to-day operational management, develops its business processes and services in an agile way, and adapts its sales promotion procedures and pricing strategies in order to respond to the changing market conditions.
Inventory turnover and working capital management
Tokmanni Group aims to improve the management of working capital by developing the processes and tools used in sourcing and in supply chain and category management. A failure by the Group to manage its working capital could have a negative effect on its financial position and profitability. Tokmanni Group continuously monitors the transportation of imported goods, the turnover of its inventory, the life cycles of and depreciation on products, and its assortment management as part of the Group’s day-to-day operational management, and takes corrective measures, if necessary.
Failure in the execution of strategic projects, as well as the competence and availability of personnel
The execution of Tokmanni Group’s strategy and strategic transformation require new kinds of skills and competences from the personnel. In addition to organic growth, acquisitions are one possible way to achieve the Group's strategic and financial targets. Acquisitions involve risks, which are related to, for example, the successful integration of sustainability work and purchasing operations and employees. If this integration is unsuccessful, it can be more difficult to achieve the required level of sustainability and the financial targets. The Tokmanni Group has created operating models and actively allocated Group-level resources to support the implementation of acquisitions and integration. External advisors are also used to assess potential acquisition targets and related transactions.
Risks of loss or damage
Accidents, natural disasters, and pandemics, as well as restrictions on travel and transportation resulting from these, can result in significant damage to people, property and the business. Moreover, risks of loss or damage can cause delays and interruptions in business and imports that cannot be prevented in advance. Tokmanni Group has prepared for a possible lack of availability in goods by introducing alternative sourcing channels, among other measures. Tokmanni Group observes official recommendations and orders in all its activities.
Impacts of climate-related risks
Extreme weather conditions, such as hurricanes and floods, can affect the Tokmanni Group’s supply chain and suppliers’ production facilities. Increased awareness and concern about climate change and more sustainable products, for example, may change customer purchasing behaviour. Climate-related risks are monitored as part of the Group’s risk management process. The Tokmanni Group takes climate change seriously, and reducing climate emissions is one of the company’s key priorities in corporate responsibility.
Destruction of or damage at the logistics centre
Tokmanni Group is dependent on the uninterrupted operation of its logistics centres. If a single logistics centre is destroyed or closed for any reason, or if its equipment is damaged to a significant extent, or if there are any other disruptions to operations, this will result in delays in the distribution of products according to timetable. Significant delays will lead to the loss of sales and to additional expenses. The Group manages this risk with business continuity, safety, and recovery plans and by carrying out preventive maintenance.
Risks relating to the health and working capacity of employees
Widespread absences by employees in various employee groups (e.g. logistics, sales, customer service, management) may impact the company’s operations. The company strives to minimise risks relating to the health and working capacity of its employees, for example, through various safety solutions and, if necessary, by instructing employees to work from home for all work duties where this is possible. In addition, the company may acquire temporary labour force during possible peaks in sickness absences. Tokmanni Group has identified the critical key persons for its various functions and made arrangements for providing deputies for them.
Reputation risk
If Tokmanni Group fails, for example, in its supervision of product safety or in controlling responsibility in the supply chain, it could result in financial losses as well as an erosion or loss of customer trust. The importance of different aspects of responsibility in product manufacturing and sourcing as well as fair and equal treatment of employees is increasingly emphasised by stakeholders. Any failure to implement responsibility perspectives would result in negative publicity for Tokmanni Group, impacting its reputation. The above-mentioned quality, human rights and reputation risks are managed with internal and external quality and responsibility audits, with the compliance requirements of the amfori BSCI Code of Conduct and Ethical Code of Conduct, with good governance principles and a good corporate management model, and with internal audit measures and a large-scale Compliance programme. In addition, Tokmanni and Dollarstore have their own quality teams that monitor product safety and quality in the country of origin, at logistics centres and in the stores.
Brand image and marketing risk
The growth of Tokmanni Group’s like-for-like sales is partially dependent on the reach and effectiveness of advertising and marketing programmes. For advertising and marketing programmes to be successful, the Group must, for example, effectively manage its advertising and marketing expenses relative to revenue. It must also increase its customer numbers through better brand awareness. To manage its marketing risk, Tokmanni Group tracks the markets and constantly measures the effectiveness of marketing and advertising. Tokmanni Group’s marketing processes have been developed to be agile and flexible, to enable very rapid reaction to any adverse events.
Product quality and responsibility risk
Some of the key measures taken by Tokmanni Group to improve the gross margin include increasing direct imports and growing the contribution of its private label products to overall sales. Increasing imports rapidly could result in risks related to product quality and to responsibility. If monitoring and quality control in the supply chain fails, it could result in financial losses, an erosion of customer trust and the company’s reputation or, in the worst case, risks to customers’ health. Tokmanni Group focuses on pretesting of products and ensures through self-supervision that products comply with responsibility standards and regulations governing them. Effective handling of customer feedback and the results of audits forms a key aspect in the management of product quality. Tokmanni Group mitigates the liability and responsibility risks related to products by striving to channel all direct sourcing from risk countries to factories audited by amfori BSCI or SA8000.
Risks related to private label products and direct sourcing
Tokmanni Group is increasing the number of private label products in all its product categories in order to achieve its aim of improving profitability. Private label products usually have a low perceived price image and offer better margins than the brand products that Tokmanni Group sells. Tokmanni Group has also improved its capability to make direct procurements by dropping intermediaries and dealing directly with the manufacturers of the products. An increase in Tokmanni Group’s direct procurements may increase operational risks related to the availability of products, the need for working capital and the quality and safety of products. A failure to increase the number of its private label products or direct procurements could also jeopardise the company’s strategic goals, which could have a negative effect on the business and financial position. To manage the above-mentioned risks, Tokmanni Group utilises the sourcing company in Shanghai, China that it jointly owns with the Europris discount retail chain, continues to utilise and develop its sourcing model and conducts audits of manufacturers, among other things.
Foreign exchange risks
Tokmanni Group is exposed to foreign exchange risks through its sourcing and foreign operations. Unfavourable changes in foreign exchange rates can raise the sourcing costs of products purchased in other currencies than the euro and reduce the result of foreign operations and the value of foreign investments in Tokmanni Group's balance sheet. The Group aims to manage this risk in many different ways, such as by utilising natural hedging or entering into agreements that protect the company from exchange rate fluctuations. Management constantly monitors the development of exchange rates and, if necessary, makes strategic decisions to manage the exchange rate risk.