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How to manage and overcome the risks inherent to

the retail industry


By: Jayne Gest | 2:42am EDT November 1, 2012

Lynn Serpico, Managing Director, Aon Risk Solutions


In some grocery stores, your smartphone uses GPS to ping you when youre near
items on your shopping list. Other retailers allow customers to order something
online, and when they arrive to pick it up from the store, the item(s) is already
bagged and ready to go. Others still provide customers with options of where to
buy, where to pick up or have delivered, and have price guarantees in order to
create a positive customer experience and resulting sales.
With the retail industry facing challenging times, savvy risk managers are helping
their companies manage costs and allocate capital strategically while finding ways
to stay ahead of market trends, says Lynn Serpico, managing director at Aon Risk
Solutions.

These risk managers have the opportunity to help shape the business as they
manage operations and costs, she says. At most retailers, risk managers are
responsible for mitigating for keeping the operation efficient, making sure that
the use of insurance, self-insurance and alternatives are in line with overall
company objectives, and that the treatment of risk is agreed to by all internal
stakeholders. At a retailer, these stakeholders can include treasury, legal, logistics,
marketing, merchandising or IT.
Smart Business spoke with Serpico about the current risks that retailers face and
the best ways to mitigate them.
What is new in the retail industry with risk?
Aon compiles a retail industry analytics report annually, collected from proprietary
data and client interviews, identifying the top 10 risks. Retailers say the global
economic slowdown is the No. 1 risk. With consumer discretionary spending as the
biggest driver of retail sales, the industry constantly battles variables that are out of
its control, such as gas prices.
Second, retailers worry about damage to their reputation or brand. For any retailer,
the worst possible scenario is that customers stop shopping in their stores. The
third-biggest risk is a market of increasing competition, one of the biggest retail
trends. How are people making their shopping decisions? What does this mean for
retailers, and how can they respond? For example, how do they prepare for a
situation in which a customer walks into the store, and tries something on before
buying it at a lower price on their mobile device?
Other risks include:

Distribution or supply chain failure.


Regulatory and legislative changes, particularly surrounding workers
compensation, normally the largest contributor to a retail risk managers total
cost of risk.
Technology failure.
Failure to innovate and meet customer needs.
Failure to retain top talent and, therefore, manage crime, theft, fraud and
employee dishonesty. With plenty of turnover, there is a need for safety
training and internal loss control to ensure not only a good store experience

for customers but also employee safety and that employees are behaving in
ways beneficial to the company.
What risks are critical priorities to manage?
Most retailers have gotten really good at managing the more traditional risks
property, workers compensation and general liability. For example, they know how
to get their stores running after a natural disaster and have programs to get
associates back to work after an injury.
Emerging and changing risks are the new focus. These include network security,
product liability for vendors, and wage and hour litigation. Network security is key,
as this feeds in to a retailers reputation. It has customer data, employee data,
financial information and, in some cases, medical data, and the risk is ever evolving
because bad actors are getting craftier and losses are high profile.
Vendor/supplier contract management also is critical. A store might have products
from 50 countries, so how does it control and manage contracts and litigation while
understanding its exposure? Additionally, employment practices liability policies
exclude wage and hour claims. However, this often drives a retailers exposure.
Finally, retailers must continuously innovate and drive down costs so savings can be
passed on to customers.
What best practices address common mistakes for retail risk managers?
As an industry, margins are thin, so retail risk managers need to carefully analyze
their portfolios to determine the best use of capital. For example, should you have
higher retentions on certain programs because the loss history is predictable? Or
perhaps you might be buying too much insurance on other programs. Maybe there
is a way to self-fund a certain amount of loss and buy excess capacity, which could
reduce fixed costs. Is there an alternative that has not been considered?
If you have a loss that is not insured, have you vetted the process internally? Do
you know how it will be funded? Risk managers ask these questions while working
to create operational efficiencies for their companies. Asking questions helps avoid
buying too much or too little insurance. Risk managers can also identify maximum
capacity for loss across multiple lines of business. For instance, a $10 billion retailer
may be able to absorb a penny per share of loss in a given year. However, you need
to know what would happen if you have losses totaling five cents a share in a worst-

case scenario year with a fire in your main distribution center, a customer death in a
store and a security breach that compromises customer data. It is important to get
feedback internally, and ensure that all stakeholders understand decisions being
made around insurance and the effect those have on the business from a financial
perspective.
Know your overall retentions and whether they are aligned with the corporate
strategy. Some companies are extraordinarily risk averse, so retentions are low,
while others are very comfortable managing their own risk. It is up to risk managers
to know the company appetite and make decisions that align with the financial
objectives. In addition, whenever theres a loss, multiple internal stakeholders need
to be involved in the process.
Lynn Serpico is a managing director and the National Retail Practice Leader at Aon
Risk Solutions. Reach her at (203) 326-3464 or lynn.serpico@aon.com.
Insights Risk Management is brought to you by Aon Risk Solutions

Risks and risk management

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Risks and risk management

Nobia is exposed to both commercial and financial risks. Commercial risks can be divided
into strategic, operating, sustainability-related and political and legal risks. Financial risks
are attributable to currencies, interest rates, liquidity,
borrowing and credit granting, financial instrument and pensions.

All business operations are associated with risks. Risks that are well-managed can create opportunities, whereas
risks that are not managed correctly may lead to damageand losses. The aim of Nobias risk management is to
create awareness of risks and consequently limit, control and manage them, while safeguarding business
opportunities and strengthening profitability.

Identified materials risks are managed on an ongoing basis at all levels in Nobia and in strategic planning. The Board
of Directors is responsible to the shareholders for the companys risk management. Company
management regularly reports on risk issues to the Board.

Strategic risks
Corporate-governance and policy risks
Corporate-governance and policy risks are managed by Nobia continuously developing its internal control. The
internal dissemination of appropriate information is ensured through the companys management systems and
processes. A more detailed description is provided in the Annual Report for 2014.
Business-development risks
Risks associated with business development, such as acquisitions and major structural changes, are managed by the
Groups M&A department and central programme office and by specific project groups organised for the various
projects. Continuous follow-ups are carried out compared with plans and expected outcomes. More long-term risks
are initially addressed by the Board in its Group strategy planning. In conjunction with this, Nobias business
development is evaluated and discussed based on external and internal considerations.

Operating risks
Market and competition
Nobia operates in markets exposed to competition and mature markets, which means that underlying demand in
normal market circumstances is relatively stable. However, price competition remains intense.
Demand for Nobias products is influenced by trends in the housing market, whereby prices, the number of
transactions and access to financing are key factors. Four-fifths of the European kitchen market is estimated to
comprise purchases for renovation, and one-fifth for new builds. Nobias strategy is based on largescale product
supply, product development and the utilisation of the positioning of the Groups strong brands in the various markets
and sales channels. Nobias various offerings are also based on the strategy of offering added value to customers in
the form of complete solutions with accessories and installation.
The companys cyclical nature does not deviate from that of other companies in the industry. Nobia has a structured
and proactive method for following demand fluctuations. Robust measures and cost-saving programmes for adjusting
capacity have proven that Nobia can adjust its cost level when demand for the Groups products falls.
Customers
Kitchens to end-customers are sold through 311 own stores and a network of franchise stores, as well as DIY stores,
furniture chains and other retailers. Conducting sales through own and franchise stores is a deliberate strategy to
achieve greater influence over the kitchen offering to endcustomers, which contributes to better co-ordination of the
Groups supply chain. The number of own stores declined following the sale of Hygena, which led to a lower share of
fixed costs and thus lower risk. However, own stores allow the concepts to be profiled with higher added
value. Another risk is that retailers are unable to fulfil their commitments under established contracts, which may have
a negative effect on sales.

Sales to professional customers, also known as project sales, are conducted directly with regional and local
construction companies via a specialised sales organisation or directly through the store network. Concentrating on
these large separate customers entails an elevated risk of losing sales if a large customer is lost as well as increased
credit risk.
Supply chain
Nobias cost structure in 2014 comprised about 60 per cent variable costs (raw materials, components, accessories),
about 30 per cent semi-variable costs (personnel costs, marketing and maintenance) and about 10 per cent fixed
costs (rents, depreciation, insurance). The division of costs is relatively equal between the primary markets, except
that the UK has a slightly higher percentage of fixed costs due to their extensive store networks.
Nobias proprietary production mainly comprises the production and installation of cabinets and doors, together with
purchased components.
In 2014, Nobia purchased materials and components valued at about SEK 5.0 billion, of which some 15 per cent
pertained to raw materials (such as chipboard), about 55 per cent to components (such as handles and hinges) and
about 30 per cent to goods for resale (such as appliances). The underlying raw materials that the Group is primarily
exposed to are wood, steel, aluminium and plastics. Cost variations can be caused by changes in the prices of raw
materials in the global market or the companys suppliers ability to deliver. Nobias sourcing organisation works
closely with its suppliers to ensure efficient flows of materials. Average market prices of raw materials fell slightly in
2014 despite rising prices during the second half of the year. The Groups sourcing and production are continuously
evaluated to secure low product costs.
Property risks in the form of loss of production, for example, in the event of a fire at manufacturing units, are
minimised by Nobia conducting annual technical risk inspections jointly with the Groups insurers and the risk
consulting firm AON that reports on deviations from Nobias Standard for Loss-Prevention Measures. Preventive
measures are continuously implemented to reduce the risk of disruptions in the operations.
Strategy and restructuring
Nobias ability to increase profitability and returns for shareholders is heavily dependent on the Groups success in
developing innovative products, maintaining cost-efficient manufacturing and capitalising on synergies. Managing
restructuring measures is a key factor in maintaining and enhancing Nobias competitiveness. In 2014, the Groups
barnd portfolio, innovation, product-range development, production and sourcing continued to be coordinated. The
strategic direction is described in the 2014 Annual Report. The implementation of these plans entails operating risks,
which are addressed every day in the ongoing change process. Restructuring is a complex process that requires the
management of a series of different activities and risks.
Restructuring costs in 2014 were related to costs that arose in association with divestment of Hygena, the
introduction of the common standard dimension and the acquisition of Rixonway Kitchens.
Human capital risks
Nobia endeavours to be an attractive employer, which is a key success factor. To ensure availability of and skills
development for motivated employees, manager sourcing and managerial development is administered by a central
unit at Nobia.

Sustainability-related challenges and opportunities


Nobias products are encompassed by international and local regulations regarding environmental impact and other
effects arising in the production and transportation of kitchens, for example, the release of exhaust fumes and
emissions, noise, waste and safety. Nobia works continuously with its operations to adjust to the necessary
expectations and requirements. The company is well aware of the demands in these areas for the near future and,
provided that they do not significantly change, the current products and ongoing development activities are deemed
to be sufficient to meet such requirements.
Political and legal risks
Changes in local tax legislation in the countries in which Nobia conducts operations may affect demand for the
companys products. Subsidies for new builds and/or refurbishment or changes to the taxation of residential
properties may influence demand. Tax deductions on labour for home renovations, for example, have had a positive
effect on demand in several Nordic countries.

Financial risks
In addition to strategic and operating risks, Nobia is exposed to various financial risks. These are mainly attributable
to currencies, interest rates, liquidity, borrowing and credit granting, financial instrument and pensions. All of these
risks are managed in accordance with the finance policy, which has been adopted by the Board.
Currency exposure
Nobias manufacturing and sales presence in several countries balances currency effects to a certain extent.
Transaction flows have the greatest impact on currency when sourcing and/or production is conducted in one
currency, and sales are conducted in another. The Group uses currency derivatives to hedge a portion of the
currency exposure that arises. Currency hedging means that the impact of currency movements occurring today will
be delayed to some extent. Nobia is also affected by translation differences when consolidated sales and operating
income are translated into SEK.
For a sensitivity analysis, read the 2014 Annual Report on page 35.
Changes in value in balance sheet
In addition to the financial risks that are regulated in the finance policy adopted by the Board, there is also a risk for
changes in value in the balance sheet. A structured work model is applied to testing the value of assets and liability
items in the balance sheet.
For a description of impairment testing of goodwill, calculation of pension liabilities and deferred tax assets, read the
2014 Annual Report on page 35.
Latest update: 30 March 2015