Burberry Group plc : 13.06.2013 - Annual Financial Report

Risk

Impact

Mitigation

Sustained economic slowdown.

The Group's performance remains strong; however, the sustained economic slowdown has: (i) reduced consumer wealth leading to a reduction in demand; (ii) impacted the financial stability of suppliers and their ability to secure finance which could disrupt the Group's supply chain or lead to an increase in bad debts; and (iii) impacted the financial stability and recovery of banks and other financial institutions, all of which could adversely impact sales and profitability.

The global reach of the Group helps to mitigate local economic risks. In addition, the Group's financial reporting and review processes are designed to highlight any change in ongoing sales performance. Counterparty credit checks are in place for all key customers and suppliers, and flexible payment terms are used to assist suppliers as required. Group Treasury monitors the credit ratings of financial institutions which hold Group deposits to enable the Group to take appropriate action should there be a downgrade in their credit ratings.

Loss of key management or the inability to attract and retain key employees.

The loss of key individuals or the inability to recruit and retain individuals with the relevant talent and experience would disrupt the operation of the business and adversely impact the Group's ability to deliver its strategies.

Competitive incentive arrangements currently exist, with specific initiatives in place designed to retain key individuals. Recent regulatory changes may make it more difficult to remain competitive in the global market for executive talent. Recruitment is ongoing and talent review and succession planning programmes are in place and have been updated during the year.

A substantial proportion of Group profits is reliant upon its licensed business in Japan and other key licensed product categories.

The licence with Sanyo Shokai and Mitsui & Company in Japan expires in 2015, whereupon the royalty income under the licence will cease.

The Group expects licensees to maintain operational and financial control over their businesses. Should licensees fail to manage their operations effectively or be affected by a major incident, the royalty income may decline, directly impacting Group profits.

The Group is preparing plans for the transition of its business in Japan following the expiration of the licence.

To minimise risks in Japan the Group has its own operations in Tokyo.

There are minimum royalty payments specified in its licence agreements, including the apparel licence with Sanyo Shokai and Mitsui & Company. Under its licence agreements, the Group can control product development, marketing and distribution. Regular licensee royalty reviews take place to monitor compliance with licence terms, which can manage but not eliminate non-compliance.

The risk has been reduced due to the integration of the Beauty business.

The Group's operations depend on IT systems and operational infrastructure in order to trade efficiently. Increasingly technology is also being used to stream major events and to communicate through social media.

A failure in these systems or a denial of service could have a significant impact on the Group's operations and reputation, and potentially result in the loss of sensitive information.

A number of controls to maintain the integrity and efficiency of the Group's IT systems are in place, including recovery plans which would be implemented in the event of a major failure. The IT disaster recovery plans are tested on a regular basis. IT security is continually reviewed and updated and third party IT security specialists are used to regularly test these controls.

Failure by the Group or associated third parties to act in accordance with ethical and environmental standards.

A failure to act appropriately could result in penalties, adverse press coverage and reputational damage with a resulting drop in sales and profit.

A number of initiatives are in place, led by the Corporate Responsibility function. These include the continuing activities set out in the Great Brand, Great Company section.

Over-reliance on key vendors.

The Group relies on a small number of vendors in key product categories, and for specialist digital and IT services. Failure of one of these businesses to deliver products or services would have a significant impact on business operations.

The Group continues to strengthen its supply chain management function to enable it to evolve and develop its manufacturing base to reduce dependence on key vendors. The Group has continued to strengthen its internal digital and IT teams and continues to facilitate knowledge transfer to internal resources. Annual financial checks are carried out on all key vendors.

The failure to adequately complete the Beauty transition would adversely affect the Group's return on investment. In addition, this incremental activity could divert management resources resulting in an adverse impact on the Group's existing business.

A failure by the Group to deliver revenue and profit performance.

The Group has established Beauty as the fifth product division staffed by industry experts from both within and outside the organisation with priority being placed on sourcing, distribution and regulatory compliance.

Major incidents such as natural catastrophes, global pandemics or terrorist attacks affecting one or more of the Group's key locations could significantly impact its operations.

A major incident at a key location could significantly impact business operations, with the impact clearly varying depending on the location and its nature. The impact of the loss of a distribution hub would clearly differ from a global pandemic, but both would impact revenue and profits.

Business continuity plans are in place to mitigate operational risks, but cannot ensure the uninterrupted operation of the business, particularly in the short-term. The regional spread of the Group's key distribution hubs also helps to mitigate risk. There is a Group incident management framework in place that addresses the reporting and management of major incidents, and this is tested each year using third party specialists in this field. Tailored plans have also been produced during the year for a number of high impact events.

The significant growth and pace of change within the business puts pressure on both internal and external resources.

Failure to effectively manage the pace of change will inevitably adversely impact the Group's operations and return on investment.

Governance processes are in place for each major strategic initiative and these are supplemented by regular meetings with senior management to review operational performance. Management and operational structures are continually reviewed to ensure that these support the Group's growth.

The Group's operations (including now its Beauty division) are subject to a broad spectrum of regulatory requirements in the various jurisdictions in which the Group operates. The pace of change and the consistency of application of legislation can vary significantly across these jurisdictions, particularly in an environment where public sector debt is often high and tax revenues are falling.

Failure to comply with these requirements could leave the Group open to civil and/or criminal legal challenge, significant penalties and reputational damage.

The Group continually monitors and seeks to improve its processes to gain assurance that its licensees, suppliers, franchisees, distributors and agents comply with the Group's contractual terms and conditions, its ethical and business policies and relevant legislation.

Specialist teams at Group and regional level, supported by third-party specialists where required, are responsible for ensuring employees are aware of regulations relevant to their roles. A number of these teams were strengthened during the year. Assurance processes are in place to monitor compliance, with results being reported to the Group Risk Committee and Board Audit Committee.

The Group operates in a number of emerging markets which are typically more volatile than developed markets, and are subject to changing economic, regulatory, social and political developments that are beyond the Group's control. Infrastructure and services also tend to be less developed.

Seizure of assets or staff. Related party business practice that is inconsistent with the Group's ethical standards and the UK regulatory environment. Increased operational costs due to country specific processes driven by the regulatory environment.

The Group uses the services of professional consultants to advise on legal and regulatory issues when entering new markets, to undertake due diligence and to monitor ongoing developments. The Group works with franchisees or partners who compensate for its relative lack of experience in a number of these markets.

Unauthorised use of the Group's trademarks and other proprietary rights.

Trademarks and other intellectual property (IP) rights are fundamentally important to the Group's reputation, success and competitive position. Unauthorised use of these, as well as the distribution of counterfeit products, damages the Burberry brand image and profits.

The Group's global Brand Protection team has continued to expand during the year to enable the Group to strengthen its brand protection efforts in a number of high risk markets, including in the digital environment. Given the Group's emphasis on digital innovation the team places a particular focus on this area.

Where infringements are identified these are addressed through a mixture of criminal and civil legal action and negotiated settlement.

IP rights are driven largely by national laws which afford varying degrees of protection and enforcement priorities depending on the country. Consequently, the Group cannot necessarily be as effective in all jurisdictions in addressing IP issues.