Risk Management
General Information
In 2022, Fix Price continued to develop its risk management practices as an integral corporate function.
Participants in the risk management process identify, assess and mitigate risks, and minimise negative implications should they materialise, which all ensure business stability and continuity.
The effectiveness of risk management is improved by engaging a wide range of participants, from managers to line staff. To this end, we promote a risk culture, regularly train employees and run standardised stages of the PDCAThe PDCA (Plan-Do-Check-Act) / Deming cycle is a decision-making methodology and algorithm for managing processes and achieving objectives cycle.
An independent diagnostic run in late 2021–early 2022 found that Fix Price’s risk management system was consistent with good corporate practices.
Risk management at Fix Price focuses on the following:
- identifying and systematically analysing risks to the Company;
- considering material risks when making management decisions as a matter of course;
- assigning risk management responsibilities;
- developing measures and plans to respond to material risks;
- monitoring risks and the effectiveness of risk management;
- building risk management expertise.
Risk Management Structure and Areas of Responsibility
The Board of Directors (via the Audit Committee) determines the underlying principles and approaches that drive the risk management system and evaluates its effectiveness.
The CEO and top managers set up and maintain an effective risk management system, assign authority, duties and responsibilities for specific risk management procedures to unit heads, approve requirements for reporting forms, review key risks and make relevant decisions, and promote a risk-management culture.
The risk management unit facilitates the risk management process at the Company in several ways. It implements the Risk Management Policy within its remit; requests risk updates; coordinates activities of the units, project teams and business units related to identifying and assessing risks and developing risk management measures; provides relevant methodological support; prepares materials for top managers and the Board of Directors; and promotes a risk culture at the Company.
Unit heads, project teams and business units ensure the risk management system runs smoothly within their area of responsibility. In particular, they identify and assess risks, develop relevant measures and ensure their implementation, including the implementation of control procedures. They appoint coordinators or authorised representatives who oversee the day-to-day management of the process and, if necessary, escalate to the risk management unit.
Key Activities in 2022
In 2022, we continued to integrate the principles of risk-based management into the Company’s practices.
In the first half of the year, we reviewed the results of a risk management diagnostic conducted in late 2021 and early 2022 by a Big Four management consulting firm. The assessment was conducted using the contractor’s model based on best practices in Russian and international retail companies. The diagnostic gauged the system’s current maturity level and yielded initiatives and recommendations for future development.
Fix Price launched a global training session for its employees covering basic risk management concepts and integrated risk management systems. We have added risk courses to the mandatory onboarding training programme for new hires and run them on a quarterly basis. We have also made course recordings available to watch for all Fix Price employees.
We continued to develop communication channels to keep employees informed about risks. In addition to the corporate intranet, we set up a Telegram account to expand the target audience to include store and distribution centre employees.
Plans for 2023
In 2023, Fix Price intends to integrate risk management system activities with regular internal control system procedures to build an integrated risk management and internal control system (RMICS). We plan a risk reassessment cycle following an updated methodology and using new templates to consolidate the risk register. In addition, we will regularly monitor the geopolitical and sanctions environment to identify and assess risks and mitigate them accordingly.
Key Risks and Mitigants
| Type | Risk | | Mitigation |
|---|---|---|---|
| S-02 | Risk of pressure on gross margin | | Expanding the Russian supplier base (having a duplicate contract with a second Russian supplier for each item to ensure uninterrupted supply in an emergency); ensuring product rotation and running deeper assortment and COGS analysis; increasing the number of freight forwarders; switching supplies to lower cost options |
| S-06 | Risk of construction and installation contractors refusing to perform work on agreed terms | | Ensuring that construction and installation contracts are signed with multiple contractors; finding new contractors, conducting tenders to revise costs |
| S-07 | Staff outsourcing risk | | Reducing the share of outsourcing; switching counterparties in the event that they fail to provide the Company with a sufficient number of employees in a timely manner and at competitive rates |
| S-01 | Reputation risk | | Streamlining the activities of the Ethics Committee; tracking the hotline’s performance; complying with the Code of Business Ethics; developing the Group’s corporate culture |
| O-03 | Risk of supply chain disruptions | | Reducing the share of imports in purchases; identifying alternative ways to ship goods from China (rail, sea, road); identifying alternatives/replacements from Russian suppliers; increasing the number of freight forwarders to transport goods; switching supplies to lower cost shipping lines |
| O-08 | Risk of higher employee turnover | | Analysing the labour market; revising salaries or benefits to drive competitiveness |
| O-12 | Information security risk | | Applying security systems and tools to counter cyber attacks (DDoS protection solutions, antiviruses, WAF, NGFW, etc.); developing and introducing information security regulations; ensuring employment contracts for Group employees are aligned with up-to-date information security regulations; investigating any violations of information security rules and regulations by Group employees; training relevant employees to monitor compliance with information security procedures |
| O-13 | Risk of IT system failure | | Redistributing the IT system load to other systems; forecasting the growing load on systems; upgrading the server fleet in due course; using a testing landscape for fine-tuning; building up a stock of backup telecommunications equipment; embedding a fail-safe connection circuit across all key facilities (offices, data centres, distribution centres); providing redundant communication channels across key facilities (offices, data centres, distribution centres) |
| O-05 | Risk of trade restrictions in the wake of the COVID-19 pandemic | | Closely monitoring changes to the Essentials List; rapidly updating the product range subject to possible restrictions; developing alternative sales channels (online, click & collect, etc.) |
| О-11 | Risks of non-compliance with the requirements of the risk management and internal control system | | Enhancing the design of internal controls to improve productivity; automating controls; reviewing and establishing workable standards for controls |
| О-14 | Asset integrity risk (stores, distribution centres, offices) | | Entering into scheduled maintenance contracts; taking out inventory insurance |
| F-10 | Currency risk | | Hedging the currency risk with derivatives; reducing the number of contracts exposed to currency risks; setting upper and lower bounds for exchange differences in contracts with contractors/suppliers |
| R-15 | Fraud and corruption risk | | Updating anti-corruption procedure rules and the Regulations on Tender Procedures; including anti-corruption clauses in contracts for the purchase of goods or services; conducting audits to identify potential cases of corruption by Group employees or suppliers of goods or services |
| R-04 | Risk of changes in the local legislation related to the product range or pricing restrictions | | Local sourcing; supplier rotation; negotiating engagement terms |
| S-16 | Sanctions risks | | Communicating with account managers of partner banks to ensure uninterrupted and full service delivery; making a list of business-critical equipment for stores, distribution centres and offices; building up reserves; tracking balances |
| O-17 | Marketing risks | | Opting for more cost-effective marketing activities; implementing SMM in-house within payroll costs to showcase the Company’s product range; balancing the budget and marketing mix when selecting the method and channel to communicate with the target audience; establishing our unique selling proposition (USP) through product/price combination and through product category image-building communications |
Risks that Materialised in 2022
As the impact of the COVID-19 pandemic on supply chains and consumer mobility was gradually fading, a new significant risk factor emerged: geopolitical tensions, resulting in sanctions and the transformation of Russia’s economy. In 2022, key functions were affected by a number of risk events due to external factors.
| Event | Response measures |
|---|---|
| Assortment management | |
| Many manufacturers of consumer goods leaving the Russian market or reducing the available product range | Searching for substitute products or alternative suppliers |
| Continued zero-COVID policy in China, international (primarily maritime) transport operators announcing the suspension of operations in Russia in March | Giving suppliers longer order lead times (earlier booking), searching for new freight forwarders and flexibly planning performance metrics amid changing costs and the time of delivery to Russia |
| Many partner banks added to various financial sanctions lists, hence more complicated transactions under contracts with foreign suppliers | Opening correspondent accounts with banks in other countries, including branches and subsidiaries in various jurisdictions, and using alternative currencies for settlement |
| Adverse impact of the adopted Resolution No. 713 of the Council of Ministers of the Republic of Belarus On the Price Regulation System, dated 19 October 2022 | Developing and introducing new price points, promptly replenishing stocks at distribution centres and only affording shelf space to targeted SKUs |
| Supply chain | |
| International container lines suspending operations in Russia and with Russian customers | Identifying contract opportunities and signing contracts with alternative operators |
| Overloaded seaports in China and low throughput capacity at Russia’s active seaports | Leveraging multimodal transportation; flexibly combining multiple modes of transport: by sea, rail and road; early demand planning; and enabling just-in-time delivery |
| Significant increase in standard container shipping costs | Regularly meeting and negotiating with suppliers |
| Limited labour availability for transportation (drivers) and warehousing due to seasonality and other factors | Reviewing employment terms and expanding the list of recruitment channels |
| Lack of handling equipment that meets certain specifications in the market | Limited reliance on used equipment and sourcing from other countries |
| More complicated procedures for obtaining product permits and certifications | Facilitating interactions between the manufacturer, the courier service (in the absence of international service operators) and certification laboratories |
| Marketing management | |
| A mismatch in timing between the publication of marketing communications and the actual on-shelf availability for some SKUs | Shifting the focus of marketing communications from product details to the image |
| Legal restrictions on using certain communication and promotion channels in Russia | Using available communication channels relevant to the target audience |
| Changes in legislation related to advertising on the internet | Adjusting business processes related to drafting and publishing promotional messages and adding provisions in line with the regulatory requirements |
| Surging service provider costs | Streamlining the marketing and advertising tactics on a regular basis without compromising their effectiveness |
Sustainability Risks
In November 2021, the Board of Directors of Fix Price set up a Sustainability Committee. The first sustainability report prepared in accordance with GRIGlobal Reporting Initiative and SASBSustainability Accounting Standards Board standards was published in summer 2022.
At present, the Company does not perform separate ESG risk assessments, but the current registry contains the following sustainability-related risk areas:
- personnel management;
- employee training and development;
- occupational safety;
- product quality;
- compliance;
- internal controls;
- information security;
- anti-corruption efforts.
As climate change becomes an increasingly urgent issue, this year we publish our first disclosure on the Company’s climate impact guided by TCFD recommendations. For more details, see the dedicated section "Climate Aspects of the Company’s Activities". Fix Price plans to identify climate risks and add them into the risk register and the risk map in future reporting periods.