Risks associated with the business
The company seeks to mitigate exposure to all forms of risk, both internal and external, where practicable, and to transfer risk to insurers, where cost-effective. This approach is governed by the company’s Gold Standard which includes the statement that Cafédirect will “work directly with smallholder growers through long-term partnerships which seek to reduce the disproportionately high risks they face in the global market”.
The directors consider that the principal risks facing the company are as follows:
- The company buys raw material commodities (coffee, tea and cocoa) from small and disadvantaged growers, often located in remote and under-developed regions of the world. The market prices of these commodities are quoted on international commodity exchanges. Any increases or volatility in prices or shortages in supply can affect the company’s performance. The company mitigates this risk by holding appropriate levels of stock in the supply chain. During February and March 2020 further potential risk to supply presented itself in the form of the potential for a global pandemic brought about by the spread of the Coronavirus disease. At the time of writing Cafédirect is in possession of peak stock of Peru beans that were contracted to purchase from the last harvest (the raw material for its best-selling product) and sufficient supplies are secured to meet the business’ need for a minimum of 5-6 months. The directors consider that this offers sufficient contingency but will continue to monitor and take action to accommodate any developments and minimise risk to Cafédirect’s trade;
- The company outsources the processing and packing of its products to third party suppliers. Any issues that these suppliers encounter could disrupt supply and affect the company’s performance. To mitigate this risk the company takes out business interruption insurance, ensures that suppliers have contingency plans in place and identifies alternative supply options;
- The company is exposed to currency movements in that it buys most of its raw materials in US dollars, pays for its processing of freeze-dried coffee in Euros and sells most of its finished products in pounds sterling. The company uses foreign exchange forward contracts to mitigate this risk as set out in note 17 to the accounts; At 31 December 2019 a proportion of the company’s future currency requirements were covered by such contracts. As required by FRS 102 the fair value of the exchange rate risk hedge has been disclosed in note 17 to the accounts;
- A significant proportion of the company’s revenues are derived from the UK supermarkets and an out-of-home distributor, and therefore inevitably come from a relatively small number of customers. The company mitigates this risk by developing sales in other sectors, such as out-of-home wholesalers and international, and taking out credit insurance where appropriate;
- Competitive pricing and discounting in the hot beverages market can impact the company’s sales volumes and market share. To mitigate this risk the company continually reviews its overall competitiveness in the market, incurs appropriate levels of promotional spend and focuses on promoting the distinctive elements of its brand;
- Cafédirect operates within working capital constraints which can be exacerbated by the seasonal nature of coffee harvests. This necessitates both a commitment to purchase and investment of working capital in raw material stocks well in advance of sales. The company mitigates this risk by forward planning of coffee purchases; ensuring a strong focus on cash management; maintaining borrowing facilities secured against raw material stock at peak times of the year (not utilised during 2019), as necessary, and ensuring that business plans establish a sustainable cash position for the future
- Continued uncertainty surrounding the impact of the UK’s exit from the European Union and risk to inbound supply of finished goods from partners based in member countries – currently the Republic of Ireland, Germany and Poland - constitutes ongoing material risk to the business. Cafédirect has executed sound contingency planning which evolves as the situation and consequences become clearer with the aim of derisking both continuity of supply and costs;
- The unknown future risk and impacts of the spread of the Coronavirus in the UK were being considered at the time of writing by the Executive of Cafédirect in the context of its responsibilities as an employer and corporate citizen. This was as well as to discuss contingency planning in the event of disruption to travel and conduct of business caused by sensible efforts to contain (such as self-isolation of employees or Government directives or advice to do so). The aim is to protect, so far as it is able, its employees and the wider population from infection and to safeguard Cafédirect’s commercial and financial position during a period that appears to present material risk of developing into a national and international crisis. Cafédirect has assembled a policy document to determine actions that will be taken as the situation develops. This will be shared with all staff.