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;
- 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 2018 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;
- Increase in aggressive pricing and discounting by competitors as they respond to the squeeze on UK household incomes 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; and
- Losses in recent years have significantly deteriorated the company’s cash position and the seasonal nature of commodity harvests and the working capital requirements of the business mean that there is a risk that the company could exceed its borrowing facilities and no longer be a going concern. The company mitigates this risk by forward planning of coffee purchases; ensuring a strong focus on cash management; identifying alternative financing arrangements, as necessary, and ensuring that business plans establish a sustainable cash position for the future
- Uncertainty surrounding the UK’s exit from the European Union creates uncertainty and risk to inbound supply of finished goods from partners based in member countries such as Republic of Ireland, Germany and Poland. Cafédirect has executed sound contingency planning for the eventuality that the UK’s exit takes place without a defined trade deal in place. This consists of building additional eight weeks supply of finished product to a total average of sixteen weeks to mitigate impact of any delays in importing products to the UK. In addition, an advisor has been appointed to assist the company in minimising the risk and cost involved in the movement of goods should such a scenario arise, and managing implications for appropriate registrations.