Risks associated with the business
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 15 to the accounts; At 31 December 2016 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 15 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.
- 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 company could exceed its overdraft facility and no longer be a going concern. The company mitigates this risk by ensuring a strong focus on cash management, negotiating short-term increases in the overdraft limit, if required, identifying alternative financing arrangements, as necessary, and ensuring that plans for the future achieve an improvement in the cash position and establish a sustainable business going forward. In September 2017 the company confirmed the restructuring of its existing short term loan facility with Triodos Bank, converting this into an 8 year Loan Facility plus a 5 year Stock Finance facility.
The directors of Cafédirect actively mitigate agains these risks using strategic planning, business interuption insurance, careful analysis of the market and other mechanisms.
This list is not necessarily comprehensive and you should read the full company annual report of the organisation to consider other risks and mitigation which may impact upon your investment.