Strategic Report
24 Finsbury Food Group Annual Report & Accounts 2018
Risk Report
Corporate Governance
Financial Statements
We maintain a high level of expertise in our buying team, and will consider long-term contracts where appropriate, to reduce uncertainty in input prices. The team also cultivates strong relationships with major suppliers, to ensure continuity of supply at competitive prices.
Regular renovation and innovation in our product range can help to manage margin pressures effectively, as far as the competitive environment allows. We also purchase forward foreign currency to minimise the fluctuation of input costs linked to future currency conversion rates.
The National Living Wage is increasing the cost of labour above inflation and demand-related adjustments. More recently, the future availability of labour has become a concern. Ongoing capital investment and improvements in operational efficiency help us reduce the impacts of both labour availability and cost, as well as material inflation.
External Risks:
Brexit There is significant uncertainty over the type of Brexit deal the UK will agree with its European neighbours. Anything different from the current situation is likely to have an impact on both the food manufacturing industry and on the Group.
The majority of the Group’s trading is in the UK, but we have sales in Europe, including through Lightbody Europe, our 50% subsidiary.
We buy a material proportion of bakery commodities, such as dairy and egg, from Europe. Any tariffs on trade will therefore have a bearing on the UK bakery market, the UK manufacturing industry and the Group. We already have contingency planning in place, looking at alternative UK sources of products.
We are also likely to face higher logistics and administration costs due to increased customs border checks, and will require higher stock levels due to lengthening delivery times for ingredients.
Equally, the food manufacturing industry, including Finsbury, typically relies on low-skilled labour. We are developing labour strategies to retain and develop existing workers, attract and hire new workers and reduce labour, while boosting productivity with our capital investment programme.
We are not being complacent in our response to likely Brexit scenarios, and have a cross-functional team preparing a number of strategies to minimise its impact.
Cyber Security The Group may be potentially exposed to random, malicious attacks from cyber criminals. Maintaining protection software is one tool in protecting our data. In addition, we are implementing common information systems across all companies, with standard protection, operating requirements and security protection. Real-time back-up, training, and regular communication, pulls our defences together.
During 2017/18, the Audit Committee reviewed cyber security in four areas: network security, hardware and software maintenance and updates, disaster recovery and related controls, and governance. Where we made recommendations for improvements, we are implementing them. We will run an annual security review, including penetration testing, auditing of all software and hardware, and testing of disaster recovery plans.
Financial Risks:
Commodity and Labour Pressures Bakery involves the use of commodities whose prices are determined by worldwide demand and macro-economic factors. Commodity pressures have increased as a consequence of a number of factors;
1. A change in the value of Sterling against both the Euro and Dollar following the EU referendum.
2. The commodity cycle, which, in the recent past, has been relatively low. The cycle has seen significant increases in the price of a number of commodities over and above any exchange rate deterioration.
3. European policies, particularly for butter and sugar.
Pension Fund Deficit The Group has one defined benefit pension scheme within its Memory Lane Cakes Limited business in Cardiff. The scheme was closed to new members in 2010, to reduce the funding risk to Memory Lane Cakes. The valuation of the scheme on a technical provision basis, as well as the underlying performance of the invested assets, can cause large fluctuations in valuations. There is an agreed deficit recovery plan fixed until September 2023, or until a new schedule is agreed, based on the next valuation, which will be at 31 December 2018.
Foreign Exchange We supply UK-manufactured products to Lightbody Stretz Ltd, our 50%-owned selling and distribution business which trades in mainland Europe. We also buy a small amount of commodities and capital equipment in foreign currency. As a consequence, we are exposed to fluctuations in foreign currency rates. We manage this risk by continually monitoring our exposure to foreign currency transactions. We use forward currency contracts when required and our procurement team works hard to ensure we get the best prices for commodities and equipment, giving special consideration to the benefits of contracts denominated in foreign currency.
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