This section highlights some of the
key risks and uncertainties which affect
Greene King, but it is not intended to be
an exhaustive analysis of all risks facing
the business. Formal risk management
processes are in place to identify and
evaluate risks, taking into account the
likelihood of their occurrence, the scale
of potential impact on the business and
the impact of planned risk mitigation
actions, so that risks can be ranked and
actions suitably prioritised. Given that
some risks are external and not fully within
our control, the risk management processes
are designed to manage risks which may
have a material impact on our business,
rather than to fully mitigate all risks.
Using a group-wide consistent approach,
each business unit or functional area
reviews its risks and mitigation plans
on a regular basis, and draws up plans to
manage new risks or gaps in mitigation
plans. Progress of these risk implementation
plans is monitored by senior management
on a regular basis. In addition, a
company-wide risk committee reviews in
detail and monitors those risk mitigation
plans, ensuring that plans work across the
group as well as the sharing of best practice.
Particular emphasis has been placed during
the year on reviewing plans to deal with
those risks which might arise from
catastrophic events, and on emerging
strategic risks. There has also been an
increased focus on ensuring that risk
mitigation plans are subject to
independent review and audit.
At executive level, each of the risks has
an identified owner to ensure senior
management accountability for risk
mitigation measures. Each business unit
managing director or functional head
presents a report to the audit committee
once a year on the risk management
processes for which they are responsible.
The audit committee also reviews the
company's top risks, as set out on the
group's risk register, on an annual basis,
prior to their submission to the board,
which retains ultimate responsibility for
the company's risk management framework.
Risks:
The group's business operations are sensitive to
economic conditions and in particular to levels
of consumer spending. Any delay in economic
recovery could affect consumer expenditure and
therefore our revenue. There is an on-going risk
to our business of increases in the cost of key
products, including food, drink, Sky and utilities.
Our licensees are also affected by the economic
climate, leading to the risk of more tenant defaults
and business failures. Property values are also
impacted by the economic uncertainty, and with
it our ability to continue to make disposals at
appropriate values.
Mitigation processes:
We have a diversified business encompassing
brewing and drinks distribution, pubs and
restaurants, with a wide range of offers targeted
at different consumer groups, as well as a broad
geographic spread. The board and the senior
management team regularly review the impact
of the economic conditions on the group's budget
and strategic plans. By emphasising excellent
quality, service, value for money and up-to-date
product offers, we aim to broaden our appeal
to customers.
All parts of our business are constantly reminded of
the need to keep costs, including labour costs, down.
Our purchasing team has successfully negotiated
various contracts to protect us against significant
increases in major cost items and a range of other
techniques are also employed to keep costs down
and protect us from price volatility.
The vital signs of our licensee health are constantly
monitored and additional operational and financial
support is provided to licensees where necessary
and appropriate. The introduction and roll out
of our new franchise agreement is designed to
ensure that more of our tenants are able to run
profitable businesses.
The long term value of each of our sites is
regularly assessed. Decisions are made on a site
by site basis around further improvements,
operational focus for poorer performing sites,
appropriate impairments where necessary and
the active marketing of sites that no longer have
long-term value for Greene King.
Risks:
The last few years have seen an increased
governmental focus on alcohol consumption,
in regard to both its impact on the health of
drinkers and law and order issues. There is a
risk of further legislation in these areas, including
additional taxation, which may adversely impact
our business.
A failure to comply with health and safety
legislation, including in relation to food safety
or fire safety, could lead to an incident which
causes serious illness, injury or even loss of life
to one of our customers, employees or tenants,
in turn leading to a significant impact on
our reputation.
The tied model in the UK has faced continuous
scrutiny by various governmental bodies over the
years and despite the EU block exemption and
clean bills of health by the OFT, it could remain
so in the future. Any changes to the model could
impact our strategy and relations with our licensees.
Mitigation processes:
We are committed to acting as a responsible
retailer and engage actively with government to
ensure that it recognises our belief that the safest
and most responsible place to consume alcohol
is in well-managed licensed on-trade premises.
Internally we ensure that our training covers all
aspects of licensing requirements and have due
diligence in place to ensure that all our pubs
comply with all relevant licensing legislation.
We have a range of policies and procedures
in place, including training and e-learning, the
carrying out of risk assessments, reporting and
regular monitoring, to ensure compliance with
existing regulatory requirements in relation to
health & safety, including food safety. Audits of all
managed houses are carried out every year by an
independent company to measure their performance
against strict standards, and scores continue to
improve year on year. All of our Retail sites have
had an independent fire risk assessment completed
during the year, whilst in Pub Partners we have
continued to improve the systems in place to
protect our assets, our brand and our tenants.
We remain committed to the tied pub model and
firmly believe that material changes to the tie,
including its abolition, would lead to accelerated
pub closures due to the higher costs of entry and
ongoing overheads for licensees. Our new Code
of Practice is designed to ensure that we continue
to have a transparent and mutually beneficial
relationship with our tenants.
Risks:
Alongside the production and distribution
of our own beers, we work with a number of key
suppliers (particularly in relation to food, lager
and wines, spirits and minerals) and third party
distributors to supply our pubs and restaurants.
Our business could be at risk of both interruption
of supply and of failure of such key suppliers
or distributors.
Mitigation processes:
We have detailed risk mitigation and risk
management plans in our internal production
and distribution activities, including an on-going
programme of testing the relevant disaster-recovery
systems. We are always looking to improve and learn
from other best-in-class operators in this area.
With regard to third-party suppliers, producers
and supply chain partners, we review the disaster
recovery plans of key suppliers regularly as well
as our own back-up plans which are designed to
ensure that we can cope in the event of the failure
by or loss of a key supplier.
We also regularly review the financial position
of our major suppliers to assess the risk of them
ceasing to be able to trade and, with the help of
external consultants, we monitor the financial
stability of those we regard as of highest risk.
Risks:
We are a consumer facing business with some
well known national brands. Poor service standards
and non-compliance with brand standards could
lead to a loss of trade and a reduction in our
perceived valuation by key stakeholders.
We are reliant on information systems and
technology for many aspects of our business,
which could be damaging if they were to fail
for any length of time.
Mitigation processes:
We endeavour to maintain tight controls to protect
and enhance our reputation and brand values. We
focus constantly on consistency and quality, with
staff training, targeted investment programmes
and mystery guest visits all designed to help maintain
standards, and have systems in place to escalate
and respond to relevant incidents.
The introduction of PDAs for our Retail business
development managers has helped improve the
effective monitoring of brand standards.
A business continuity plan is in place to regularly
review our critical business processes and ensure
that we can continue to operate in the event of a
major incident affecting our systems or technology.
We have access to an off-site disaster recovery
facility, which is regularly tested, in the event of
a major issue with our head office or its systems.
Risks:
It is vital to the business that we continue to
meet our financial covenants and to ensure that
there is sufficient short term financing to meet
our business needs. We are exposed to interest
rate risk on the variable and floating rate
components of our financing.
We are also reliant on maintaining sound systems
of internal control to protect us from risk of financial
fraud or material error in our financial statements.
Mitigation processes:
Our performance against our financial covenants
is regularly monitored. We also undertake detailed
and regular stress-testing of our performance against
those covenants. Working capital is carefully forecast
and closely managed. At the year end 98% of our
floating rate debt was hedged through the use of
derivative financial instruments, more details of
which can be found in note 24 to the financial
statements. During the year we successfully
negotiated a new £400m 5 year bank facility.
We continue to move towards a single platform
financial accounting system to unify the systems,
processes and organisation of our finance teams.
Our systems of internal control, which include
segregation of duties and authority levels for
expenditure and payments, are reviewed on a
regular basis to ensure that they remain suitable.
Risks:
A failure to attract, retain, develop and motivate
the best employees and tenants across all our
managed and tenanted pubs, our brewing
operations and our head office may impact
our ability to deliver our operational and
strategic objectives.
Mitigation processes:
We aim to recruit the best people with the
right skills and offer training and development
programmes to ensure that we retain them.
Remuneration packages are benchmarked to
ensure that they remain competitive, including
incentive arrangements where appropriate.
There has been an increasing emphasis on
succession planning across the group.
We carry out an annual employee engagement
survey to obtain direct feedback from our employees,
and make sure that our businesses act on the results
thereof to improve employee engagement.
Our licensee recruitment and training programmes,
and the variety of rental agreements and support
available, are designed to attract and retain the
best quality licensees.
