| Inherent Risk and Trend |
Risk Description |
Impact |
Risk Mitigation |
Changing Customer and Competitor Landscape
Inherent Risk: High
Trend: Static
Strategy:
Customer Innovation,
Optimising network,
Financial strength |
The Group sells and distributes building materials through a number of channels. The number of outlets and channels where building materials can be purchased continues to grow with new competitors also entering the market. These new entrants may operate business models which differ significantly from the traditional merchanting and retail and online formats from which the Group operates and may take market share.
At the same time, customer purchasing habits are evolving with increasing online transactions. Customers' preference for purchasing materials through a range of supply channels and not just through the Group's traditional competitors may affect the Group's performance and adversely impact the profitability of branch based operations.
Increasing price transparency could lead to a perception that the Group is less price competitive leading to downward pressure on price and margins. |
Adverse effect
on financial results |
Changes to market practice are tracked on an on-going basis and reported to the Board each month.
The Group is building multi-channel capabilities that complement its existing operations and provide its customers with the opportunity to transact with the Group through channels that best suit their needs.
The Group's strategy allows it to use sites flexibly. Alternative space utilisation models are possible, including maintaining smaller stores and implanting additional services into existing branches.
The development of new, innovative and competitive supply solutions is a key strength of the Group. It works closely with customers and suppliers on a programme of continuous improvement designed to improve its customer proposition.
Pricing strategies across the Group are regularly reviewed and where necessary refined to ensure they remain competitive.
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Colleague recruitment, retention and succession plans do not deliver the required skills and experience
Inherent Risk: Low
Trend: Static
Strategy:
Customer Innovation,
Portfolio Management |
The ability to recruit, retain and motivate suitably qualified staff is an important driver of the Group's overall performance. The Group may also be exposed to skills shortages in certain areas which can result in salary cost pressures.
The strength of the Group's customer proposition is underpinned by the quality of people working throughout the Group, particularly in customer facing roles. Many of them have worked for Travis Perkins for some considerable time, during which they have gained valuable product and customer knowledge and expertise.
The Group faces competition for the best people from other organisations. Ensuring the retention, proper development of employees and that robust succession plans exist for key positions is important if the Group is not to suffer an adverse effect on its prospects. |
Inability to develop and execute development and succession plans.
Competitive disadvantage |
The Group's employment policies and practices are kept under regular review.
Staff engagement and turnover by job type is reported to the Executive Committee regularly and to the Board. Succession plans are established for the most senior positions within the Group and these are reviewed annually.
The Group's reward and recognition systems are actively managed to ensure high levels of employee engagement.
A wide range of training programmes are in place to encourage staff development, whilst management development programmes are available to those identified for more senior positions.
Salaries and other benefits are benchmarked regularly to ensure that the Group remains competitive and the Group operates incentive structures to ensure that high performing colleagues are adequately rewarded and retained. |
Supplier dependency, relationships and disintermediation leading to adverse impacts on ranging and price
Inherent Risk: Medium
Trend: Static
Strategy:
Customer innovation,
Scale advantage,
Financial strength |
The Group is the largest customer to a number of its suppliers. In some cases, those suppliers are large enough to cause significant supply difficulties to the Group if they are unable to meet their supply obligations due to either economic or operational factors.
Alternative sourcing may be available, but the volumes required and the time it may take those suppliers to increase production could result in significant stock-outs for some considerable time leading to poor customer service.
The Group has increased the sourcing of products from overseas factories. This has increased the Group's exposure to sourcing, quality, trading, warranty and currency issues, which again may lead to an adverse impact on customer service.
Manufacturers of building materials sold by the Group may also look to sell their products directly to end customers in the future diminishing the role of distributors such as merchanting and retail distribution businesses. |
Adverse effect on financial results.
Adverse effect on reputation. |
Making decent returns is one of the Group's cornerstones which requires it to treat both customers and suppliers fairly. The commercial and financial teams have established strong relationships with the Group's key suppliers and work closely with them to ensure contracts that are beneficial to both parties and the continuity of quality materials.
To spread the risk where possible contracts exist with more than one supplier for key products.
The Group has made a significant investment in its Far East infrastructure to support its direct sourcing operation which allows the development of own brand products, thereby reducing the reliance on branded suppliers.
Comprehensive checks are undertaken on the factories producing products and the quality and the suitability of those products before they are shipped to the UK. |
Unsafe practices result in harm to colleagues, customers, suppliers or the public
Inherent Risk: Medium
Trend: Reducing
Strategy:
Scale advantage,
Portfolio Management,
Financial strength |
Keeping the Group's colleagues, customers, suppliers and the public safe is a cornerstone of the business. The Group operates over two thousand sites, many with complex and busy yards. It also operates one of the largest vehicle fleets in the UK, distributing heavy and bulky materials. Poorly implemented safety practices could result in significant harm to people which would damage the company's reputation and could impact trading performance. |
Adverse effect on financial results.
Adverse effect on reputation. |
The Group continues to challenge its thinking and approach to improving its safety performance through its now well established 'Stay Safe' brand.
Stay Safe performance is reviewed at all Plc Board Meetings, by the Executive Committee and during the Group's regular Divisional leadership meetings.
Incidents are monitored, investigated and corrective action taken to reduce the likelihood of similar incidents in future.
De-risking the Group's operations, improving health and safety awareness and implementing improved ways of working are at the forefront of the Group's activities. Further information on progress made during 2017 can be found in the Health and Safety report on pages 44 to 45. |
The Group allocates capital inefficiently or under invests in advantaged businesses and does not achieve desired returns
Inherent Risk: Medium
Trend: Static
Strategy:
Customer innovation,
Optimising network,
Financial Strength |
The Group operates a number of different businesses in the UK which operate in different, but complementary channels. As the Group's markets continue to develop, it is investing to enhance its existing businesses and also to develop new propositions to better serve its customers.
While the Group operates a disciplined capital allocation process, there is a risk that it may be over-investing in channels which may decline or that it may not be allocating sufficient capital to new propositions resulting in sub-optimal returns on capital. |
Adverse effect on financial results. |
Return on capital is one of the Group's key performance indicators as shown on page 14. Responsibility for identifying and implementing opportunities to expand, improve or modify the Group's operations rests with each of the divisional boards, with capital being deployed or re-deployed by the Group to those projects expected to achieve the best return on capital.
Major projects are kept under review to monitor progress and ensure the deployment of capital remains appropriate.
Post implementation reviews are undertaken of all major projects and returns are monitored on an ongoing basis to ensure that the expected returns are achieved, but also to allow the Group to modify its capital allocation when appropriate. |
Business transformation projects, turnaround projects and M&A activity fail to deliver the expected benefits, cost more or take longer to implement than anticipated
Inherent Risk: Medium
Trend: Static
Strategy:
Customer innovation,
Optimising network,
Financial Strength |
The Group undertakes a variety of projects throughout its business in order to generate returns for its shareholders. These projects are intended to transform the Group's core IT systems, to develop its supply chain operations and its branch and store networks and to materially improve performance in certain businesses which have underperformed in recent years. The Group also undertakes acquisition and disposal activity to optimise its portfolio of businesses.
By their nature, such strategic projects are often complicated, interlinked and may result in a high level of change and require considerable resource to deliver them. As a result, the expected benefits and the costs of implementation of each project may deviate from those anticipated at their outset. |
Adverse effect on financial results.
Adverse effect on shareholder value. |
All potentially significant projects are subject to detailed investigation, assessment and approval prior to commencement.
Dedicated teams, including financial resource, are allocated to each project, with additional expertise being brought into the Group to supplement existing resource when necessary.
All strategic projects are closely monitored by the Executive Committee with regular reporting to the Board.
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Market conditions leading to demand uncertainty
Inherent Risk: High
Trend: Increasing
Strategy:
Customer innovation,
Optimising network,
Financial Strength |
The Group's products are sold to businesses, tradesmen and retail customers for a broad range of end uses in the built environment. The Group's markets are cyclical in nature and the performance of those markets is affected by general economic conditions and a number of specific drivers of construction, RMI and DIY activity, including mortgage availability and affordability, housing transactions and the timing and nature of government activity to stimulate activity, net disposable income, house price inflation, consumer confidence, interest rates and unemployment.
A significant downturn in economic conditions or alternatively major uncertainty about the future outlook could affect the levels of construction activity in the Group's markets and the confidence levels of the Group's customers, which could reduce their propensity to purchase products and services from the Group's businesses. |
Adverse effect on financial results. |
The Board conducts an annual review of strategy, which includes an assessment of likely competitor activity, market forecasts and possible future trends in products, channels of distribution and customer behaviour.
The Group maintains a comprehensive tracking system for lead indicators that influence the market for the consumption of building materials in the UK.
Significant events including those in the supply chain that may affect the Group are monitored by the Executive Committee and reported to the Board monthly by the Group CEO.
Should market conditions deteriorate then the Board has a range of options dependent upon the severity of the change. Historically these have included amending the Group's trading stance, cost reduction, lowering capital investment and cutting the dividend. |
Uncertainty caused by the UKs decision to leave the European Union
Inherent Risk: High
Trend: Increasing
Strategy:
Customer innovation,
Optimising network,
Financial Strength |
The result of the UK vote to leave the European Union has caused considerable market uncertainty. This has made the economic outlook more difficult to predict in the short term and has resulted in significant volatility in the value of sterling against the principal currencies used by the Group to pay for imported goods.
Future trading relationships with foreign markets have yet to be determined and these may result in higher tariffs or duties on imports of construction products as well as extended lead times on imported supplies or result in the need to source some products elsewhere. The construction industry and the distribution and logistics markets employ a significant number of non-UK nationals and the UK may become a less attractive place for them to work resulting in labour shortages and consequent salary cost pressures.
The effect on the Group's operations is unlikely to become clear until the UK's future trading relationships are determined. |
Adverse effect on financial results. |
It is still too early to determine the full impact of the decision to leave, but the Board is closely monitoring market conditions and will react accordingly.
The Board has already taken steps to reduce some costs, but is carefully balancing the current needs of the business against what may or may not occur in the future.
The Group continues to invest in the business where those investments are expected to realise acceptable returns, but it is prepared to reduce activity levels should market conditions so dictate.
Where the cost of goods increases due to the exchange rate deteriorating or additional tariffs and duties, the Group will seek to pass those price increases through to its customers, but its ability to do so will depend upon market conditions at the time.
The processes in place around the recruitment and retention of people are set out in the principal risk pertaining to such matters on page 34.
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Defined benefit pension scheme funding requirements could increase
Inherent Risk: Medium
Trend: Static
Strategy:
Portfolio management,
Financial Strength |
The Group is required by law to maintain a minimum funding level in relation to its on-going obligations to provide current and future pensions for members of its defined benefit pension schemes.
The level of contributions required from the Group to meet the benefits promised in the final salary schemes will vary depending upon the funding position of those schemes.
While the Group has taken actions to manage the future cost, the cash funding of pension obligations could increase significantly due to a number of factors including poor performance of the pension fund investments, falling corporate bond and gilt yields and increasing longevity of pension scheme members. |
Adverse effect
on financial condition |
All the Group's final salary pension schemes are closed to new members, although they remain open to accrual. Since 2015 individual employee contribution rates have been more closely linked to the cost of accrual which has resulted in the current service contribution of the Group being capped.
For the Travis Perkins scheme, pensionable salary inflation has been capped at 3% per annum.
The schemes' investment policies are kept under regular review by the trustees in conjunction with the Group to ensure asset portfolios produce the desired level of return within an acceptable risk profile.
In 2017 an investment de-risking plan established in 2015 was completed with hedging strategies designed to limit the Schemes' exposure to inflation and interest rate fluctuations being put in place.
Notwithstanding this the Group remains exposed to movements in member longevity, the value of pension scheme investments and falling corporate bond and gilt rates.
The Group has agreed deficit reduction payment plans for each of its defined benefit pension schemes with the Trustees of the schemes. The repayment plans will remain in place until the next actuarial valuation, when in conjunction with the Scheme Trustees they will be reassessed to take into account the circumstances at the time. |
Data security
Inherent Risk: Medium
Trend: Increasing
Strategy:
Customer innovation,
Financial Strength |
Incidents of sophisticated cyber-crime represent a significant and increasing threat to all businesses including the Group. A major breach of system security could result in system disruption to both customer facing and financial systems and / or the theft and misuse of confidential data with consequential impacts on the Group's reputation or ability to trade. |
Adverse effect
on financial results
Adverse effect on
the Group's reputation |
The strategic demands of the business, the resources available to IT, the performance levels of key systems and IT security are kept under review by the Executive Committee with responsibility for monitoring and maintaining cyber security delegated to a data security committee.
Investments in best of breed solutions are made that continually adapt to mitigate the risk associated with the most advanced threats.
Cyber security controls are in place to protect IT systems and data including firewalls, virus protection and penetration testing. A programme of risk oriented reviews is undertaken to ensure the level of control around IT systems remains robust.
An IT disaster recovery plan exists together with a business continuity plan. Arrangements are in place for alternative data sites for both trade and consumer businesses. Off-site back-up routines are in place. |
The changing regulatory framework, including GDPR and new building regulations, increase the risk of non- compliance and fines
Inherent Risk: Medium
Trend: Static
Strategy:
Customer innovation,
Optimising network,
Scale advantage,
Portfolio management, Financial strength |
The Group is subject to a broad range of existing and evolving governance, environmental, health and safety and other laws, regulations, standards and best practices which affect the way the Group operates and give rise to significant compliance costs, potential legal liability exposure for non-compliance and potential limitations on the development of the Group's operations |
Adverse effect on the Company's reputation.
Adverse effect on branch operations.
Adverse effect on performance. |
The Group's legal team is responsible for monitoring changes to laws and regulations that affect the business.
The Group has policies in place that set out the ways employees and suppliers are expected to conduct themselves. Those expectations are widely disseminated using a range of methods to ensure colleagues and suppliers understand their responsibilities to comply with the law and other regulations affecting the Group at all times.
The Board and the Executive Committee regularly monitor compliance with laws and regulations.
The Group operates a whistleblowing process that allows the anonymous reporting of non-compliance with health and safety, environmental, bribery and other laws and regulations. |
