Decentralised business models and geographic diversification is key to effective risk management within Bidcorp.
We cannot control the national economy, but we can control how we respond to macro-opportunities and challenges.
Sourcing and procurement
Product cost volatility
Foodservice distribution is characterised by high inventory turnover at relatively low profit margins. Volatile product costs have a direct impact. Our profit levels may be negatively affected by product cost deflation, even though our gross profit percentage may remain relatively constant. We tend not to enter into long-term customer agreements, as such, our businesses are able to react quickly to changes in product pricing.
Third-party product supplier dependencies
Most of our products are sourced from third-party suppliers. We typically do not have long-term contracts with suppliers. Although our purchasing volume can provide leverage, suppliers may not be able to provide the quantities and prices requested. Hence we may incur delays caused by production interruption and costs based on conditions outside our control.
Extreme weather conditions and natural disasters
Some of our facilities and our customers’ facilities are located in areas that may be subject to extreme, and occasionally prolonged, weather conditions. Such extreme weather conditions may interrupt our operations and reduce the number of consumers who visit our customers in such areas, and may impede our access to customers, all of which could have an adverse effect on our business.
Group purchasing organisations
Some customers purchase through group purchasing organisations (GPO) in order to reduce prices paid on the foodservice orders, in turn placing pricing pressure from these GPOs on us. GPO membership has recently included smaller, independent restaurants. If GPO membership continues to add a significant number of our customers, we may be forced to lower the prices we charge in order to retain the business.
Warehousing and distribution
Timely infrastructural investment
Timely future investment in infrastructure development is key to creating the capacity demanded by growth. Expansion requires distribution centres and depots to be large enough to be economically viable, yet small enough to be agile and customer focused.
Fuel and other transportation costs
Fuel costs often negatively affects consumer confidence and discretionary spending. This could result in a reduction of the frequency and amount spent on food prepared away from home. Increasing fuel costs often increases product prices, and delivery costs to our customers. These factors affect our sales, margins, operating expenses and results.
Foodservice distribution is highly competitive driven by local presence, geographic reach, private label offerings, purchasing power, cost efficiencies and meeting varied customer requirements. By not having exclusive agreements, customers switch suppliers easily to lower prices, differentiated products or perceived better customer service. The cost of switching is very low as are the barriers to entry in this market.
Should customers suffer significant financial difficulty which results in an inability to pay debts timely. Even when contracts with these customers exist, if customers are unable to meet their obligations, it does adversely affect our collections, resulting often in negotiating discounts or financing terms.
Industry pricing practice changes
Foodservice distributors generate some gross margin from supplier promotional allowances. Promotional allowances are based upon efficiencies provided to suppliers through purchasing scale and marketing and merchandising expertise. Promotional allowances are a standard practice, however changes that might impact these allowances could be adversely disruptive.
Sales and customer mix
Foodservice distribution is a low margin industry. For customers in the independent or street segments, we provide a higher level of service and therefore create a higher operating margin. Our ability to grow this key customer base is a key element of our strategy.
High depedency on technology
To effectively serve our customers requires that our IT systems are able to manage significant aspects of our business. These include purchases, orders, warehouse management, efficiently loading trucks, storage space optimisation and e-commerce. IT disruptions can negatively impact our customer service, decrease volumes and result in increased costs and lower returns. We have invested and continue to invest in technology security initiatives, business continuity and disaster recovery plans.
We rely upon IT networks and systems to process, transmit and store electronic transactions in virtually all of our business processes. This gives rise to cyber security risks such as security breach, espionage, system disruption, online platform hijacking or unauthorised access to information. We have implemented measures to prevent security breaches and cyber incidents; however a breach of this nature could still result in significant negative business disruption and/or reputational damage.
Horeca – to market
Changes in consumer eating habits
Changes in consumer eating habits such as a decline in consuming food away from home, declining portion sizes, or shifts in non-customer restaurant preferences could reduce demand for our products. If consumer eating habits change, we may be required to modify product lines at high implementation costs. We remain close to our customers’ requirements arising from changes in consumer eating habits, however, compliance may be costly and time consuming.
Reputational damage from adverse publicity
Good reputation is critical particularly in selling our own brand products. Any event that damages our reputation such as adverse publicity about the quality, safety or integrity of our products could quickly affect our results. Instances of food-borne illnesses or food tampering or other health concerns, even those unrelated to our products, can result in negative publicity about the foodservice industry and dramatically reduce our sales.
Environmental, health and safety compliance
Compliance is non-negotiable. Non-compliance results in lawsuits, investigations and reputational damage. We face a broad range of international, national and local laws and regulations governing issues such as discharges to air, soil and water; hazardous substances; contamination exposures; employee health and safety; and fleet safety. The cost of compliance is significant, and although we are committed to ensuring we remain compliant, the risk is ongoing.
Product liability claims
As a reseller of food products, we may be exposed to liability claims should our products cause injury or illness. We have insurance to cover product liability claims. We generally seek contractual indemnification and insurance coverage from suppliers, but this indemnification is limited. The impact if we do not haveadequate cover for a liability related to defective productscould be significant.
Growth through organic expansion and acquisition
Bidcorp may selectively pursue opportunities to supplement organic growth with strategic acquisitions. Any such acquisition or joint venture may change the scale of Bidcorp’s business and operations and may expose it to new geographic, political, social, operating, financial, legal, regulatory and contractual risks.
Bidcorp’s ability to operate or expand effectively depends largely on the experience, skills and performance of its senior management team and technically skilled employees. Any senior management departures or unavailability (due to death, injury, illness or other reasons) or technically skilled worker shortages could adversely affect Bidcorp’s operational efficiency.
Generally business sentiment to Brexit appears to be more cautious than consumer sentiment, however, the longer-term implications are unknown. Foodservice market impact is unseen currently, however, some food inflation would benefit but consumer confidence may inhibit demand. Increased tourism and “staycations” will most likely boost demand.
Economic, political or social instability
Bidcorp is a geographically diverse entity exposed to the changes or instability affecting the global economic, political or social environment in the various regions which could affect an investment in Bidcorp. Continued instability in South Africa could lead to increased borrowing costs and a diminished ability to raise capital from the international debt markets.