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TU DISPOSITIVO ES MUY PEQUEÑO,
PRUEBA CON UNO MÁS GRANDE

Logotipo Supermercados Día Memoria Anual 2015
02 Consolidated directors´ report

2.4Main risks and uncertainties

4.1. Operating risks

4.1.1 Risk of liability for defective products

The DIA Group’s business is susceptible to personal liability risks inherent in the trade of food and non-food products. Although DIA Group is not the direct producer of any of the products distributed, there is no guarantee that responsibility claims may not be issued against the Group.

Product safety and quality are essential to maintain consumer trust. The loss of optimum conditions of product safety and quality may cause a loss of trust that would lead to a loss of customers and a negative impact on the “DIA” brand and its reputation. All these effects would have an impact on the “sales” account.

To mitigate this risk, DIA Group has implemented a quality management program that includes the following areas:

  • Selection of suppliers: During the final selection stage of private-label suppliers, candidates must pass a strict initial homologation audit that guarantees the safety of all the factories where DIA products are manufactured.
    All these audits to private label suppliers follow DIA’s own standards or well-recognized standards such as IFS and BRC.
    Thanks to auditing, the general management of activities, space and equipment, and specific conditions of production and quality management system are evaluated.
    Regular supplier audits are also performed once the product is placed in the market, to guarantee quality and safety.

  • Product definition and validation: After taking the decision to develop an own-brand product, the product is technically defined using the Technical Sheet. Also, a consumer tasting needs to be passed that evaluates consumer perception of the sensory and design characteristics of the products.
    All DIA product tastings are carried out following the UNE 87004:1979, UNE 87023:1995 rules.

  • Control of the finished product: once the product is developed and placed in the market, there is a Control Plan through internal analysis carried out in the Quality Laboratories of the warehouses and external analysis in external authorized Laboratories.

  • Ensure the quality of the entire chain: Quality audits in warehouses and stores (sanitary, cold chain and cleaning) are carried out in order to allow DIA Group to identify and correct in advance any circumstance that could affect the processes, to guarantee the safety and quality of the products throughout the entire supply chain and to offer customers a safe and quality product.

DIA’s Quality Management System has been certified under ISO 9001: 2008 since 2006. As every year, in 2015 DIA successfully passed the external audit that revalidates our certification, which guarantees the correct performance of the Quality Management System.

Moreover, to mitigate risks, DIA Group has a specific insurance policy with appropriate coverage on personal liabilities due to defective products.

4.1.2 Risks associated with provisioning, production and distribution

Products sold by DIA Group are mainly manufactured or sourced in the country where the business is carried out, or in neighbouring countries, which leads to a risky situation in countries that are more exposed to political or economic instability, high labour conflicts and environment disasters.

As some DIA products are perishables, an inaccurate assessment of demand or the impossibility of keeping products in stock may complicate stock management and have a negative impact on the group’s operating results.

Regarding product distribution, the Group relies on several transport and distribution contracts (activities entirely carried out by third parties). Any significant interruption in the normal operation of the transport network or the insolvency of suppliers and transporters may cause delays in the distribution of products and eventual stock-outs in stores. Additionally, the failure to fulfill the tax and Social Security obligations by the transport company may result in additional costs for DIA Group when it is considered as the subsidiary responsible in countries where it is required by law.

The non-compliance of the deliveries or tasks, the delay in the deliveries or tasks and any additional cost due to these delays or failures by suppliers or transporters, may lead to additional costs and have a negative impact on DIA’s business.

To mitigate the above risks, the Group has several management systems and tools:

  • DIA’s competitive strategy is based on operating efficiency across the entire value chain, with the use of high technology logistics and information systems.

  • In relation to the transport of goods from the DIA Group logistic platforms to stores, a standard contract is used to hire the transport companies that are responsible for the loading, transportation and unloading of goods. This contract establishes the internal rules required for the performance of the service in terms of quality and prevention of workplace risks.

  • A strict and ongoing control procedure has been established to ensure the tax and employment obligations of the transporters.

  • To reduce risks in case of conflicts with transport companies, DIA Group has a policy of diversification and distribution of the warehouse bulks among a significant number of companies. Thus, a specific problem can be quickly solved by the others or by new companies, reducing the impact on DIA’s business.

  • Furthermore, DIA has established binding corporate rules to be accomplished by the entire DIA Group to guarantee quality throughout the supply chain, as well as contingency plans and diversification of operations. All these procedures allow to the necessary action plans to be implemented immediately in the event of incidents that pose a risk to DIA’s business.

  • Logistics platforms and warehouses are provided with software that gives real-time information about the stock and allows a production and transport daily plan to be established.

  • For the management of stores, DIA Group has developed an Automatic Order software tool (APT2) which automatically places the store order for each item, according to the stock, sales forecasts, expiration dates and characteristics of implementation in stores. This tool also optimizes truck loading, improving transport cost and is flexible in the event of changes in the service model.

4.1.3. Regulatory Risk

The DIA Group’s business is subject to a broad range of regulations (labour, environmental, tax, data protection, retail trade, franchising, food handling and safety, competition and other legislation) in the different jurisdictions in which it operates. The differences in regulatory requirements applicable in each jurisdiction may present a significant challenge from an operational point of view, by requiring that the DIA Group adjust its business to varying regulatory schemes.

The operations of the DIA Group also could be affected by changes in the rules applicable to it, in particular in relation to any amendments of regulations affecting opening hours, the construction and opening of new stores, or the establishment of prices and taxes. Any violation of the applicable rules could result in fines, penalties, administrative sanctions, and even potential sanctions of a criminal nature.

The DIA Group is responsible for identifying, measuring and minimizing legal risks, continuously observing the applicable regulatory framework and reporting on compliance with legal obligations to the internal operations heads.

To develop and properly fulfil this function, the Company has an organizational structure consisting of Human Resource Management, Financial and Fiscal Management and Legal Departments in all jurisdictions in which it operates, which identify applicable regulations and monitor compliance.

To properly perform the functions of identification of the regulatory and supervisory framework of compliance, the DIA Group has undertaken the following actions:

1.- Establishment of a process control and monitoring rules.

The DIA Group has what has been termed a “regulation map”, which identifies and details all regulations applicable to the Group, with a focus on key legislation in the main processes of the supply chain, and which has been classified into six sections:

  • legislation applicable to the negotiating process of the product: the DIA Group’s relationship with its suppliers of services and goods, competitors, regulatory boards, brands, etc.;

  • legislation applicable to the logistics activity: to the exercise of the activities of warehousing, distribution and transportation of goods;

  • legislation applicable to the wholesale and retail trade;

  • legislation applicable to business premises, urban leases, condominiums, local taxes, business hours, etc.;

  • legislation applicable to the relationship between DIA and its customers, protection of personal data, consumption, methods of payment, advertising and sales promotion, etc.;

  • legislation applicable to the DIA Group, as a listed company, on stock market issues, internal code of conduct, etc.

Those responsible for monitoring are also responsible for informing the rest of the Company on the content and scope of the new and/or regulatory changes, designing and holding training sessions, either in classroom or e-learning mode, when legislative developments have a significant impact on the activity of the DIA Group.

The said persons have established a procedure for monitoring and updating policy and communication to carry out this function, and have defined the resources, responsibilities and internal and external tools needed to perform this function and achieve the dual objective of having a regulatory map updated and an organization informed about their legal obligations.

2.- Implementation of Regulatory System Compliance.

The DIA Group has established policies and procedures to inform and train employees on certain principles of behaviour and to prevent and detect misconduct. It is worth noting the existence of the DIA Group Code of Ethics and the creation of an Ethics Consultation and Information Channel, as well as the implementation of a plan or model of crime prevention in the Company.

  • (i) Code of Ethics and Ethics Consultation and Information Channel
    The DIA Board of Directors approved the second Code of Ethics (available at www.diacorporate.com), a result of consensus and a reflection of the diversity within the DIA Group. The Company has decided that the Code of Ethics is the best instrument to implement an enforcement policy from the top down, leading by example for employees with certain types of conduct or behaviour. As with the other standards defined by the Company, all employees must comply with the principles of conduct contained in this Code.
    DIA has also established an Ethics Consultation and Information Channel (via email and postal address) at group level and at the level of each jurisdiction in which DIA operates to clarify questions of interpretation and analyse and resolve potential breaches of the Code, in accordance with internal and external regulations that are applicable. The Ethics Committee at the corporate level is responsible for managing the Ethics Consultation and Information Channel, advertising its existence and overseeing its proper functioning.

  • (ii) Crime Prevention Plan in Spain
    The DIA Group has implemented a model of crime prevention to establish the most appropriate procedures and internal control policies to prevent the commission of acts contrary to the law and, where appropriate, to reduce or hold harmless the Company after reform of the Organic Law 10/1995 of 23 November, approving the Penal Code.
    To this end, we have analysed the activities of the different business areas and the DIA Group assessed the risk of each activity in relation to the commission of offenses in terms of probability and impact, given the controls already in place by the DIA Group to mitigate risks.
    Also, the organization has designated a person responsible for prevention, who will report to the Director of Compliance and Ethics Committee at the corporate level and is responsible for the maintenance and proper functioning of the prevention model.

  • (iii) Anti-fraud Program in Spain
    DIA has an Anti-fraud program in Spain.
    Following the same methodology as for the Crime Prevention Model, we have analysed the activities of the business areas and DIA assessed the risk of each activity in relation to possible behaviours of fraud and corruption, given the controls already in place by DIA to mitigate risks.
    Similarly, the organization has designated a person responsible for anti-fraud prevention, who will report to the Director of Compliance and Ethics Committee at the corporate level and is responsible for the maintenance and proper functioning of the prevention model.

4.2. Financial risk factors

The Group’s global risk management programme focuses on uncertainty in the financial markets and aims to minimize potential adverse effects on the Group and shareholder profitability.

Risks are managed by the Group’s Finance Department. This department identifies, evaluates and mitigates financial risks in close collaboration with the Group’s business units.

The Group’s activities are exposed to various financial risks: market risk (exchange rate risk, interest rate risk), credit risk and liquidity risk.

4.2.1. Market Risk

A- Interest-rate risk

The Group interest-rate risk arises from the fluctuations in interest rates which affect the financial costs of non-current borrowings issued at variable interest rates.

In line with its risk management policy, the Group arranges various interest rate hedges to mitigate its risk exposure. At 31 December 2015, there were no outstanding derivatives with external counterparties to hedge the interest rate of long-term financing. At the end of 2014, the nominal value amounted to EUR215m, maturing in 2015.

At the end of 2015, the hedge percentage on the gross debt volume was 78.70% versus a hedge of 80.32% the previous year.

The Group’s policy for financial assets is to keep ready cash to use. These balances are held in financial institutions with high credit ratings.

B- Currency risk
- Operational: cash flows

Fluctuations in currencies, other than the local currency, may have a positive or negative impact on the consolidated accounts. The Group seeks to minimize the risk through the negotiation of forward currency contracts managed by the Group’s Treasury Department. In 2015, the amount of annual purchases in foreign currencies, mainly in US dollars, was USD5.359m (2014: USD5.862m). The hedged transactions carried out accounting for 99.99% of the hedge in both years. At year-end, outstanding hedges totalled USD1.284m and expire in the next twelve months (2014: USD1.549m).

- Subsidiaries

The Group holds investments in foreign operations, the net assets of which are exposed to currency risk. Currency risk affecting net assets of the Group’s foreign operations in Argentinian Pesos, Chinese Yuan and Brazilian Real is mitigated primarily through borrowings in the corresponding foreign currencies.

The translation differences included in other comprehensive income are significant due to the significant devaluations of the Argentinian Peso and the Brazilian Real. Had the exchange rates in the countries where the Group operates that use a currency other than the Euro depreciated/appreciated by 10%, the translation differences would have varied by +11,01% / -13,46%, respectively, in the equity of the DIA Group.

C- Risk on financial instruments

With effect from 21 January 2015, the company signed an extension to the Equity Swap contract with expiry date 21 January 2016 of 1,000,000 shares. On 30 September 2015, the Parent renewed another equity swap contract whereby the latter acquired 6,000,000 own shares with expiry date 30 September 2016. Both operations have been performed to meet the payment obligations arising from the LTIP program (Long Term Incentive Plan) to the Group Executives. Details are included in note 16 of the Notes of the Consolidated Annual Accounts. The derivative financial instrument is registered in the consolidated Net Equity.

4.2.2. Credit risk

The Group is not significantly exposed to credit risk. The Group has active risk policies to ensure that its wholesale customers have adequate credit quality. Retail sales pose less risk in that they are settled in cash or by credit card.

Derivative and cash transactions are performed with financial institutions that have high credit ratings, with minimum ratings of BBB. In countries where the rating is below that rating, it operates with local financial entities that are considered high credit quality by local standards.

Also, the Group places cash surplus in high credit quality assets and maximum liquidity. Policies established by the Executive Management of the Group are based on criteria of liquidity, solvency and diversification, establishing maximum amounts invested by counterparty, within a maximum term of 90 days of investment duration and definition of the instruments to which the surplus placement is authorized.

4.2.3. Liquidity risk

Recommendations regarding the information on this type of risk, its possible impact on the Company and the policies carried out by the same in order to mitigate it, are included in note 3 “Liquidity and capital resources” in section 3.1. Liquidity. We refer to this section.

Creditos

Edita:
DIA, S.A.
Parque empresarial de las Rozas - Edif. TRIPARK
C/ Jacinto Benavente 2 A 28232 Las Rozas. Madrid - España

Realización y coordinación:
DEVA | Comunicación financiera y sostenibilidad

Diseño:
STROCEN.COM | New Corporate Design

Desarrollo web:
efe6 <Rebuilding ideas/>

Translation:
Tara O’Donoghue

Fotografía:
Jesús Umbría / DIA