Risk Management
Risk management is key to the maintenance of the sustainable growth of the Company and value creation for all stakeholders. To ensure effective business conduct, the Company needs to anticipate possible business and financial risks as well as mitigate their potential impacts. Therefore, the Company has established a risk management system to manage the various elements of risks, benefits, responsibilities, accountability, mitigation, and competitive advantage as well as to establish clear guidance on business risk management.
Classification of the Impact of Risks
The Company has identified material risks it is facing in the performance of its business. These risks are categorised into business, operational, financial, and capital risks.
Business Risk Exposure
The material business risks faced by the Company include:
- Risk associated with Watsons’ brand license;
- Risk related to competition;
- Risk related to rent, location and outlet expansion;
- Risk related to suppliers;
- Risk related to changes in market trends, consumer spending, political, social and economic conditions;
- Risk related to changes in the existing laws and regulations in Indonesia;
- Risk related to human resources;
- Risk related to information technology system;
- Risk related to claims/complaints about products and sales of own brands under the A.S. Watson Group;
- Risk related to store maintenance;
- Risk related to inventory control and distribution line;
- Risk related to complaints, publicity and litigation;
- Risk related to permits and licensing;
- Risk related to seasonal demand changes; and
- Risk related to weather, natural disasters, public health, and security.
Operational Hazards
The Company manages its operational risks through the following measures:
- operating in accordance with the standard operating procedures that have been set out across the operations of the Company;
- ensuring an effective internal control system to safeguard the operations of the Company and its assets; and
- requiring all employees to sign and adhere to an integrity pact.
Financial Risk Exposure
In the implementation of its business activities, the Company is exposed to a variety of material financial risks, such as foreign exchange risk, interest rate risk, credit risk and liquidity risk. Therefore, the risk management program of the Company is designed to mitigate the unpredictability of the financial market and the potential adverse effects on the financial performance of the Company.
- Foreign Exchange Risk
The Company is exposed to foreign exchange risk, which arises mainly from the purchase of merchandise. The Company monitors foreign exchange fluctuations and may hedge the exposure on the foreign currency fluctuation for known and committed transactions. - Interest Rate Risk
The Company is exposed to interest rate risk from the possible fluctuation of rates for interest-bearing liabilities. Interest rates for borrowings may fluctuate over the borrowing period. The treasury policy of the Company sets the guideline that the interest rate exposure shall be identified and minimised/ neutralised promptly. - Credit Risk
The Company is exposed to credit risk primarily from cash in bank and the credit exposures given to vendors in connection with claimable sales discount as well as incentive and revenue from promotional activities. The Company manages the credit risk by placing its cash in highly reputable banks and by monitoring the receivable aging and entering into transactions with reputable vendors.
Also, there is no concentration of credit risk as the Company has a large number of vendors without any individually significant vendor. The Company believes that the credit risk from credit cards receivables is not significant as they represent receivables from reputable banks and are generally settled within two or three days from the transaction date.
The maximum exposure to credit risk at the reporting date is the carrying value of each financial asset. - Liquidity Risk
The Company manages its liquidity risk through regular monitoring of the projected and actual cash flows. The Company believes that the cash collection cycle enables it to meet its obligations when they fall due.
Capital Risk Exposure
The maintenance of a sound capital structure is vital to the sustainability of the Company. The capital management policy of the Company is designed primarily to ensure the ability of the Company to continue as a going concern in order to generate returns for the shareholders and benefits for other stakeholders.
To ensure a sound capital structure, the Company takes into consideration its financial condition in paying dividends to the shareholders and issuing new shares for additional capital.
The Company periodically reviews and manages its capital structure to ensure an optimal capital structure and shareholder returns, taking into consideration future capital requirements and the capital efficiency of the Company, current and projected profitability, projected operating cash flows, projected capital expenditures, and projected strategic investment opportunities.
Evaluation of the Effectiveness of the Risk Management System
The Board of Directors regularly reviews the risks that could have a significant impact on the Company and defines the controls that should be operating to ensure that the key business risks are managed effectively.
The regular assessment of key business risks as well as the establishment of relevant internal controls in each business function and the internal audits performed by the Internal Audit Unit form the key elements of the risk management system of the Company.
The Board of Commissioners through the Audit Committee has conducted the assessment of the risk management system for the year ended 31 December 2022 with the support of the Internal Audit Unit. They have also reviewed the effectiveness of the remedial actions taken during the year. As key risks are identified at an early stage and mitigations are planned in a comprehensive manner, it is satisfied that the risk management system is effective and adequate.