OPERATING + FINANCIAL REVIEW There are countless opportunities in the global health category as well as some inherent risks. Blackmores takes a proactive approach to managing these with a focus on the following core areas to mitigate risk: • Robust risk governance framework overseen by the Audit and Risk Committee of the Blackmores’ Board. • Attract and retain strong management teams with local experience in all markets. • Diversify revenues to ensure less reliance on any one brand, channel or market. • Ability to identify risks, and the agility and capability to respond accordingly. The material risks that could impact Blackmores achieving future financial performance and outcomes are summarised as follows: RESPONSE Industry risk Quality or claims breaches by competitors or suppliers impact the credibility of the industry domestically and internationally. • High visibility and transparency of our full supply chain and enforcement of Blackmores’ own quality standards. • Crisis and communication response plans are continually reviewed, updated and tested to ensure appropriate skills and capabilities are ready to be deployed. • Key government and regulatory relationships are actively maintained. Supply constraints 05 GROUP POTENTIAL IMPACTS Blackmores’ high quality and sustainability standards and limited availability of natural ingredients puts pressure on the continuous supply of some key products. • Increased inventory on hand. • Increased direct sourcing of key and scarce ingredients. • Customer service line activated to assist consumers finding the products through stores and online merchants. • Strengthened supplier relationships. Product quality issue Financial loss due to: • Delay in restoring supply of product for sale. • Product recall and reformulation costs. • Reduced industry capacity. • Industry concentration reducing competitor tensions and ability to negotiate price and supply. • Long term relationships with suppliers, quality audits and supply chain business reviews. • Product testing and validation procedures in place. Every product has passed more than 30 tests and quality assessments. • Retention of samples from every batch for ongoing testing and quality evaluation to cover the whole shelf-life of all products. Brand damage Brand damage caused by a product or industry related event resulting in loss of share and value. • High quality controls throughout the supply chain. • Focus on complaint handling. • Active program to train stakeholders on Blackmores’ business values and ethics practices. • Consumer advisory line to provide product information. Treasury risk Treasury risks including change in exchange rates, ingredient prices, interest rates and funding causes a financial loss. • Diversification of currencies and working with supply partners to more effectively use these currencies for Group procurement. Regulatory changes Government policy and regulation may change and restrict or limit the ability to sell existing product or ranges in key markets. • Employing strong, experienced local teams able to actively engage with local governments. • Blackmores actively engages with key stakeholders to monitor and react to regulatory changes in key markets such as China. • Continue to educate and inform stakeholders of the regulatory rules and routes to market in China through both the Australian and China business • Engagement with industry associations in key markets to encourage informed policy setting and regulation. • Diversification of revenues. • Diversification of routes to market. Reliance on customers and markets • Financial loss due to reduced revenue of a key customer or market. • Greater financial cost to serve customers due to aggressive competitors. • Financial loss due to a large bad debt. • Focus on Blackmores’ brand health to drive brand loyalty and consumption. • Drive category solutions to gain consumer loyalty. • Close monitoring of customer payments and continued transparency across markets. • Diversification of revenues. RISKS BLACKMORES ANNUAL REPORT 2016 RISKS 23