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Risk

Risk management is critical to the achievement of our strategic objectives and to the long-term growth of our business. At ASOS, we have developed a risk management process that applies to every part of our Group. It enables us to determine what our key risks are and how to manage them appropriately.

HOW WE MANAGE RISK

Risk Diagram

At ASOS, we understand that risk is an inherent part of realising reward, and that it’s only through effective risk management and internal controls that the Company is able to maintain a good understanding of our business performance and decisionmaking processes. Risk management is therefore critical to the achievement of our strategic objectives and to the long-term growth of our business. We deliberately seek to manage – but not eliminate – risk, so as to provide reasonable, but not absolute, assurance against material misstatement or loss.

The Board has overall responsibility for risk management and for reviewing the effectiveness of our process for managing risk; responsibility for reviewing specific risk controls is delegated to the Audit Committee. The Executive Board and management are responsible for implementing processes to put the Board’s policies on risk and control into effect, and for providing assurance on compliance with these policies and processes.

The General Counsel & Company Secretary is responsible for the day-to-day operation of the Group risk management process. The framework for this process is the Business Risk Register, through which we consolidate risk information and determine our strategy for risk management. The Register is reviewed regularly by both the Executive Board and the Audit Committee.

During the year, the Executive Board identified the need for a dedicated Business Assurance function. For more information on this see page 45 of this report.

PRINCIPAL RISKS AND UNCERTAINTIES

The Directors confirm that, through their most recent review of the Business Risk Register, they have carried out a robust assessment of the principal risks and uncertainties facing the Group. This includes risks that would threaten the Group’s business model, future performance, solvency or liquidity. These principal risks are set out in the table on the following pages along with explanations of how they are mitigated. In addition, as explained in the Audit Committee report on page 45, a Black Swan assessment was undertaken by the Executive team. The Board remains committed to ensuring that the key risks are managed on an ongoing basis and that the Group operates within an acceptable level of risk appetite. We also recognise that risks change constantly, especially in a high-growth company like ASOS, and there may be other, as yet unidentified risks or others currently deemed immaterial, that could have an impact on our ability to achieve our objectives. We reassess the risks affecting our business on a periodic basis to ensure we continue to manage risk appropriately.

Read more in the viability assessment statement.

market risks

Risk Mitigating activities
Change in the primary ways customers go online  
The big technology players are increasingly seeking to keep internet users within their own environment, while enabling them to still carry out all the other online activities they currently do in third-party online ecosystems. Our performance therefore depends upon our ability to provide an engaging, unique experience that overrides any convenience that comes from remaining within a different online environment.
  • Our business model is specifically based around engagement with customers, to include a range of fashion services in addition to great fashion retail.
  • We ensure that we price appropriately for our market, and that our customer proposition around deliveries and returns keeps pace with customers’ expectations, reducing the reasons for customers to look for other online destinations.
  • Our own-label ASOS products are only available from our online platforms and not through third parties.
  • We continue to invest in making sure that our user experience, particularly on mobile, is intuitive and easy for our customers to use.
Market forces increase cost of ecommerce drivers
Fashion – and in particular online fashion retail – is an increasingly competitive space, with very big ecommerce players moving in, while existing bricks and mortar retailers continue to improve and better assimilate their ecommerce offerings. This potentially increases the cost and/or reduces the effectiveness of key ecommerce drivers (in particular digital marketing activities).
  • Our business model is specifically based around engagement with customers, including providing them with a range of fashion services and content in addition to great fashion retail, which in turn reduces the reliance of the business on ecommerce drivers such as digital marketing.
  • Having been one of the first movers in online fashion retail, we have greater experience in how to best use ecommerce drivers such as digital marketing in a fashion context than newer entrants to the market, and we continue to drive greater effectiveness and seek more efficiencies with our platform.
Retail market position and ‘fashionability’
The retail fashion industry and market are subject to changing consumer tastes. Our performance depends on our ability to predict and respond quickly to changing consumer demands, and to translate market trends into saleable merchandise at the right price.
  • A proactive approach to monitoring consumer trends including regular attendance at all major fashion weeks, catwalk shows, festivals, trips to fashion cities, signing up to blogs, as well as the use of freelance fashion experts to refresh internal knowledge to ensure we offer a well-balanced, diverse product range to meet the demands of different customers.
  • Employing and investing in experienced buyers, merchandisers and designers, and developing a pipeline of up-and-coming talented individuals. The ASOS Retail Brilliance Scheme was re-launched in January 2016 to provide a technical skills training programme for new starters in our retail teams.
  • Regular review of product design and selection by senior members of our retail teams.
  • Use of a diverse, multifaceted sourcing and supply chain involving many different suppliers, so that products are produced at a range of prices, and rapid speed to market, in order to be able to get our customers the fashion they want when they want it.
  • Use of zonal pricing to enable us to price appropriately for, and remain competitive in, each key market.
Poorly engaging digital experience
As an online retailer, our digital experience is our shop window and the core way we engage with our customers (whether that’s on a computer, tablet, mobile or any other device). Failure to effectively predict and respond to user experience/IT/website/ application/market demands or trends, or to offer our customers both the core user-experience they expect in any given market, will result in a poorer customer experience.
  • Customer Experience Team more focused on creating and recreating a consistently engaging ASOS digital experience.
  • Improved customer relationship management activities ensure more engaging and relevant contacts with customers at more appropriate times.
  • Programme of rolling upgrades and ongoing improvements to all elements of our digital experience, with a particular focus on our mobile propositions for the last 18 months, given the increasing importance of mobile to our 20-something customer demographic.
  • We have customer user groups to give direct feedback on all elements of our digital experience, and our internal team increasingly focuses on the latest market and tech developments to ensure we identify and adopt new developments as quickly as we can.
  • Customer Care Team now working more closely with the Customer Experience Team to ensure a seamless customer experience.

reputational risks

Risk Mitigating activities
Brand name  
Internet-only businesses depend on their brand name. Failure or inability to support, protect and defend our trademarks, brands and online domain names in all relevant business locations, given that they are the ASOS shop window and the primary mechanism by which customers buy our products, could have a materially detrimental effect on the Group’s performance, reputation and brand positioning in each of its key markets.
  • The Company was the first to use the ASOS brand name both for online retailing and on clothing labels.
  • Robust strategy for actively pursuing and defending the ASOS brand name and all supporting trademarks, domain names and other intellectual property in all key markets in all relevant classes.
  • Continued to expand our team of highly experienced intellectual property legal experts, headed by the Brand & IP Director and overseen by the General Counsel & Company Secretary, to proactively execute that strategy and manage the ASOS trademark and domain name portfolios.
  • Ever-increasing number of trademarks and domain names applied for and registered across the world.
  • Global settlement reached of all existing litigation against the Company.
Security of customer data
As an online retailer, ASOS needs to gather and use customers’ personal data in order to process orders, receive payment, effectively engage its customers and carry on its business. Unauthorised access to our customer data – either from external attack or internal control weaknesses – could lead to reputational damage, compliance issues, substantial regulatory fines and a loss of customer confidence.
  • Strengthened our dedicated, discrete IT Security Team, headed by the Chief Information Strategy Officer, both in terms of expertise, experience and numbers to increase the team’s capability to consider and mitigate internal and external IT and data security threats.
  • Controls and processes, both within the website and with our key service partners, regularly reviewed and enhanced to ensure that all handling and use of customer data is appropriate and complies with all applicable laws and customer expectations.
  • Invested in greater technical and physical security controls (including secured infrastructure and firewalls) to mitigate unauthorised access to customer data held on the Group’s servers, including access restrictions and encryption of customer credit card data, with regular testing of those systems.
  • Enhanced alert systems, particularly in case of attempted unauthorised access.
  • Greater liaison across the business between key IT Security Team members and relevant employees in all key departments, including Executive Board members and members of the Audit Committee, to ensure IT and data security is more proactively considered in all relevant business decisions.
  • References taken for all employees to check character, and physical security passes required to enter non-public areas of all buildings.
Inadequate or incorrectly adhered to Product Quality or Ethical Trading standards
Ultimately, ASOS depends on the products it sells – having an engaging, exciting customer experience and a first-class customer proposition is worthless if the products do not match our customers’ expectations. Our fashion must make them feel great. That depends on us setting appropriate product quality and ethical trading standards, and our suppliers meeting and adhering to those standards – something which becomes more and more crucial the bigger our brand gets and the greater our customers’ expectations become.
  • Continued to expand our Sourcing and Ethical Trading Teams, headed by our Sourcing Director and overseen by Womenswear and Menswear Directors, to ensure we continue to increase our focus on product quality and ethical trading standards.
  • Enhanced our work with suppliers to support them in achieving our sustainable sourcing and ethical trade principles and targets, including holding conferences and workshops in China, Mauritius, Turkey and the UK, where 88% of the factories making our products are located.
  • Strengthened our existing sourcing manual and supply chain policies and standards, and established a cross-functional Modern Slavery Group as part of continuing our long-standing ethical trade programme to protect workers against modern slavery within our product supply chains. Our suppliers are obliged to sign up to our policies.
  • Carried out a wider programme of supplier visits to monitor how factories are performing against our standards and to provide support where required, including implementing improvement plans to help our suppliers and factories reach our required standards, particularly when they are finding it difficult to meet all of them.
  • Strengthened our Garment Technology and QA testing teams to provide increased surety that the products we receive from our suppliers meet our product quality standards and expectations.

technological risks

Risk Mitigating activities
Inability to recover sufficiently quickly in the event of
a loss of the main Data Centre
 
A large number of ASOS’ systems and capabilities depend on our main external Data Centre in London Docklands remaining online. Any failure or interruption in the availability of that Data Centre could cause serious business interruption.
  • Replatforming our systems to become more Cloud-based.
  • External Data Centre and its operators have recently extended the number of power units serving the Centre.
  • Additional uninterrupted power supplies (UPSs) put in place for our servers in the Data Centre.
  • The Data Centre is used by ‘economy critical’ industries, which encourages the operator to make sure its systems are robust.
Robustness of other IT systems and infrastructure
As an online retailer, the Group is particularly dependent on its IT infrastructure, and any system performance issues or shortcomings, or reduction or loss of operational IT capability (for example, system, software or infrastructure failure or damage, or denial of access) could cause serious business interruption.
  • Continued investment in IT systems, infrastructure, security and people (including increased server capacity) to ensure that they are sufficient for the needs of the business and do not become obsolete or compromised.
  • Third-party resources available to assist with additional demand when and where necessary, with increased use of Cloud-based providers to increase capacity.
  • Back-up facilities in place to ensure that business interruptions are minimised and internal and customer data is protected from corruption or unauthorised use.
  • Business recovery plans in place to minimise the effects of damage or denial of access to infrastructure or systems.
  • IT Security Team overhauled and upgraded, including a new Chief Information Security Officer, to significantly increase the robustness of all systems and infrastructure.
IT capacity and capability fail to keep pace with growth
and increasing complexity of the business
ASOS continues to grow at a fast pace. Such growth requires ever more complex and sizeable technological systems. At the same time, technology itself continues to develop. Any failure to ensure that IT capacity and capability keep pace with the business could act as a drag on the Group’s ability to grow.
  • Detailed tech roadmap looking ahead across all areas produced and agreed with the business to ensure capacity for growth.
  • Senior IT management team substantially strengthened, including a new Chief Technology Officer, Director of Retail, Finance & People Systems, and new Heads of Technology for each of eCommerce, Data, Mobile and Digital Experience, all with vast experience of much bigger operational requirements.
  • Cross-functional Truly Global Retail transformation project now established and under way to upgrade retail technology systems to match ASOS’ future retail requirements.
  • Continued use of third-party expertise where we do not have the internal capability or capacity to ensure all roadmaps and plans can be met.
  • Continued substantial capital expenditure investment in IT.

financial risks

Risk Mitigating activities
Foreign exchange movement  

We are a UK-based global retailer and sell products to customers across the world in many different currencies, while recognising our revenues in pounds sterling. The Group therefore has potential exposure to changes in interest and foreign exchange rates.

Note: further information on the Group’s exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk can be found in Note 19 to the financial statements.

  • Our Treasury Department takes responsibility for reducing exposure to this risk and other financial risks to ensure that sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.
  • We take out forward contracts to hedge key currencies in proportion to our calculated net exposure in line with our hedging policy, which is approved and overseen by the Audit Committee. Following Brexit, we took the decision to increase the percentage of our net exposure that is hedged from 80% to 100% over the next 12 months to protect the business during this period of uncertainty and market volatility.
  • Foreign currency balances are monitored regularly, with margins frequently reviewed by the Executive Board so any required adjustments can be made quickly when required.
  • Zonal pricing capability enables us to take into account the variability in costs including foreign exchange rates.

supply chain risks

Risk Mitigating activities
Logistics and fulfilment  

ASOS delivers to 240 countries and territories and has agreements with several logistics providers to fulfil deliveries to customers. The interruption, deterioration or loss of delivery services from suppliers to the Group’s warehouses, and from our warehouses to our customers, may affect our ability to complete sales.

  • ASOS has multiple delivery routes and options, and uses many delivery service providers (particularly with the completion of additional warehousing capacity in Germany and the US), to reduce dependency on any one provider to fulfil a particular subset of orders.
  • We have relationships with many more providers than we currently use in case we need extra support.
Insufficient warehouse capacity

ASOS continues to grow at a fast pace, particularly internationally. This means we need ever more warehousing space that is close enough to customers to enable us to serve them in line with their expectations. Failure to ensure that warehouse capacity and capability keep pace with the business could limit the Company’s ability to grow.

  • We continue to maximise the available capacity in our main fulfilment centre in Barnsley by investing in further automation.
  • We are expanding further our international fulfilment centres in the US and Germany (our new Eurohub 2 warehouse is due to become operational in 2017), so that we have sufficient warehouse capacity in place or under construction to accommodate expected future growth in order volumes.
  • Collaboration and communication between the Retail, Supply Chain and Commercial Finance Departments to adapt to the changing business needs.
  • Retail Department now operating with a tighter stock model as we continue to identify and realise the opportunities and advantages of our ecommerce-only business model.
Warehouse disruption

Any disruption to the Group’s warehousing facilities due to physical property damage, breakdown in warehouse systems, capacity shortages, poor logistics management or staff-wide personnel issues could have a detrimental effect on our ability to complete customers’ orders.

  • All warehouses are managed by large multinational companies specialising in the provision of these services.
  • Continuous monitoring of service levels and warehouse handling to ensure goods are handled, packed and delivered in a timely manner.
  • Continued improvements to worker pay, conditions and practices in our warehouses, including a substantial investment in air conditioning in our Barnsley warehouse.
  • Frequent communication and engagement with workers in our warehouses, including active liaison with the formal Employee Forum at Barnsley.
  • Business recovery plans in place to minimise effects of any material disruption within any of our warehouses.
  • The expansion of our existing international fulfilment centres in the US and Germany will provide alternative stock pools to which demand could ultimately be transferred in the event of long-term disruption at Barnsley.
  • All products are on relatively short lead times, with a steady flow of products into the warehouse, enabling the supply chain to be diverted to alternative locations if necessary within a manageable timeframe.

people risks

Risk Mitigating activities
Reliance on key personnel  

Almost all the sectors that are relevant to our business are very competitive, and our people across all departments are frequently targeted by other companies for recruitment. Our performance depends on our ability to attract, motivate and retain key staff.

  • The Remuneration Committee monitors the structure and levels of remuneration and seeks to ensure that, as a whole, remuneration is designed to attract, retain and motivate senior management to run the Group successfully.
  • All employees are provided with the opportunity to have fulfilling careers through employment policies, competitive remuneration and benefits packages, and career development opportunities.