Material impacts and risks

In determining the material risks of the Group, a formalised “top down” and “bottom up” risk management process is applied. The following key impacts and risks have been identified:

Risk Context Mitigating factors
General economic conditions, including certain political, social and environmental conditions in South Africa   The economic downturn is expected to persist for some time to come. This may affect consumer health, and in turn could have an adverse effect on revenue and profitability, in spite of the Group’s historical resilience to adverse economic conditions.  

It has been the Group’s experience that the diversity of its mix of products and services and distribution channels has limited its exposure to economic downturns. Consumers appear to be unwilling to reduce spending on utilities, transport and airtime. In this regard the Group’s products are bought rather than sold.

Blue Label believes that economic sentiment is positive in the areas in which it operates. In the past it has taken courageous decisions to terminate product lines and business activities in areas where returns have not delivered appropriately when compared to other competing opportunities. The Group continues to consider expanding its operations beyond South Africa, the UK, India and Mexico with particular focus on other emerging markets, which are typified as large and fast growing with low penetration.

Margin compression   Network operators determine the margins to the prepaid airtime distribution channel. Blue Label may not always be able to pass on to the retailer or customer any margin compression enforced by the network operators.   Management is confident that based on historical trends, the Group will be able to continue to pass on any margin compression to the distribution channel. Any margin compression is also likely to force inefficient distributors out of the distribution chain, a trend welcomed by management. In addition, the Group is constantly looking to add new product and service offerings comparable at higher margins than its traditional business, through the leverage of its significant distribution footprint and merchant relationships.
Further declines in interest rates   As the Group is highly liquid, declines in interest rates have an effect on finance income.   Wherever possible, free cash flow is utilised for early settlements or bulk buying in order to obtain discounts in excess of interest rates.
Further increases in rand/foreign exchange rates   Changes to the rand exchange rate affect the results reported from, and any refinancing required by, associate and joint venture companies in the UK, India and Mexico.   Associate and joint-venture companies in the UK and India are not expected to require any further financing. Every effort will be made to secure the best available foreign exchange rate in any further financing required in Mexico.
Non-compliance with legislation   Non-compliance with legislation applicable to the Group could lead to fines and negative reputational impact, i.e. POPI, CPA, WASPA legislation, Companies Act, Income Tax Act, Value Added Tax Act, JSE Listings Requirements, OHSA, BEE Act, Employment Equity Act, industry charters and scorecards.   All legislation that affects the Group has been identified, analysed and categorised according to its impact and relevance. The process is ongoing to test and ensure ongoing compliance on an operational level.
Ability to attract and retain skilled resources   The Group’s future performance will depend largely on the efforts and abilities of its key personnel and employees. The existing executive management at Blue Label pioneered the mass prepaid market and established the Group’s business model. Blue Label’s future success will depend, in part, upon its ability to continue to attract, retain, motivate and reward personnel, including executive officers and certain other key and specialised employees.   The Joint Chief Executive Officers and co-founders, are both substantial shareholders and are passionate about and dedicated to the sustainability and growth of the Group.

Key members of the management team are bound by service and restraint agreements and in many instances are shareholders of Blue Label. Executive management has implemented talent management and succession planning in key areas of the Group. Appropriate skills transfer activities are ongoing through on the job and other training programmes.

The Remuneration and Nomination Committee has approved remuneration policies which include long-term retention benefits and incentives. In addition, key components of the Group’s remuneration policy have been adjusted to focus on retention.

Increasing exposure to issues such as data security, breaches in technology security or privacy   As the bulk of the Group’s inventory is of a virtual nature, defence against cybercrime is a top priority as susceptibility to hacking and the penetration of firewalls are always matters of extreme concern.   The Group is significantly dependent on the systems and platforms that it utilises to deliver its products and services, as well as to manage its merchant base. Over the past few years, Group technology spend has been increasing in recognition of this key imperative, in order to support not only significant growth in the business (and the concomitant rise in the number and type of transactions processed), but also to improve system availability and robustness. This invariably includes a major focus on the security of all systems, both production and enterprise, in order to suitably detect and manage security threats, as well as the ability to recover from damage that may be caused as a result of security-related incidents.
Elimination of the middle man   In most industries a wholesaler is at risk of being eliminated from the supply chain if the supplier has the infrastructure and capabilities to supply the customer directly.   From inception, the objective of the Blue Label Group was to become a one-stop destination for the supply and distribution of all of the networks’ offerings. This would provide both convenience and efficiency to the retailer and customer. Furthermore the technology and footprint developed by the Group allows retailers to earn additional revenue by the introduction of additional products. This would make it difficult to disintermediate the Group.

No single network can offer this complete solution.

The introduction of the sale of prepaid electricity, and its phenomenal uptake in South Africa, strengthens Blue Label’s foothold as a one-stop destination that is most convenient to the retailer. Blue Label’s increasing bouquet of products and its aggregation thereof will continue to ensure that its middle man status as distributor is essential to the retailer. The Group will continually develop and upgrade new, innovative products to strengthen the foundation of the middle man. Many merchants have access to limited cash flow, and by utilising Blue Label’s vending solution, this allows them to vend products and services which they previously could not afford to, due to various complexities, i.e. managing stock levels, obsolescence, pilferage at store level, inability to order small quantities, access to limited stock ranges, to name a few.

Also, the addition of such products and services, and a growing suite of products, necessitates that Blue Label not only excels in the sourcing, management and delivery of these products, and the management of its merchant base, but also that it delivers an excellent supporting back-office capability – including the ability to deliver and manage reconciliation and settlement on behalf of its customers, extensive and professional merchant support services, and deep technology support for online and integrated systems. These competencies make it even more difficult for Blue Label to be disintermediated, because of the significant value that it provides to merchants, not only in the products and services it delivers, but also in respect of the increasingly complex back-office support functionality required to deliver such services.

Blue Label is not seen as a competitor. It is rather seen as an aggregator and an enabler to both its customers and suppliers.

Disaster recovery and continuity of business   The Group has developed proprietary technology supporting the roll-out of its bouquet of products and services. The Group’s infrastructure connects into some of South Africa’s major banks, Eskom, utility companies and telecommunication operators and switches, both debit and credit card, electronic funds transfer transactions and e-token products for some of the country’s leading retailers and petroleum companies. The effective and continuous operation of this infrastructure is critical to the company’s service delivery.   Management recognises the importance assigned to IT in its corporate governance systems.

The Technology team has been strengthened. The Group has a formal Business Continuity and Disaster Recovery Plan which provides guidance for emergency and crisis management, business unit recovery and technology disaster recovery. The latter includes the restoration of information technology facilities. The plan describes the IT framework and procedures to be activated in the event of a disaster. The major goals of the plan are to:

minimise interruptions to the normal operations;
limit the extent of disruption and damage;
minimise the economic impact of the interruption;
establish alternative means of operation in advance;
train personnel on emergency procedures;
provide for rapid restoration of service and, where possible/required, to ensure high availability/continuity of critical business operations.
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