Industry and market-related risks

Financial crises can have a negative impact on consumption patterns. Operations are affected in that Cloetta’s customers are suffering from lower profitability, which leads to price
pressure.

From a historical perspective, the confectionery market has been comparatively mildly affected by market downturns among consumers. This applies to a large extent to Cloetta’s products, which most people can afford to buy. To support the customers’ business and promote sound price development, Cloetta cooperates with the customers among other things through in-store sales activities.

The confectionery market is highly competitive with several major players. Furthermore, grocery retailers offer private labels that compete with certain Cloetta products. This competition can limit Cloetta’s opportunities for price increases to compensate for higher raw material costs.

Cloetta may also need to increase its investments in marketing and product development in order to maintain or expand its market shares.

Cloetta is a significant player in pick & mix, which by nature often consists of multi-year contracts that must be continuously renewed. Competition from other players, including the grocery retail chains, can cause Cloetta to lose major contracts.

Cloetta competes in the market through active pricing, product innovation, product quality, brand recognition and loyalty, marketing and the ability to predict and satisfy customer references.

It is important that Cloetta’s products are perceived as providing the consumers with greater value added than the cheaper  alternatives.

Cloetta strives for effective marketing.

Cloetta strives to offer the best pick & mix concepts with regard to the customer and consumer experience. Furthermore, the integrated production chain enables Cloetta to be cost-effective in pick & mix.

The European grocery and service trade has undergone a process of consolidation leading to the establishment of large, sophisticated players with substantial purchasing power. These
major players are not necessarily dependent on individual brands and can hold back price increases and demand higher investment in marketing initiatives. They can also take over
shelf space that is currently used for Cloetta’s products for their own brands.

Cloetta’s strong brands and market position, together with a strong sales force and close cooperation with the trade, contribute to its ability to maintain good relations with the retail
trade. Cloetta also works actively with new sales channels. Cloetta has a relatively wide and diversified customer base. In 2017 Cloetta’s ten largest customers accounted for around 42
(43) per cent of the Group’s total sales.

Changes in consumer behaviour give rise to both opportunities and risks. Health trends and the debate on health, weight and sugar can have a negative impact on confectionery consumption.
The health trend has also spurred a growing interest in natural raw materials.

In the wake of rapid globalization, individual consumers are more aware of how their consumption patterns affect the environment and social/ethical conditions around the world.
Consumers want to know more about product origins, manufacturing methods and raw materials. Information that Cloetta, or Cloetta’s suppliers, are not taking adequate environmental or social responsibility could damage Cloetta’s brand.

Health trends have not affected confectionery sales to a great extent, since confectionery is often eaten as a small luxury in everyday life. Cloetta works continuously to satisfy consumer
preferences. In addition, Cloetta offers both sugar-free products and products with less sugar, as well as products that promote dental health. In the long-term, Cloetta’s goal is for all products to be free from artificial colours and additives
(NAFNAC).

Cloetta strives to include supplier codes of conduct in all agreements as far as possible, but as an individual company Cloetta is unable to influence international development on its
own. Cloetta’s goal is to be open and, through cooperation with other confectionery producers and via various organizations, to identify problem areas and contribute to improvements..

Cloetta conducts operations through companies in a number of
countries. New laws, taxes or rules in various markets may lead to limitations in operations or place new and higher demands. There is a risk that Cloetta’s interpretation of the applicable tax
laws, tax treaties and regulations in the different countries is not entirely correct or that such rules will be changed, possibly with retroactive effect.

Cloetta continuously assesses legal issues in order to predict and prepare its operations for possible changes. The introduction of confectionery taxes and fat taxes often has a short-term impact on sales.

Provisions for legal disputes, tax disputes, etc., are based on an estimation of the costs, with the support of legal advice and based on the information that is available.

Price development for raw materials is steered mainly by supply and demand, and is beyond Cloetta’s control. The prices on sugar and many of the other raw materials purchased by
Cloetta are also affected by agro-political decisions in the EU regarding quotas, support, subsidies and trade barriers, but also by rising living standards and the activity of financial  investors on the commodities exchanges.

Cloetta continuously monitors the development of raw material prices and all purchasing is carried out through a central purchasing function. To ensure access and price levels, Cloetta normally enters into supplier contracts that cover the need for raw materials for a period of 6–9 months forward. If the average raw material prices had been 10 per cent higher/lower at 31 December 2017, profit before tax for the year would have been around SEK 150m lower/higher.

Cloetta’s policy is to  compensate for higher raw material costs by raising prices to its customers.