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Industry and market-related risks

Cloetta works continuously to assess and evaluate the risks to which the Group is, and can be, exposed.

Critical external risks are handled both strategically through business and product development and operationally through day-to-day purchasing, sales and marketing activities.

 

Risks
PROBABILITY
Management
IMPACT
Market climate Crises can have a negative impact on consumption patterns. This can affect Cloetta both with lower sales as well as a shift towards more price consciousness that can lead to retail customers experiencing lower profitability, which leads to price pressure. Global pandemics has a negative impact on consumption patterns as well as a sharp decrease of mobility which lower sales of impulse categories in channles such as convenience stores and travel retail. Historically, the confectionery market has been relatively mildly affected by market downturns in consumption. This is particularly true for Cloetta’s products, which most people can afford to buy. To support the custom-ers’ business and promote sound pricing development, Cloetta cooper-ates with its customers on in-store sales activities and other measures.

The majority of Cloetta’s sales come from grocery stores, which has remained open during a global pandemic as they are considered essential for society. Cloetta has proven to be able to adjusts its busi-ness model to cope with the huge changes of consumer behaviour by being agile and adaptable.

Competition The confectionery market is highly competitive and includes several major players. Furthermore, grocery retailers offer private labels that compete with certain Cloetta products.

Cloetta is a significant pick & mix player, which by its nature is a market that often consists of multi-year contracts that must be continuously renewed. Competition from other players, including the grocery retail chains, may cause Cloetta to lose major contracts. Cloetta’s drive to get to sustainable value creation means stepping up the differentiation of the pick & mix concepts to be able to demand a higher price in order to improve profitability.

This competition means that Cloetta needs to continue on its strategic journey to strengthen it’s key brands vs competition by good commer-cial execution, not the least by increasing brand support to competitive levels. Strong brand lead to more sales, can bear premiumisation and demand a price premium.

Cloetta competes in the market by a strong consumer focus approach, insights generated will lead to product innovation, product quality, brand recognition and loyalty, marketing investments and in store execution.

Cloetta endeavours to offer the best pick & mix concepts in terms of the customer and consumer experience. Furthermore, an integrated production chain enables Cloetta to be cost-effective in pick & mix.

Retail trade development 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.

E-commerce is challenging the current retail structure, and will over time likely change the retail landscape substantially. The introduction of self-scanning services in stores might impact sales of Cloetta’s products since they are often placed next to regular store checkouts. Events such as a global pandemic may accelerate the shift to e-commerce.

Major retailers are joining the Science Based Target initiative to join the fight against climate change. They need suppliers to act in order to reach their climate targets.

Cloetta’s strategic direction to strengthen its key brands and market position, together with a strong sales force and close cooperation with the retail trade enables Cloetta 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 2021, Cloetta’s ten largest customers accounted for around 51 (51) per cent of the Group’s total sales.

Cloetta is working actively with retailers regarding e-commerce, helping them to learn how to sell impulse confectionery products online.

By supporting retailers in learning how to sell products in self-scanning areas, Cloetta is able to maintain sales in the checkout area.

As Cloetta joined the Science Based Target initiative in 2020, and set targets during 2021, we show our customers our willingness to collabo-rate towards climate goals, thus strengthening our relationship and position ourselves as a responsible supplier.

Consumer trends Health and Sustainability Health trends and the debate on health, weight and sugar may have a negative impact on confectionery consumption. The health trend has also spurred a growing interest in natural raw materials. Significant events, such as a global pandemic may also affect both short-term and long-term consumer behaviour, but its too early for us to make firm conclusions on that now.

In the wake of rapid globalisation, individual consumers are more aware of how their consumption patterns affect the environment and social/ethical conditions all over the world. Consumers want to know more about product origins, manufacturing methods and raw mate-rials. Information indicating that Cloetta, or Cloetta’s suppliers, do not take adequate environmental or social responsibility could damage Cloetta’s brand.

Health trends have not affected confectionery sales to any great extent, since confectionery is often eaten as a small luxury in everyday life.

Cloetta has a Choice for You strategy, where we inform consumers about product content and calories and we work to offer lower sugar or sugar free alternatives next to portion control pack. In general we do not see a strong consumer trend against confectionery consumption. We also work on dental health propositions to promote dental health. In the long term, Cloetta’s goal is for all products to be free from artifcial colourants and additives (NAFNAC).

Cloetta’s sustainability agenda works in social, environmental and con-sumer-centric areas to improve our overall sustainability performance. Consumers’ increased awareness opens an opportunity to inform and be transparent with our priorities when it comes to sourcing ingredients.

Improving conditions in our supply chain remains a priority. Therefore, our Supplier Code of Conduct developed in 2020 was implemented during 2021.

Cloetta sources certified raw materials where this is possible and continuously looks to improve conditions through cooperation with suppliers and NGO’s.

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

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

Provisions for legal disputes, tax disputes, etc., are based on an esti-mation of the costs, with the support of legal advice and based on the information available. An increased focus on compliance in various areas will require more time and resources spent on ensuring such compliance and reporting.

Raw material prices Price development for raw materials is steered mainly by supply and demand, and is beyond Cloetta’s control. The prices of sugar and many of the other raw materials purchased by Cloetta can also be affected by agro-political decisions in the EU regarding quotas, sup-port, subsidies and trade barriers, and 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 ahead. If the average raw material prices had been 10 per cent higher/lower at 31 December 2021, profit before tax for the year would have been around SEK 103m lower/higher.

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