Strategic rationale for the acquisitions
C. Key Risks (cont'd)
Further, the businesses of Metcash are highly regulated in many markets in which they sell their products. These regulations govern many parts of Metcash's operations, including the import, manufacturing,
marketing, advertising, distribution and sales of its products. Examples of such regulation include industry codes of conduct, country of origin labelling laws, container deposit schemes and tobacco and liquor
licensing, packaging and advertising laws. The products in a particular market could be subjected to changes or additions to existing regulations, which could increase the cost of goods or restrict Metcash's
ability to sell or market products.
The introduction of new laws and regulations, or reform to existing laws and regulations, or increases in levies to fund government schemes and regulations, could materially impact Metcash's operational and
financial performance, including through increased expenditure on compliance and controls and any required adjustments to how Metcash conducts its business.
1.7 Property and facilities risk
Metcash leases facilities for the wholesale distribution of grocery, fresh produce, liquor, hardware, tools and other fast-moving consumer goods. Damage to or destruction of these facilities could result in the
loss or reduction of distribution capability and hence adversely impact Metcash's financial results. While Metcash has in place insurances that it considers are sufficient for a business of its type and size, Metcash
will be required to pay for the loss on any event up to the deductible and self-insurance retention.
1.8 Financial risks
Competitive trading conditions and broader adverse economic conditions can increase the credit risk associated with the Group's activities, including the provision of credit and trading terms to its independent
retailers.
Funding and liquidity risk continues to be relevant to the Group due to the need to adequately fund business operations, growth initiatives and absorb any loss events that may arise. Inability to adequately fund
the Group's business operations and growth plans may lead to difficulty in executing the Group's strategy. Metcash maintains a prudent approach towards capital management, which includes optimising
working capital, disciplined capital expenditure, capital recycling and careful consideration of its dividend policy.
In an economic environment of high inflation and higher interest rates, Metcash may be impacted by increases in the cost of debt and potential instability in international banking markets. This could lead to a
risk that the Group may be unable to refinance or renew its banking facilities following expiry, or will only be able to refinance or renew those facilities on terms that are less favourable to the Group than the
existing terms. Further, if Metcash failed to meet any of the covenants on its debt facilities there is a risk that the Group may be required to repay outstanding debt on notice or take other actions to remedy the
breach. Any requirement to repay outstanding debt on notice, or inability to refinance banking facilities or obtain capital or financing generally, on favourable terms or at all, may have a material adverse effect
on the Group's financial performance and position.
1.9 Trading and customer risks
Metcash's ability to operate efficiently is critical to support independent retailers in remaining competitive. A disruption to the business could result in an increased cost to serve retailers and inability to meet
customers' requirements.
In our Food pillar, Metcash services a number of large customers known as Multiple Store Owners (MSOs). These customers own and/or operate more than one independent retail store, and in some cases can
own and/or operate a sizeable number of stores (examples of larger MSOs include Ritchies Stores Pty Ltd (Ritchies), Romeo Retail Group and Drakes Supermarkets). In addition, Metcash Food is a supplier to a
number of contract customers, one of which is Australian United Retailers (AUR), which operates the Foodworks bannered network. In 2022, Metcash entered into an agreement to supply AUR for a further five
years commencing 1 July 2022. Metcash also extended the term of its agreement to supply Drakes Supermarkets stores in Queensland for a further five years, to 3 June 2029. If any one or more MSOs or AUR
were to materially reduce or cease to source their inventory from Metcash for any reason (including vertically integrating their supply chain, establishing an alternative buying group, purchasing from another
source, entering into a supply agreement with a competitor or closure of stores due to insolvency or poor performance), this could adversely impact Metcash's long-term performance and profitability.
In addition, there are a number of large contract customers in the Liquor business whose contracts are renewed on a regular basis. If one or more of these contract customers decided not to renew their supply
contract this could adversely impact Metcash's long term performance and profitability. Further, the Liquor business also has a number of large suppliers and if one or more of these suppliers decided to no
longer conduct business with Metcash, this too could adversely impact Metcash's long-term performance and profitability.
Metcash
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