Shoppers Stop Ltd Management Discussions.

Economic Environment

World

The world has changed dramatically in the last few months. The COVID-19 pandemic and subsequent lockdown that the world has seen, has put pressure on all economies. According to the International Monetary Fund (IMF), while there is huge uncertainty about 2020 growth prospects, and even more so about the 2021 outlook, the impact of COVID-19 on the world will—across the board—be severe and unprecedented. This is the lowest growth rate in almost 60 years, including during the global financial crisis (4.7%) and the Asian financial crisis (1.3%). The global economy is expected to contract in 2020 by 3% causing the worst recession since the Great

Depression. This is a synchronised contraction, a sudden global shutdown.

India

During the first three quarters of FY 2020, the cyclical slowdown in the Indian economy showed signs of a turnaround, on account of counter-cyclical measures announced by the Government of India, along with the accommodative stance adopted by the Reserve Bank of India (RBI). However, the emergence of the COVID-19 pandemic in March has cast a shadow on these incipient signs, with the economy estimated to have grown at an 11-year low of 4.2%.

In addition to a phased nationwide shutdown, the Government of India has rolled out a series of policy initiatives and broad-based stimulus to offset the economic impact to the lockdown.

The fiscal support under the ‘Aatma Nirbhar Bharat Abhiyan announced on May 12, 2020 intends to inject Rs. 20.9 trillion into the economy, ~10% of the nominal GDP of India.

There were some structural measures announced for the vulnerable sections such as using technology to provide seamless disbursal of food subsidy. These actions have served to reduce systemic stress and contributed to limiting the amplification of the shock. However, the full impact of the outbreak cannot be ascertained yet.

A concerted effort remains the need of the hour, to position the economy on the path to recovery spanning a multi-pronged approach through public policy impetus, private sector participation and civic society support.

Indias growth pattern (%)

2015-16 2016-17 2017-18 2018-19 2019-20
8.0 8.2 7.2 6.1 4.2

Source: Economic Survey of India 2019-20; Central Statistics Office

Industry Overview

The Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players. Total consumption expenditure is expected to reach ~$3,600 billion by 2020 from that of $1,824 billion in 2017. The Indian retail industry is the fifth largest in the world, and accounts for over 10% of the countrys GDP and ~8% of its employment.

However, post the announcement of the nationwide lockdown and closure of ‘non-essential operations, the retail sector has been severely affected.

Even as businesses open up in the green zones, social distancing will restrict footfalls and sales at stores and malls in the ensuing months. The retail industry is estimated to require 9-12 months to recover amid the pandemic. The demand for non-essential retail is projected to open with 40% of the value noted in pre-COVID-19 times. The cost of business across non-essential sectors is likely to increase by

30-35% post lockdown. Moreover, the non-essential industry is hit hard, especially due to the overlap of the lockdown with the peak season from March to May.

COVID-19 perspective: Consumer trends

? Discretionary spends witnessing either cutbacks or postponement of demand

? Health and wellness, at-home entertainment and

‘essential categories witnessing the most traction

? Spends in categories like beverages and food delivery witnessing mixed performance

? Panic buying inducing a ‘stocking up and ‘savings-first mind set

? E-commerce witnessing a clear surge, even in traditional categories

Source: Boston Consulting Group research; CT Group research

COVID-19 perspective: Supply chain imperatives
? Establish demand-side rapid response teams to monitor marketing, sales and pricing implications ? U nderstand liquidity and business position of key suppliers
? Understand changing customer needs ? Arrange for contingencies for critical components, operations and logistics routes
? Focus product and service offerings ensuring alignment with key customers ? Evaluate alternate demand/supply scenarios and mitigate their impact on capacity (such as, through local sourcing)
? Divert resources to newer channels, products and services appropriately ? S hift inventory position to manage near-term market impact
? Activate centralised rapid response teams for daily monitoring of supply chain vulnerabilities ? E nsure proper safety precautions inbound from suppliers and outbound from warehouses, stores and other facilities with consideration to lead times
? Prioritise health- and safety-critical products and services with upstream and downstream linkages ? Assess viability of current investment roadmap and ensure cost discipline
? Actively communicate with suppliers, manufacturing partners and logistics vendors to minimise business disruption ? Leverage resources and network to make a difference to those affected in nearby communities
? Implement product/service allocation processes to reduce constraints in the supply chain ? Reinforce purpose and values to stakeholders

Source: Boston Consulting Group research

COVID-19 perspective: Stepping up

Disruptions in supply chains and stringent social distancing norms have led retail businesses to rethink their ways of working and unravelling new opportunities. Stakeholders and the society at large will remember a companys behaviour during the crisis. Businesses that demonstrate responsibility will establish trust and a truly differentiated position. Companies have stepped up to mitigate the impact of the crisis, while preparing for the post-COVID-19 new normal, in primarily three ways.

1 2 3
Mobilising emergency response teams and ensuring business continuity through digital tools and Omni-channel Prioritising employee health and welfare, and utilising the downtime for upskilling and reskilling Expediting collections and lowering discretionary spends and non-key short-term costs
Some examples of initiatives include:
? Early procurement of protective gear ? Redeployment of sales effort to online channels
? Regular review of procedures ? Online flash sales and diverse online shopping scenarios
? Periodical communication with employees ? Dynamic budget allocations
? Online training programme and digital learning modules ? Zero, partial or deferred rental payments
? Conversion of offline store sales to online channels

The future of retail, thus, will involve a combination of human and digital. The convenience of ordering online in a safe and secure environment of ‘your home and of setting up safe delivery systems will play equally important roles. Investments in Omni-channel capabilities will be accorded high priority. Online consultations will hold greater appeal, as customers will be able to connect with personal shoppers and stylists through simple video calls. Overall, the definition of usual in ‘shopping as usual will see a lasting change.

Source: Boston Consulting Group research

Outlook

Fashion and accessories

With the new reforms shaping the industrys growth, non-contact demand during the pandemic is expected to boost sales at standalone stores and malls with the observation of high security measures. Due to the impact of the enforced COVID-19 lockdown on consumer behaviour and habits, online sales are expected to witness a significant surge when the industry resumes operations after the lockdown is lifted. The establishment of online platforms is expected to become indispensableforoffline stores, and online offline service integration is expected to increase. Omni-channel will be the way to go, with customer convenience becoming a top priority and key differentiator. Additionally, categories that will see an uptick will be in casual clothing, athleisure, home dcor, environment-friendly and sustainable products. Opportunities will also arise in the categories of school-at-home essentials and entertainment options for kids.

Beauty

The beauty industry is constantly evolving and therefore, retailers need to be at the top of their game to effect growth in this challenging economic environment. Newer makeup scenarios for occasions are expected to give rise to new areas of demand, including ‘home makeup, ‘mask makeup and ‘contrast makeup influencing the pattern of beauty products. Amid the downturn for offline beauty stores, demand for in-home skincare is expected to increase.

Supported by the increased use of virtual technologies, online shopping is likely to gradually replace offline shopping, making decentralisation imperative for the industry.

Shoppers Stop

Shoppers Stop is the nations leading premier retailer of fashion and beauty brands since its establishment in 1991. FY 2020 witnessed us enhancing our journey of accelerated expansion both physically and online. We have continued to review the different aspects of our business and successfully adopted an agile way of working with sharper execution and faster turnarounds. We have reaped rich dividends from our investments in our technology and are certainly poised for industry-leading growth in the new normal. Our single-minded objective is our commitment to do what is in the best interest of our customers, employees, shareholders and all other stakeholders. Being connected closely with them and the realities of the world around us, enable us to maximise the value we create for all.

Widespread dispersion of COVID-19 and subsequent lockdown measures have had a material negative impact on all major industries in India. In this rapidly evolving situation, the current line of sight indicates a slow and staggered lockdown release and sustained economic recovery till the end of 2020 and early 2021. The financial and mental distress caused by pandemic is expected to have a lasting impact on consumer behavior. Poor consumer sentiment, lower discretionary spending coupled with the fear of catching the disease will result in consumers avoiding crowded places such as malls and retail outlets and diverting spends to online. Among all the categories, fashion and beauty mostly discretionary will witness largest decline in intent to purchase. Shoppers

Stop being a leading player in this industry is expected to face significant headwinds. Keeping this in mind, we have embarked on a strategic implementation process to build a resilient business.

1. SCOT analysis
Strengths Challenges
? First Citizens loyalty programme ? Social distancing, thus less footfalls at stores
? Brand marketing ? Personal ? Higher cost of operations
Shoppers service ? ? Fast-paced adoption of technology
Omni-channel presence ? Scarcity of skilled workers
? Refined portfolio mix
? Robust supply base
? Strong systems, processes and teams
? Corporate governance
Opportunities Threats
? Omni-channel and online expansion creating convenience ? Economic conditions
? Premiumisation and global brands access in India ? New entrants
? Beauty and personal care categories ? Industry disruptions
? Digital innovation ? Marketplace scale in fashion and beauty
? Analytics

1.1 Strengths

? First Citizens loyalty programme:

A successful programme, it accounts for 82% of our sales. Started in 1994 and with 7 million enrolled members (as on 31 March 2020), it is one of the longest-running and most coveted loyalty programmes in India. The programme is at the heart of customer relationships that is visible in a ticket value that is twice that of a non-member. The rich database helps us collect gainful data-driven insights, enabling informed decision-making and analytics-backed targeted promotions across the organisation.

? Brand marketing:

Shoppers Stop has been known to launch clutter-breaking campaigns that stand out in imagery and tone of voice. We draw from 25+ years of rich insights into customers shopping behaviour, habits and preferences, to design and plan our campaigns and promotions. In the year, we effectively carried out thought provoking campaigns with customer sub-segments and regional segments and created new marketing occasions.

? P ersonal Shoppers service:

The initiative innovates customer engagement and provides a differentiated shopping experience, contributing to 15.6% of our revenue. It was introduced to help discerning customers explore our product range and indulge in a premium end-to-end personalised journey. We have more than 300 Personal Shoppers that are trained in premium standards of customer service, styling and fashion by the best experts.

? Omni-channel presence: With changing trends of the Indian shopper, our expansive presence across all channels has contributed significantly to our growth.

A cross-channel approach, comprising 89 large department stores in 44 cities (plus 11 HomeStop and 132 specialty beauty doors), 8 EDI-enabled stores and DCs, an e-commerce website, and a mobile application that helps in Endless Aisle and, Snap. Find. Buy., have helped us become more accessible and further strengthen ties with our shoppers. We recorded 67 million visits to our website and 9.7 million mobile app downloads serving 25,000 pin codes during the year leading to a 17% growth in sales. This further validates our strategy of being where the customer wants to find us.

? Refined portfolio mix: The Shoppers Stop product portfolio caters to the evolving fashion trends and covers a wide range of customer preferences. Designedtomeettherequirementsofeverycustomer segment, a variety of products encompassing private labels, national and international brands, exclusive tie-ups and niche categories, together with an incomparable ‘Shoppers Stop brand recall, attracts and retains customers. This has enhanced our market position and enabled us to become the first choice for mall developers, brands and suppliers, thereby helping us in our pursuit of greater consumer mindshare.

? Robust supply base: We support the growth of our Omni-channel distribution through an efficient supply chain system. Right from sourcing, design and production to a hub-and-spoke distribution model, it plays a key role in sustaining our multi-channel approach and we consistently invest in improving it to remain competitive. We leverage its round-the-clock efficiency to service four brick-and-mortar regional centres spanning more than 5 lacs sq. ft. We launched a 6,500 sq. ft. design studio in May 2019, for private brands with a sampling unit, ramp walk and photo studio at our headquarters in Mumbai.

? Strong systems, processes and teams: Our strong back-end capabilities have helped us coordinate our operations on well-oiled wheels. We are focused on building our back-end efficiencies through increased usage of digitisation, technology and improved processes to drive growth and profitability across our channels.

? Corporate governance: We have at the helm, an experienced team, with a growth-oriented mind set and streamlined focus, which helps us unlock value for our stakeholders. Our commitment to good governance further enables us to be a beacon of light for the industry.

1.2 Challenges

? Social distancing, thus less footfalls at stores: The social-distancing imposed during the COVID-19 outbreak has significantly reduced footfalls, thereby leading to a complete shut-down in operations. This has affected the organisations performance and bottom line and would continue to do so till things regain normalcy.

? Higher cost of operations: Rental expenditure is one of the largest components in a retail business fixed costs. The rise in 100% Foreign Direct Investment (FDI) in single-brand retail has led to increased competition and upgradation of retail spaces. The surge in demand for key catchments in prominent malls is driving rentals higher, thereby increasing the cost of overheads.

? Fast-paced adoption of technology: The increased adoption of new technologies by customers is providing greater access to global designs, that have been made accessible through disruptive technologies and management practices. This has contributed to an increase in the development of new platforms that are steadily being adopted by the industry, leading to an increased investment.

? Scarcity of skilled workers: The Indian organised retail space incurs significant expenditure due to spending on personnel; a large part of which is on account of investment in training and development. The industry also deals with a high churn rate. Lack of specialised courses that impart pertinent skills to suit the evolving requirements of Shoppers Stops operations, impact the business ability to build a talent pipeline.

1.3 Opportunities

? Omni-channel and online expansion: The influx of mobile usage and internet technologies have led to increasing popularity of online shopping. This trend has led to the rise of the Omni-channel and other online shopping avenues in the retail industry. This will play a significant role once the lockdown is lifted, when customers would still be wary about stepping into stores for shopping, despite stores stepping-up their anti-COVID-19 precautionary measures.

? P remiumisation and global brands access in India:

With higher disposable income, there is a discernible shift in preference towards premium and customised services. Convenience also continues to play for young, aspirational consumers who seek more flexibility and choice in their consumption basket as well as a superior shopping experience. High-street retail is increasingly gaining ground, online platforms notwithstanding.

? Beauty and personal care categories: A combination of higher discretionary spending, rising awareness towards personal hygiene and grooming with urbanisation as well as globalisation have impacted consumption decisions vis--vis these products.

? Digital innovation: Internet access will be democratised in India by 2030 with more than one billion citizens on the internet. More than

80% of internet users primarily access the web through mobile phones. This implies a potentially different profile of connected consumers for businesses to tap into.

? Analytics: The power of data has become a big differentiator in how a business is run. Besides a real-time update of stocks and inventory, data offers great potential for more targeted advertising.

1.4 Threats

? Economic conditions: Retail consumption is directly impacted by the general economic environment. A subdued GDP growth performance, lowered market confidence, unanticipated policy reforms and rising oil prices, along with the ramifications of the COVID-19 pandemic are some of the many macroeconomic factors that affect retail performance.

? New entrants: With India presenting an attractive retail market, there is a continuous influx of new entrants into the sector. Our nationwide footprint, seamless service offers, and capable management team are few of the factors that help us retain our competitive edge.

? Industry disruptions: Increased competition among leading national retailers, compounded by foreign brands entering the market has led to rivalry for locations, footfalls and offering price-based discounts to attract the customer. Our robust pipeline of stores and an array of insightful promotions help us navigate a tough operating context.

? Marketplace scale in fashion and beauty: The existence of online marketplaces in fashion and beauty with all-season discounts on new and old merchandise can pose a threat to department stores

2. P erformance review

2.1 Operational metrics

Merchandising purchase: Our ability to present on the shelves, correct merchandise assortments in the right mix, style, colour and fashion is one of our most critical success factors. A team of buyers and merchandisers ensure that the pricing strategy and value proposition are completely in tune with the customers expectations. We regularly monitor sales trends to optimise inventory levels. We take inputs on customer buying behaviour from Loyalty and Analytics teams, to alter the product and brand assortments. Our systems and processes in buying, merchandising and logistics enabled us to efficiently manage the flow inventory to stores, provide prompt replenishments. We believe in a broad distribution of risk with no dependency on any single diversified supplier supplier, confirming our base. Suppliers are selected on fairly stringent parameters to ensure the quality and reliability of supply. Alternate distribution channels for inventory have also been put in place as a contingency, should the need arise.

2.2 Efficiency metrics

We review our Gross Margin with reference to our Space, Inventory and Labour to monitor our efficiency with the help of three indicators, that is, Gross Margin Return on Inventory (GMROI), Gross Margin Return on Floor Space (GMROF) and Gross Margin Return on Labour (GMROL).

3. F inancial review

3.1 Fi nancial metrics

? EBITDA/Operating profit (Non-GAAP): Operating profit (without exceptional items) in FY 2020 is Rs.182.93 crores (4.2% of sales) as compared to Rs.264.50 crores (6.0% of sales) in FY 2019 an increase of 114.94% over the last year.

? N et interest: Interest cost has increased to Rs.194.38 crores, as against Rs. 12.45 crores last year; Interest cost for FY 2020 includes interest on ROU liabilities amount to Rs.187.84 crores on account of adoption of IND-AS 116 with effect from April 1, 2019.

? Dividend: The Board of Directors has not recommended any dividend for the year under review.

? Inventory: The inventory at the end of current year is Rs.1,223.92 crores as against Rs. 1,053.55 crores as at the end of the last year. Inventory holding period is 18 weeks during the current year, as against 20 weeks last year. The inventory has been valued at lower of cost or net realisable value.

3.2 F inancial ratios

The significant changes in the financial ratios Shoppers Stop, which are more than 25% as compared to the previous year in terms of Listing Regulations are summarised below:

Ratios* 2019-20 2018-19 Change (%)
Interest coverage 3.00 21.79 (86.23)
PAT margin (%) (4.50) 2.40 (286.76)
Debt equity ratio 0.91 0.04 2,175
Return on net worth (%) (103.20) 8.10% (1,374)
Return on capital employed (%) (54.10) 10.30 (625)

* Ratios have been computed as per GAAP financials.

Notes

1. Lower Interest coverage in current year is majorly due to interest on ROU liabilities as per IND-AS 116 applicable from 1 April 2019 amount to Rs.187.84 crores, therefore previous years ratio is not comparable.

2. PAT margin in current year is adversely impacted by combination of provisions aggregating to Rs.127.62 crores which are non-cash provided purely on a conservative basis. The detail explanation has been provided in point no.2 review of operations to Directors Report.

3. Debt equity ratio: Considering the mutual fund investment the net debt is nil in fact there is net surplus of Rs.30.34 crores as on 31 March 2020. In addition, there is one-time impact on reserves amount to Rs.517.17 crores (net of deferred tax) on account of applicability of IND-AS 116 with effect from 1 April 2019, and deferred tax reversal on reserve of Rs. 77.45 Crores created on IND-AS 116 transition due to change in tax rate, which has led to decline of debt equity ratio.

4. Return on net worth is negative primarily on account of combination of factors as explained note 1,

2 and 3 above.

5. Return of capital employed is negative in current year as explained in note 1, 2 and 3 above.

4. W omen at the forefront

Dignity for women has been the core mantra for Shoppers Stop over the years. This is the focal point across our CSR campaigns and initiatives, its employee policies as well as the clutter-breaking and stereotype-questioning marketing campaigns. Shoppers Stop promotes equal employment practices for women at work and recognises that economic progress is strongly linked to social and financial independence of women.

It has a three-pronged approach of development and employment of women at work, support to rural women for their wellness and other needs, and employment generation for rural women through ancillary initiatives. The Company works with women from marginalised communities by providing them a livelihood, access to menstrual hygiene kits and increasing their awareness on menstrual hygiene. At the workplace, we have initiatives promoting gender equality, diversity and inclusiveness.

In fact, our core customer is a young family where the woman is the primary influencer. Women today form 55% of our audience and influence 57% of our sales.

5. M arketing campaigns

At Shoppers Stop, we work to deliver more than delightful shopping experiences. As a responsible organisation, our team, comprising unmatched marketing talent, strives to raise awareness on the social causes that move us and communicate more transparently with our customers across platforms, including both traditional as well as new-age digital media. Our commitment also extends to offering unique perks to those customers who have been intricately connected with our universe over the years.

5.1 F ocusing on women

Shoppers Stop has been pushing the agenda for womens place in society, at home and at work through various inspiring campaigns. Our women-centric content received much appreciation and screen time across regional channels. They reached over 25 million viewers and features across channels catering to movies, music, western entertainment and lifestyle, among others. Of these ad pieces, 70% featured during primetime television and have upped sales by 11% compared to last year and customer engagement by 2%

? Its Our Time: Our most pertinent campaign, #CelebratingWomen is a satirical take on the several social rights concerns that women have struggled with and fought for over the years. Featuring young women of the new world, it raises awareness on myriad issues while smashing an age-old stereotype associated with women.

The campaign reached 7.7 million people with 28 million impressions

? Mothers Day: One of the advertisements in the campaign released on the occasion of Mothers Day was about a young woman recalling how as a child she would emulate the strong influence mother wielded. It came with a message to donate your mothers old sarees to those who could use them in starting a new life.

The campaign reached 9.1 million people with 16.4 million impressions.

? #CelebratingSisterhood: Our truly singular initiative was dedicated to the community of caregivers who keep children safe while their parents are at work. The piece chronicles a family on Rakhshabandhan where the mother encourages her daughter to tie the first rakhi on her caregivers hands respect for the others nurturing presence in her life.

The campaign reached 2.6 million people with 13.8 million impressions

? #ShareMyNewYear: This campaign celebrated the rich cultural heritage of India. It is aimed at raising awareness on the myriad names and ways in which new years are celebrated and titled across communities in the country and encourages a more inclusive understanding of Indian culture.

The campaign reached 11.8 million people with 40.6 million impressions

? #JaagoTumiJaago: This powerful campaign designed for our Bengali-speaking customer base, is a call for women around the world to rise to their that hinderpotentialand womens growth.

The campaign reached 3 million people with 11.9 million impressions

? #RecycleForHerCycle: Released on Womens

Day this year, our one-of-a-kind CSR campaign, aimed at generating employment opportunities for marginalised women. It encouraged customers to donate their old clothes to be in turn upcycled into other products. The campaign was supported by eminent personalities, including Anupama Chopra,

Tisca Chopra, Richa Chadha and Kalki Koechlin. .

The campaign reached 7 million people with 8.7 million impressions.

? Scarred but not scared: This Valentines Day campaign chronicled the life of an acid attack survivor in a short film where she confidently picks out gifts for all the people who have supported her and thought of her. The film was well received. This was in association with our CSR initiative of helping to rebuild the lives of such survivors. Shoppers Stop contributes Rs.1 towards this initiative from all beauty purchases.

The campaign reached 14 million people with 30 million impressions that her

5.2 First Citizen Black

We launched a by-invitation programme for the discerning few with a singular objective of bringing the magic of ‘personal touch back to large format retail shopping. First Citizen Black is the only retail

‘Relationship and ‘Experience programme in the country with incentives such as no-queue billing, a Black Assist service with direct access to Personal

Shoppers and Store Managers, dedicated trial rooms, one year of no-questions-asked garments exchange, beauty makeovers and exclusive access to mark of sales, among others.

? 14,000+ First Citizen Black card members

5.3 First Citizen turns 25

This year marked the 25th anniversary of the programme and we celebrated with a mass media campaign that involved 250 brands and 25% discount on the most popular brands in our repertoire.

? 17% growth in yearly sales

? 14% growth in repeat sales

5.4 Personal Shoppers app

The Personal Shoppers app is designed to provide hyper-personalised styling recommendations, in addition to gathering loyalty data flows and tracking customer relationship management ticket status. The app helps identify discerning members from our First Citizen programme who are likely to opt for personal shopping assistance and connect them to our Personal Shoppers team.

? 2.5+ lakh members served under the programme

? 4X ATV of members who availed the service

? 15.6% of total sales

5.5 Riding the wave of trends

Throughout the year, we invested in several topical campaigns that leveraged special occasions to encourage our customers to shop and avail unique benefits and discounted rates. These initiatives included the popular ‘Black Friday sale where we offered discounts of up to 50%, marking a sales growth of 36% and CE growth of 16%. This clubbed with our end of season sale with up to 50% discount on our apparel and accessories drove sales by 24% and customer engagement by 2%. In keeping with our spirit of celebrating diversity, we offered the Ramadan sale that witnessed remarkable traction across markets in

Kolkata, Hyderabad and Lucknow.

5.6 Communicating effectively amidst a pandemic

We understand that the pandemic and the subsequent nationwide lockdown dampened consumer spirit like never before. Shoppers Stop stayed connected with customers, conveying key information on themes like beauty, edutainment and fitness.

? Regular SMS communications: We circulated social responsibility messages and regional festive wishes alongside promoting online shopping, e-gift vouchers and online transactions, in keeping with the spirit of social distancing through our communications. These messages also requested customers to provide feedback on their concerns, which would help us serve them more effectively once our outlets reopen after the pandemic.

? Being vocal about a global crisis: During these trying times, our campaigns remained sensitive to the most pressing concern at hand. We regularly updated our social media handles with creatives that encouraged empathy for our frontline workers, staying home to help contain the outbreak and practicing healthy habits to avoid burnout (in collaboration with Adidas and Reebok) while keeping indoors.

? Staying true to who we are: We ensured our communication retained the essence of the brand. Our social media campaigns, therefore, included Live Facebook sessions, easy-to-follow beauty and wellness tutorials, among other category-based creatives.

6. S upply chain partners

O ur initiatives towards our supply chain partners disclosed on Page 22 of the Annual Report, as well as the Business Responsibility Report.

7. H uman capital

O ur initiatives towards managing and developing people are disclosed on Page 24 of the Annual Report. as well as the Business Responsibility Report.

8. C orporate social responsibility

O ur initiatives in corporate social responsibility disclosed on Page 26 of the Annual Report, as well as the Business Responsibility Report.

9. I nformation technology

O ur initiatives in digital tools and technologies disclosed on Page 18 of the Annual Report.

10. R isk governance and internal controls

E verything we do at Shoppers Stop revolves our vision and values. And that vision can only be secured through effective risk management. Our risk management framework applies to every part of our business in an effective manner, so that it continues to enable us to assess and determine what our key risks are and how to manage them appropriately. That then enables us to meet our strategic objectives and deliver the long-term growth and viability of our business.

10.1 Risk management

Risks are owned, managed and formally reviewed across Shoppers Stop using the following process.

COVID-19 perspective: Risk management

The pandemic has had a huge impact on Shoppers Stops offline stores (albeit temporarily for a medium term of at least next eight to 12 months) owing to central/state government legal mandates around lockdown and social distancing. This has resulted in us having a definite risk exposure to our business model, since we were not able to open our doors at mall premises for walk-in customers. We faced similar issues at our airport stores since airline operations were closed completely for a significant period of time. In addition, deteriorating macroeconomic conditions have led to demand postponement and a savings-first mindset.

We are emphasising our Personal Shoppers service and our First Citizen loyalty programme, as well as other revenue streams, such as ship from store. Further, we are deferring capital expenditure and discretionary spends, to focus on cash conservation. With gradual easing of the lockdown in the country, we expect the footfall and sales to recover in the coming quarters.

10.2 Principal risks and uncertainties

Key risk Description Actions initiated
Economic and market conditions Major changes in the economic environment (such as the pandemic) may challenge the existing business strategy, have a material impact on financial performance and dilute our competitive advantage. We rely on a multi-format click-and-mortar model that enables us to respond to changes in customer demand, manage the product mix and pricing policy and identify opportunities for growth.
Online retail E-commerce offers a unique value proposition to the digitally savvy new-age consumer who increasingly prefers to shop online. We are investing in our cross-channel approach of reaching customers. Our objective is to drive sales across all channels, while recruiting customers through holistic experience-led offerings.
Execution We operate in a multi-stakeholder context that requires careful estimation of inventory and sale. We have a strong execution team and we believe it has the capability to execute varied retail formats.
Supplier risk Our broadly varied offering necessitates alliances with many suppliers from various business sectors. We enter into arrangements with vendors in various business formats such as outright buy/sale or return, consignment and concessionaire/conducting arrangement.

Shrinkage

Shrinkage in the retail business is defined as the loss in inventory through a combination of shop lifting, pilferage and errors in documentation and transaction processing that go unnoticed.

We have focus on inventory control. We monitor shrinkage on a regular basis and look at various factors that could lead to shrinkage at stores and distribution centres. Store Operations and Supply Chain teams work together and monitor the shrinkage level on a month-on-month basis. Our shrinkage percentage is controlled at 0.36% of the turnover and our endeavour will always be to lower this ratio through proper monitoring and continuously reviewing inventory management processes and systems.

Employee retention Our strategic goals are heavily dependent on the competencies and performance of our people. The high churn rate in the retail space is a key risk since demand for experienced personnel in modern retail will only increase in the near term and long term. We monitor the labour market and provide employee benefits in line with and/or ahead of the market. We have a defined system for employee on-boarding, training and development in place. We also nurture a culture of collaboration among our people to build a spirit of teamwork and unity.
IT and data privacy Failure to match IT capabilities, scalability and reliability in relation to business requirements will disrupt business continuity. We engage the best external experts and develop partnerships and in-house expertise in key IT solutions. We ensure corporate governance of IT architecture with sufficient reliability of centralised IT infrastructure. We have in place policies and procedures to ensure cybersecurity.

 

Regulation Our operations are subject to a broad spectrum of national and regional statutes, laws and regulations. These include product safety, trademarks, competition, employee and customer health and safety, data, corporate governance, employment and tax. Changes to laws and regulations or a major compliance breach could have a material impact on the business. We have the internal controls in place, to ensure that compliances are adhered to.

E ffective governance consists of management; implementation of standard policies and processes; maintenance of an appropriate audit programme with internal control environment; effective risk monitoring and Management Information Systems (MIS).

We adopt an integrated approach towards management of risk, formulating the framework for regulatory and risk management and standardising the definition of internal controls. We also provide a framework for risk management and regulatory compliance, which requires risk assessments and related policies, a control-based environment and activities, information and communication procedures, and a monitoring mechanism.

We have laid down a sound system of internal controls for financial reporting of various transactions, efficiency of operations and compliance with relevant laws and regulations commensurate with the size and nature of business.

We have a well-defined system of management reporting and periodic review of businesses to ensure timely decision-making. These internal control procedures ensure the following: protection of resources ??E

? Compliance with policies, procedures and statutes

? Accuracy and promptness of financial reports

The MIS forms an integral part of our control mechanism. All operating parameters are monitored and controlled, with material deviations from the annual planning and budgeting and business outlook, including capital expenditure reported to the Board on a quarterly basis.

In adherence to the Companies Act 2013, we have documented and tested all the key internal controls related to both financial reporting and operational controls. Reports of internal auditors are reviewed by the Audit Committee and corrective measures are carried out towards further improvement in systems and procedures as well compliance with the internal controls. The Board recognises the work of the auditors as an independent check on the information received from the management on our operations and performance.

11 C orporate governance

W e have taken adequate steps to ensure that

Corporate Governance guidelines are adopted and fully complied with. The detailed Corporate Governance Report is attached on Page 84.

Cautionary Statement

Statements in this Annual Report, particularly those that relate to Management Discussion and Analysis, describing the Companys objectives, projections, estimates and expectations, may constitute ‘forward-looking statements within the meaning of applicable laws and regulations.

Although the expectations are based on reasonable assumptions, the actual results may differ.