Risks

Risks as described in Interim Report Q1 on 14 May 2020:

Factors of uncertainty over the global economic trend affect the retail trade and consumer confidence in all of the company’s market areas. The coronavirus that spread rapidly all over the world during the first quarter of 2020 has taken uncertainty over the global economy to a completely new level and weakened the consumer demand outlook in all markets. Exceptional circumstances like these, especially if prolonged, can have significant impacts on Marimekko’s sales, profitability, cash flow and the operational reliability of the company’s value chain. The coronavirus pandemic and other exceptional circumstances can also have long-term impacts on consumers’ preferences, purchasing behavior and buying power. Changes in these especially in Finland and Japan, which are the company’s biggest single countries for business, pose considerable strategic risks to the company. A slowdown in economic growth and a rise in unemployment can affect the company’s sales outlook and increase consumers’ price sensitivity.

Other strategic risks include risks related to changes in the company’s design, product assortment and product distribution and pricing. Digitization in retail trade has gathered pace in the past few years and may further accelerate as a result of the pandemic, which can have an impact on the company’s distribution channel solutions and priorities, sales and profitability as well as create new revenue generation models. The importance of omnichannel business in the retail trade is emphasized. International e-commerce increases the options available to consumers and the negotiation power of big e-commerce operators. Maintaining competitiveness in a rapidly changing operating environment being revolutionized by digitization demands agility, efficiency and the constant re-evaluation of operations. The company’s ability to design, develop and commercialize new products that meet consumers’ expectations while ensuring effective, quickly reacting and sustainable production, sourcing and logistics also has an impact on the company’s sales and profitability.

The company’s growth in the longer term is based primarily on omnichannel retail: on increasing e-commerce, on partner-led retail in Asia, as well as on enhancing the sales per square meter of existing stores in the company’s main market areas. The Asia-Pacific region is Marimekko’s second-biggest market, and it plays an important role in the company’s growth and internationalization. Major partnership choices, partnering contracts and other collaboration agreements involve considerable risks. With the company’s internationalization and the growing interest in its brand, risks related to grey exports have increased, which may have an impact on the company’s sales and profitability. Store lease agreements in Finland and abroad also contain risks.

Intellectual property rights play a vital role in the company’s success, and the company’s ability to manage and protect these rights may have an impact on the value and reputation of the company. Agreements with freelance designers and fees paid to designers based on these agreements are also an essential part of the management of intellectual property rights. As the company internationalizes, the risks of infringements of its intellectual property rights may increase, particularly in Asia.

Prominent among the company’s operational risks are those related to internationalization, digitization as well as supply chain reliability and sustainability. As Marimekko is a small company, risks related to key personnel can also be significant. The coronavirus pandemic increases operational risks related especially to taking care of the health and safety of customers and employees, production, supply and logistics chain reliability, inventory and product flow management as well as cybersecurity and information system reliability as, during the crisis, sales are concentrated online. Early commitment to product orders from subcontractors, which is typical of the industry, weakens the company’s possibilities to respond to rapid changes in demand especially in exceptional situations.

In normal circumstances, too, there are risks associated with information system reliability, dependability and compatibility. With digitization, various risks related to cybersecurity and personal data protection have also increased. DoS attacks, malfunctions in data communications or, for example, in the company’s own online store, may disrupt business or result in lost sales. Data leakage can lead to claims for damages and reputation risks.

Operational risks related to Marimekko’s supply chain are associated especially with procurement and logistics processes and price fluctuations for raw materials and procurements. As product distribution is expanded and operations are diversified, risks associated with inventory management also grow. The company primarily uses subcontractors to manufacture its products. Of the sustainability elements of manufacturing, especially social aspects related to the supply chain (including human rights, working conditions and remuneration) and environmental aspects (for example production methods and chemicals used) as well as transparent communications on these subjects are of growing significance to customers. Compliance with sustainable business methods is important in maintaining customers’ confidence; any failures or errors in this area will involve reputation risks. Any delays or disturbances in supply, or fluctuations in the quality of products, may have a harmful impact on business. Business and reputation risks are prevented by taking care of product safety and through continuous quality control.

Climate change is expected to bring an increase in various extreme phenomena such as floods, typhoons and hurricanes. Marimekko has stores in areas in which such extreme phenomena may occur, and if they damage stores or cause momentary changes in consumers’ purchasing behavior, it may result in lost sales as well as expenses. Extreme phenomena may also affect the availability of products if they cause damage to the company’s suppliers’ factories. Furthermore, climate change or extreme weather may cause droughts, soil depletion or other changes in growth conditions, which could impact the availability and price of Marimekko’s most used raw material, cotton.

Among the company’s financial risks, those related to the structure of sales, price trends for factors of production, changes in cost structure, changes in exchange rates (particularly the US dollar, Swedish krona and Australian dollar), taxation, and customers’ liquidity may have an impact on the company’s financial status. The coronavirus pandemic has significantly increased risks related to customers’ liquidity.