Risks as described in the Interim Report 1–9/2022, 2 November 2022:
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 pandemic has been the worst crisis experienced by the global fashion industry and specialty retail sector in decades. The development of the pandemic situation in different markets and related restrictions, in particular in China, Russia’s war against Ukraine, various political tensions, further increased inflation following these factors as well as the risk of recession impact the global economic trend as well as consumers’ purchasing power and behavior. These factors can have significant impacts on Marimekko’s sales, profitability, cash flow, the operational reliability and efficiency of the company’s value chain.
Changes in consumer behavior and buying power, especially in Finland and Japan, which are the company’s biggest single countries for business, pose considerable strategic risks to the company. Other strategic risks include risks related to changes in the company’s design, product assortment and product distribution and pricing. Increased inflation increases pressure to raise prices while the uncertainties in the global economy and the operating environment negatively affect consumers’ purchasing power and behavior. Digitization in retail trade has gathered pace in the past few years and has accelerated further as a result of the coronavirus pandemic, which can have an impact on the company’s distribution channel solutions and choices, sales and profitability, as well as create new revenue generation models. The importance of omnichannel business in the retail trade has been emphasized. International e-commerce has increased the options available to consumers and the significance of big e-commerce operators. The coronavirus pandemic has also intensified the financial difficulties of many traditional wholesale customers in the fashion sector, such as department stores and multi-brand retailers, which may have an impact on Marimekko’s business and distribution channel choices. Maintaining competitiveness in a rapidly changing operating environment being revolutionized by digitization demands agility, efficiency, flexibility 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. In addition, Russia’s war against Ukraine and various political tensions affect consumers’ purchasing behavior, supply or logistics chains and operating possibilities in certain countries.
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. In addition, the company expands its distribution through physical and digital wholesale channels appropriate for the Marimekko brand. The Asia-Pacific region is Marimekko’s second-biggest market, and especially Asia plays an important role in the company’s international growth. Major partnership choices, partnering contracts and other collaboration agreements involve considerable risks. Store lease agreements in Finland and abroad also contain risks. With the company’s internationalization and the growing interest in its brand, risks related to gray exports have increased, which may have an impact on the company’s sales and profitability. Internationalization also increases the applicable regulation for company’s operations in different markets.
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 grows and internationalizes, the risks related to intellectual property rights, in particular to its most renowned prints, may increase.
Prominent among the company’s operational risks are those related to internationalization, digitization, sustainability as well as the supply and logistics chain. As Marimekko is a small company, risks related to securing the necessary talent for international growth as well as risks related to key personnel can also be significant. The coronavirus pandemic has increased operational risks related especially to taking care of the health and safety of customers and employees, securing sufficient workforce in cases of sickness caused by the pandemic, risks related to production, supply and logistics chain reliability and efficiency, inventory and product flow management as well as cybersecurity and information system reliability. The pandemic situation and related restrictions for example in China cause supply chain disruptions, resulting in delivery delays. Delays like these can, through the availability of products, impact net sales and profitability. Early commitment to product orders from subcontractors, which is typical of the industry and has been further accentuated in the pandemic situation, weakens the company’s possibilities to optimize product orders and respond to rapid changes in demand especially in exceptional situations as well as increases risks related to inventory.
There are risks associated with information system reliability, dependability and compatibility. With digitization, internationalization and Russia’s war against Ukraine, cybercrime and cyber attacks as well as various other 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 production, procurement and logistics processes and their flexibility and efficiency, price fluctuations for raw materials and procurements as well as the availability and price of logistics. The pandemic situation and related restrictions, such as those in China, and the war against Ukraine cause even significant disruptions in production and logistics chains which may negatively impact company’s sales and profitability. In addition, it is of utmost importance to safeguard the operational reliability of the company’s own printing factory in all circumstances. The overall increased prices of raw materials and other factors of production as well as for logistics also impact Marimekko. The price of Marimekko’s single most important raw material, cotton, has in 2022 been at historically high levels. Early commitment to product orders from subcontractors, which is typical of the industry, means that changes in material costs affect the company with a delay. Marimekko is actively working on mitigating the negative effects of disruptions in production and logistics chains and increased costs. As product distribution is expanded and operations are diversified, risks associated with inventory management also grow. Substantial nonrecurring promotions can also increase risks related to procurement, transport and inventory management, especially in exceptional circumstances. Any delays or disturbances in supply, or fluctuations in the quality of products, may have a harmful impact on business, also on substantial nonrecurring promotions.
Enhancing sustainability is increasingly important for competitiveness in the industry, which can have an impact on the company’s sales and profitability, as versatile investments are required for the enhancement. 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 as well as raw materials and chemicals used) as well as transparent communications on these subjects are of growing significance to customers. These sustainability elements apply to Marimekko’s own production and sourcing as well as licensed products. Compliance with sustainable business methods and legislation is important in maintaining customers’ confidence; any failures or errors in this area will involve reputation risks and risks for financial liability. Business and reputation risks and potential claims for damages are prevented by taking care of product safety as well as through continuous quality control and sustainability work.
Climate change is expected to bring an increase in various extreme phenomena such as floods, forest and bush fires, 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 or hamper the logistics chains. 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), taxation, and customers’ liquidity as well as increased interest rates may have an impact on the company’s financial status. The US dollar has strengthened significantly, which affects company’s dollar-denominated items.