Risks as described in the Half-year Financial Report 1–6/2023, 17 August 2023:
Marimekko’s business exposes the company to various risks. The risks and uncertainties presented below have the potential to substantially weaken Marimekko’s business conditions, sales, financial performance and position. Marimekko’s risk management practices are described in the Corporate Governance Statement.
The economic and political operating environment
The uncertainties related to the general development of the global economy, such as the risk of an economic recession, and geopolitical tensions influence consumer confidence, purchasing power and behavior in all of Marimekko’s market areas. Declining consumer confidence and purchasing power may have a significant unfavorable impact on Marimekko’s sales and profitability. This risk is emphasized in Finland and Japan, which are the company’s biggest single countries for business.
Geopolitical tensions can also affect Marimekko’s production and logistics chains and operating possibilities in certain countries. Geopolitical tensions may lead to military action, trade disputes, economic sanctions as well as export and import restrictions that can affect the reliability and efficiency of the company’s value chain. Russia’s war against Ukraine has not directly affected Marimekko’s business, but the war continues to cause disruptions in global supply chains and contributes to the development of the global economy and the purchasing power and behavior of consumers.
Sudden market movements, development of inflation, changes in the price development of production factors, in exchange rates (particularly the US dollar) and in the company’s taxation, as well as rising interest rates may affect Marimekko’s financial position.
The coronavirus pandemic has been the worst crisis experienced by the global fashion industry and specialty retail sector in decades, and its economic and societal consequences may continue to slow the recovery of the global economy and affect the demand for Marimekko’s products, employee health as well as the reliability and efficiency of the company’s value chain. Possible new pandemic or epidemic situations and related restrictions may have a negative impact on Marimekko’s sales, profitability and cash flow as well as the reliability and efficiency of the company’s production and logistics chain.
Marimekko is also exposed to labor market disputes. Strikes and other labor market disturbances may have a negative impact on the company’s business.
Marimekko continuously monitors the development of the economic and political operating environment, takes various scenarios into account in the management of the company’s business, and adapts its operations as necessary.
The retail environment, customers and partners
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.
The importance of omnichannel business in the retail trade has been emphasized over the past few years. International e-commerce has increased the options available to consumers and the significance of big e-commerce operators. The pandemic has accelerated the digitization of retail and intensified the financial difficulties of some traditional wholesale customers in the fashion sector, such as department stores and multi-brand retailers. Structural changes in the retail environment may have an impact on Marimekko’s distribution channel decisions, the prioritization of different distribution channels, sales and profitability. The structural changes can also lead to the creation of new revenue models. Risks related to the sales structure may have an impact on the company’s financial position. Maintaining competitiveness in a rapidly changing operating environment being revolutionized by digitization demands agility, efficiency, flexibility and constant re-evaluation of operations from the company.
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 may increase, which may have an impact on the company’s sales and profitability. In addition, risks related to changes in the company’s cost structure as well as the liquidity of customers and partners may have an impact on the company’s financial position.
Other significant risks include risks related to changes in the company’s design, product assortment and product distribution and pricing. Increased inflation creates pressure to raise prices while the uncertainties in the global economy and the operating environment negatively affect consumers’ purchasing power and behavior. 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 has an impact on the company’s sales and profitability.
Supply chain
The risks related to Marimekko’s supply chain are associated especially with production, procurement and logistics processes and their reliability, flexibility and efficiency, price fluctuations of raw materials and other production factors as well as the availability and price of logistics. Russia’s war against Ukraine and possible epidemic or pandemic situations, among other things, may cause even significant disruptions in production and logistics chains, which may have a negative impact on the company’s sales, profitability and cash flow. It is of utmost importance to safeguard the operational reliability of the company’s own printing factory in all circumstances.
Higher costs of raw materials, energy and other production factors may affect Marimekko’s sales and profitability. Early commitment to product orders from supplier partners, which is typical of the industry, means that changes in costs affect the company with a delay. These early commitments have been further emphasized by the exceptional situation, undermining the company’s ability to optimize product orders and respond to rapid changes in demand and consumer behavior, which also increases risks related to inventory management.
In addition to supply chain disruptions and even earlier commitment to product orders, risks related to inventory and product flow management increase as product distribution is expanded and operations are diversified, which may have a weakening impact on the company’s cash flow as well as on relative profitability. Substantial non-recurring wholesale promotions can 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 including also on substantial non-recurring wholesale promotions. The risk of supply chain disruptions is also increased by cyber threats, possible epidemic- or pandemic-related shutdowns, geopolitical tensions and other uncertainties related to the global economy. Marimekko works actively to mitigate the negative impacts of disruptions in production and logistics chains and increased costs, and to enhance inventory management.
Sustainability
Enhancing sustainability is increasingly important for competitiveness in Marimekko’s industry, which can have an impact on the company’s sales and profitability, as versatile investments are required for the enhancement. Risks and opportunities with regard to Marimekko’s sustainability work and targets include, for example, changes in consumer behavior and in the company’s product portfolio weightings, continuously evolving best practices in the industry as well as increasing regulation that may affect for example, the company’s products and value chain. The company’s ability to anticipate changes, react to them and develop more sustainable products and ways of working plays a key role in the company’s competitiveness. Compliance with responsible business practices and legislation is also important in maintaining the trust of customers and other stakeholders; any failures or errors in this area will involve reputation, financial liability and business risks.
Marimekko primarily uses supplier partners to manufacture its products. Global supply chains in the fashion and design business are complex, which makes it challenging for companies to ensure the sustainability of the entire value chain despite active sustainability work. Of the sustainability elements of manufacturing, especially social aspects related to the supply chain (e.g. human rights, working conditions and remuneration) and environmental aspects (e.g. production methods and raw materials and chemicals used) as well as transparent communications on these issues in compliance with continuously increasing legislation is of growing significance to customers. These sustainability topics apply to Marimekko’s sourcing and own production as well as licensed products.
The environment and climate change
Climate change increases the likelihood of extreme weather phenomena and natural disasters, such as floods, forest and bush fires and storms. Extreme weather phenomena and natural disasters pose a risk to the operational reliability and efficiency of Marimekko’s value chain. Climate change-related heatwaves, drought, water shortages, soil depletion and other changes may, in turn, affect the availability and price of the raw materials used in Marimekko’s products, such as cotton. Extreme weather phenomena and natural disasters may also affect the availability of products if they cause damage to the company’s partner suppliers’ factories or hamper the logistics chains. In addition, Marimekko has stores and offices in areas where extreme weather phenomena or natural disasters may occur, and if they damage stores or offices or cause momentary changes in consumer behavior, it may result in lost sales as well as expenses.
Risks related to climate change are managed by, for example, increasing the share of materials with lower emission intensity and water consumption in Marimekko’s collections, exploring new more sustainable material and production method innovations, as well as diversifying the company’s operations in general.
Compliance
Compliance with applicable legislation, regulations and responsible business practices, as well as product safety and quality, are essential for Marimekko. Potential allegations, failures or mistakes can lead to, for example, reputation and business risks for the company, fines, claims for damages, or criminal charges. Internationalization increases the regulations applicable to the company’s operations and elevates the risk of potential allegations, failures and mistakes. Risks are prevented by focusing on sustainability and compliance work as well as by ensuring product safety and continuous quality control.
Intellectual property rights
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 company’s business, value and reputation. 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.
Information security risks
There are risks associated with information system reliability, dependability and compatibility. With digitization, internationalization and Russia’s war, 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. Personal data breaches can lead to claims for damages, fines and reputation risks.
Personnel and competence
Potential new serious coronavirus infection waves or new epidemics or pandemics may increase risks related to taking care of the health and safety of employees and securing sufficient workforce in cases of sickness.
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 be significant. Marimekko’s competence development efforts include focusing on training for the management and supervisors, succession planning and performance management. These measures support a performance-oriented, diverse and inclusive culture.