Written by Etienne Borg Cardona, 17 June 2013
Two unrelated pieces of news caught my eye in recent weeks.
Every May, winegrowers in the Bordeaux wine region release their “en primeur” pricing for wine futures – an opportunity to purchase a 2012 vintage which will only be released on the market in 2014.
This year’s price levels have been drastically down on the previous year, up to 30% lower in some notable cases, and predictably the higher priced first growth brands have taken some of the biggest hits.
Various factors have been quoted to have played a part in this slump – one major factor has been a preference shift by buyers to lower priced less well known houses in the face of the continued squeeze on disposable income. In particular, the Chinese market which created a succession of boom years of late has contracted sharply, with official restrictions on government hospitality and consumers opting for red wines from lower priced regions high on the list of reasons why orders for the pricier wines have dropped sharply.
Another announcement making waves in recent weeks was the havoc wreaked by the exponential growth in the tablets market at the expense of traditional PCs, with the PC vendors such as HP and Dell reporting terrible quarters in their hardware segments, as they scramble to address rapidly changing customer preferences.
In both cases, these are not results that can be waved away by economic slowdown or a poor quarter. The dramatic revenue drops point to a deeper underlying landscape shift, and the outlook does not augur a change of fortunes any time soon. If the winegrowers in Bordeaux can take some consolation that prices have been artificially inflated in recent years and this is a return to sanity, PC hardware vendors have seen their business fall off the cliff after years of savage restructuring.
Few businesses can shrug off a 30% year on year decrease in revenue without drastic ill-effects, and an impact of this magnitude can present even the best run business with serious difficulties.
Faced with the possibility, however remote, of such a dramatic negative downturn of this nature, boards would do well to make themselves aware of the impact of an unexpected drastic drop in revenues brought about by an extraneous event or circumstance, as part of their risk management appraisal.
What are the questions directors should be asking?
Quite simply, we should be seriously addressing some good old business fundamentals in order to make a risk assessment of this nature:-
Is the business overly dependant on one brand, product or service line? If so, what measures if any can be taken to diversify or mitigate this dependence?
Or is the business highly dependant on a single or small number of customers – can measures be taken to reduce this risk exposure?
Does a critical business line within the company remain overly dependant on a key member of staff. If so what measures have been taken in terms of formal knowledge transfer programs to address this situation?
Is the business unduly exposed to changing technology, customer preferences, fashion swings or disruptive technology?
And of course – is somebody inside the organisation responsible for focussing at the ever changing business landscape and asking the right questions about how the business can be impacted?
Boards would do well to require proper continuous assessment of these risks and, to the extent that this is possible, mitigate against them.