Trading Environment

The performance of our business will be impacted if we fail to meet customer expectations or respond to the continued pressures of a changing retail environment.

Aggressive competition, cost pressures and the consumer impact of the UK's departure from the European Union all contribute to the challenge that is faced.

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Our Clothing & Home business must respond to the continued shift in customer preferences towards online and mobile shopping. Consequently, our strategy is focused on the creation of a seamless, relevant customer experience and the need to be 'digital first'. We must also continue to strengthen capability across all areas of our Clothing & Home business to ensure we deliver contemporary, wearable style and wardrobe essentials that our customers want.

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Food consumers continue to be driven by value and we need to ensure our product ranges resonate and are available at the right price. While we have limited influence over a number of contributory factors, for example raw material prices and the impact of Brexit, we recognise the need to manage costs, driving efficiencies and delivering savings in areas such as packaging and waste.

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This new risk is a consolidation of a number of risks, which were disclosed separately in the prior year, to better reflect the increasingly challenging conditions facing our business.

Business Transformation

As we build a platform for change, the successful delivery of our business transformation programme is critical - a failure to execute faultlessly and at pace will hinder progression.

Our business is undertaking a number of transformation projects; many of these are significant in their own right but the level of interdependency also requires careful alignment. Transforming our business will generate cost savings but also underpins the delivery of our strategic objectives.

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-������ The reshaping of our UK store estate continues at an accelerated pace. We need to ensure that the programme delivers against agreed targets and that we incorporate changes in customer preferences into decision making on a timely basis.

-������ We must deliver on our digital first ambitions - improving customer experience, reducing costs and working smarter across the business.

-������ Our supply chain must be fit for purpose. It is currently slow, outdated and expensive, and must be improved.

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This new risk is an expansion of the prior year's specific risk around our store estate programme and now incorporates a far broader range of transformational projects.

Food Safety and Integrity

A food safety or integrity related incident occurs or is not effectively managed.

Food safety and integrity remains vital for our business. We need to manage the potential risk to customer health and confidence that faces all food retailers, while also considering how external pressures facing the food industry could influence the integrity of our food, our reputation and shareholder value.

Many of these pressures, including inflationary costs, labour quality and availability, increased regulatory scrutiny and the as yet unknown impact of Brexit are outside of our control.

We also recognise the criticality of internal influences including the level of change underway in our Food business and the significant levels of new product development.

This all places greater demand on the technical team and suppliers to complete required raw material testing and product safety checks to guarantee provenance, safety and integrity.

Corporate Compliance and Responsibility

Failure to deliver against our regulatory obligations, social commitments or stakeholder expectations undermines our reputation as a responsible retailer.

Responsible corporate behaviour is a basic expectation of all businesses, especially those that are consumer facing. Public sentiment can shift rapidly, especially as the traditional influencers of public perception evolve and issues can escalate rapidly through social media.

There are also many examples of where 'good' corporate behaviour has, over time, become a legal or regulatory requirement. Human Rights, Modern Slavery, Anti-Bribery and Data Protection are just a few examples impacting our business.

The mandatory nature of an increasingly broad and stringent legal and regulatory framework creates pressure on both business performance and market reaction. While our business operates appropriate controls, we recognise that potential noncompliance is a risk for all businesses and that there can be no room for complacency.

Given the high level of trust we have with customers and stakeholders, coupled with our high media profile, we must get this right.

Information Security (including Cyber)

Failure to adequately prevent or respond to a data breach resulting in business disruption, brand damage or loss of information for our customers, stakeholders or our business.

The increasing sophistication of potential cyber-attacks, coupled with the General Data Protection Regulation, highlight the escalating information security risk facing all businesses. Our reliance on a number of third-parties to host and hold data also means the risk profile of our information security is changeable.

We recognise the importance of ongoing education and vigilance within M&S to reduce the likelihood of attack or breach in (i) an internal environment that is undergoing significant transformation and (ii) an external environment that is changing at pace. We must ensure that our control environment evolves and that our systems operate effectively. A data protection breach would not only impact our reputation, but would also cause business disruption and could result in a significant fine.

Technology

To support future profitable growth, we need to keep pace and develop our technology and innovation capability. The digital world continues to evolve at an unprecedented rate, influencing consumer behaviours and setting a high bar  in terms of IT infrastructure requirements.

We have clearly communicated our aim to be digital first, and recognise the need to invest to achieve this.

Our existing IT infrastructure needs to be more flexible to lower costs, leverage developments and enable us to move with pace to meet customer and colleague needs.

In addition to developing our technology, we must develop the skills and capabilities of our people. This will be critical to providing a top quartile, seamless customer experience.

Talent and Capability

We need to attract, develop, motivate and retain the right individuals to achieve our operational and strategic objectives to transform the culture and the business.

As we transform our business, the calibre of our people is integral to delivering operational and strategic objectives, and is especially important in our drive to be Digital First.

Attracting, developing and retaining quality individuals is influenced by many factors, a number of which are outside of our control. Growing market labour shortages, which may be further compounded by Brexit, and the perceived fragility of UK retail could influence our ability to attract external talent.

However, our focus cannot solely be outwards looking - our existing workforce is one of our greatest assets. We need to ensure that our colleagues and culture are developed to drive a Digital First and customer centric mindset, colleagues need to feel empowered to drive change at pace.

Brand and Customer Experience

Our brand and underpinning customer experience need to evolve with consumer lifestyles and attitudes for us to remain relevant and successfully attract and retain customers. Consumer lifestyles and attitudes continue to evolve at pace in an increasingly diversified and competitive retail environment.

We are proud of our strong brand recognition, but external pressures make it more difficult for all businesses to drive brand relevance and attract and retain customers, failure to do so creates the very real risk of a decline in market share. We must attract and retain our core customer segments.

Our intention to be a customer-centric, digital first business has been clearly communicated. We need to ensure that our organisational design and operating model support this aim and that we put the customer at the forefront of all our decision making. Our Sparks loyalty programme, marketing strategies and cross functional ways of working will be key enablers in achieving this, supported by meaningful measurement of customer experience.

Third Party Management

To drive value for our business we need to successfully manage and leverage our third-party relationships and partners.

Our business is increasingly engaged in significant third-party partnerships. These span our full operating model, from products and services to franchise management and our international joint venture.

To fully leverage these relationships, we need to have clear, consistently applied processes to track performance, ensuring commercial expectations are delivered. We also recognise the importance of managing the business interruption risk conferred by such dependencies, and of maintaining appropriate contingency plans in response.

We cannot lose sight of the expertise and eff ort that is required to effectively manage third-parties, especially as we move through our transformation programme.