Strategic risk
The risks related to changes in consumer preferences come mainly from two areas:
- substituting decorative paints with other products such as wallpapers, slats and other wall coverings,
- the evolution of consumer trends and the failure to adapt the Group’s product offering to new market expectations.
As for the substitution risk, the Group has been observing this phenomenon for years, which is insignificant on the markets in which it operates. The low risk of the above is mainly due to the following three factors:
- The use of substitutes by consumers is connected with incurring higher investment costs to change the interior appearance. Substitutes are more likely to be used by interior designers and decorators who work with more affluent clients. Paints are still the cheapest and most common way to change the interior design.
- The use of substitutes often requires to hire a specialist to apply or install them, or the end user must have appropriate renovation skills to do it by themselves. This also involves a longer time and higher costs necessary to carry out the investment. Paints are still the easiest way to change your interior design on your own.
- The use of substitutes often entails a complete change in the interior character – it determines the decorative style of the remaining elements. Paints in this area remain less invasive and provide a wider possibility of adapting to already existing interior elements (lighting, furniture, flooring, etc.). In this way, the proportion of necessary expenditure to final effects remains definitely in favour of decorative paints.
In the Group’s opinion, the substitution phenomenon will remain a permanent feature of the market, yet the scale and risk associated with it remain low.
In the context of the risk of changing consumer trends, the Group assesses this phenomenon as more dynamic, but at the same time relatively easy to monitor. Changes in consumer megatrends affect virtually all industries and product categories, and therefore there are numerous studies and sources of knowledge on this subject. From the Group’s perspective, the key dimensions on which consumer trends evolve focus on areas related to:
- greater sensitivity of consumers to the health of their families and ecology,
- design, i.e. in the case of the Group, the colour collections on offer,
- features and attributes of products such as: product quality, functional and application properties, etc.
Due to the on-going monitoring of consumer needs and preferences and the Group’s operational capabilities, the area of changing consumer trends is perceived by the Group as an opportunity to build a competitive advantage rather than as a risk. By adapting to changing trends more quickly and more agilely, the Group is able to accommodate to new conditions on local markets faster than its direct competitors.
Competition-related risk involves an incorrect assessment of changes in the Group’s competitive environment – consolidation processes or new entrants, which may lead to a loss of share in the markets in which the Group operates.
Individual companies comprising the Group operate in a highly competitive environment. The following competitors have been operating on Śnieżka’s key markets for a long time:
- large international corporations;
- local entities.
Relatively high crossbars to enter onto the market mean that to start up a new business in the industry would require large capital expenditure. The most likely scenario for the emergence of a new player on the market or significant changes in the balance of power may be an acquisition. According to the information held by the Group, in 2024 no merger or acquisition transaction occurred in the key markets of the Group’s operations which would significantly affect the market share structure.
A constant element of the Group’s operations is monitoring of the activities of other entities in all key markets. Mitigating the risk associated with competition activities is achieved through appropriately planned investments and marketing and sales activities aimed at supporting the building of shares and brand recognition as well as the sale of the Group’s products.
Risks related to technological changes include:
- the risk of necessity to change the product formula, which may result from, inter alia, the unavailability or lack of efficiency of production raw materials, the need to change product parameters in response to changing customer preferences and amending legal requirements regarding the composition of products and their impact on the environment.
The consequence of materialization of the above risk to change the product formula may be the lack of production capacity or ineffective production of specific products, the production of non-competitive products – which do not live up tp consumer expectations, or the lack of possibility of production and sale of products which do not comply with legal standards.
The Group manages this risk by continuously improving the quality of its products and actively searching for substitutes for raw materials. The Group has its own Research and Development Centre (R&D) whose goal is to develop recipes and implement new products and technological solutions, which contribute to high quality of manufactured products and their safety for customers and the environment.
- the risk of loss of efficiency of production processes and technologies, which may materialize as a result of lack of investment (technological debt) and changes in production processes
The consequence of the loss of efficiency of production processes may be higher unit production costs and, consequently, lower profitability. The Group manages the risk of loss of efficiency of production processes by continuously monitoring the efficiency, profitability and production dynamics, monitoring cost effectiveness and technological progress in the industry.
In order to prevent the occurrence of so-called technological debt and, as a result, the loss of efficiency of production processes, the Group has for years been following an adopted investment policy according to which the level of capital expenditure (CAPEX) is balanced by the level of depreciation.