Company Registration No. 01333367 (England and Wales) TRAIDCRAFT PLC REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2018 TRAIDCRAFT PLC COMPANY INFORMATION Directors R Gidoomal J Borden M Edmundson S Hughes C Moorhouse D Neale R Roth A Biggs Secretary A Biggs Company number 01333367 Registered office Kingsway Gateshead NE11 0NE Auditor UNW LLP Citygate StC James' Blvd Newcastle upon Tyne NE1 4JE TRAIDCRAFT PLC STRATEGIC REPORT FOR THE YEAR ENDED 31 MARCH 2018 The directors present the strategic report and financial statements for the year ended 31 March 2018. STRATEGIC MANAGEMENT Traidcraft works through three closely-linked entities, sharing the same values and mission. Senior management and certain other staff roles work across Traidcraft plc and the charity The Traidcraft Exchange (Registered Charity No. 1048752). The two organisations have the same non-executive directors/trustees. However, the organisations are financially independent and these financial statements only reflect the trading entity, Traidcraft plc. Both these operational arms work within the oversight and guidance of The Traidcraft Foundation. A broader summary of the entire work of Traidcraft is available on our website traidcraft.co.uk. This includes the broader environmental, social, employee and producer impact dimensions of activity. Business Model The business model of Traidcraft plc is designed to have a positive impact upon poverty. Traidcraft plc is one of the oldest dedicated fair trade companies in the UK. It is a trading company, owned by around 5,000 individual shareholders who have invested their capital to deliver social impact rather than to maximise their financial return. Unlike most commercial companies that sell Fairtrade-marked products, Traidcraft plc is dedicated to applying fair trade principles across its product range and focuses on sourcing from more marginalised and smaller-scale producer groups. It is notable for its track record in pioneering new approaches and sectors in fair trade. The company’s Articles of Association require it to “put fair trade principles into commercial practice”. The company sources a wide range of grocery products (including foods, beverages and household cleaning products) as well as crafts and clothing products. These come from fair trade suppliers in more than 30 countries. Traidcraft also sells a range of UK-sourced greetings cards and recycled tissue products. Many of our products are sold through activists, known as Fair Traders, who operate in churches, schools and other locations around the UK. We also sell through small retailers, to online / mail order customers, and to wholesale distributors. Sales into supermarkets are largely handled in collaboration with licence partners who handle the manufacture and distribution of certain Traidcraft-branded products, whilst Traidcraft sources the ingredients and is responsible for branding and messaging. As the most visible part of Traidcraft in the UK, our trading activities help us to find new supporters, mobilising them behind the cause of justice for those afflicted by poverty. Our identity as a public limited company allows us to model more ethical ways of doing business and gives us credibility when challenging corporate practices and engaging in international development work through the separate charity The Traidcraft Exchange. Our customer / supporter base represents a valuable intangible asset, in terms of loyalty for future purchases and in donating to and campaigning alongside Traidcraft Exchange. BUSINESS ENVIRONMENT Trends and factors Traidcraft’s historic success as a leading part of the fair trade movement has led to a mainstream availability of products labelled as “Fairtrade”, as well as a number of other ethical labels, brands and certification systems being in general use. Whilst this trend is welcomed because of the impact it has upon poverty, Traidcraft has found it increasingly difficult to differentiate itself from mainstream retailers and larger food companies. Traidcraft has a seasonal business, especially so for handicrafts and therefore the trading weeks up to Christmas are crucial for the whole year’s result. Consumer trends such as “Black Friday” and the ease of online shopping and easy home delivery have meant that the Christmas shopping season has been getting later each year and companies have shifted away from traditional retail sales models of high street shop and personal reselling. Whether they have physical outlets or not, retail organisations without an effective online sales strategy incorporating mobile devices, are arguably less likely to succeed. The aftermath of the June 2016 Brexit referendum on economic uncertainty, consumer 1 TRAIDCRAFT PLC STRATEGIC REPORT FOR THE YEAR ENDED 31 MARCH 2018 confidence and exchange rates has led to rising import costs and a more difficult trading environment which has continued throughout the current year. Traidcraft’s activist / reseller network is an asset, but average age of faithful volunteers who are long term supporters of Traidcraft is increasing. For this channel to remain at the scale it is, Traidcraft must reach and activate younger volunteers and customers. However, the overall maturity and scale of fair trade sales, together with growth of ethical and organic products demonstrates that a market exists for products with trustworthy credentials which have broad impact goals. Traidcraft’s challenge is to find and prove a prosperous and sustainable business model in that marketplace. Only then can it move beyond existing producer partnerships to pioneer new supply chains that offer long-term solutions for those afflicted by poverty. Principal risks and uncertainties The principal short-term risks primarily relate to declining sales trends in the face of retail competition and maintaining adequate cash resources. The risks to cash flow are somewhat mitigated because Traidcraft principally operates out of a long leasehold building in Gateshead. Because this asset is in use, its market value has not been recognised in these financial statements, but it was valued in March 2017 at £910,000. This building represents security against short term loan facilities and ownership means that there is no net premises rental cost to be covered by trading activities. Ongoing cash commitments to the closed defined benefit pension scheme increase the company’s operational risk. The accounting valuation shows the scheme to have been in surplus at both at 31 March 2018 and the prior year. However the valuation basis adopted by the pension scheme trustees at the last triennial valuation in March 2016 indicates a deficit of £679,000 which is attributed to the company. To maintain the employer covenant to cover a deficit the company had been making payments at a rate of £173,800 per annum and has funded the administration costs of the scheme. During the year the company agreed a revised recovery plan with the pension trustees to reduce these contributions by the amount of the direct administration costs of the scheme. As a result, the net contribution to the scheme in the year to March 2018 was £140,641. The existence and scale of any deficit is sensitive to the assumptions used and the company’s future cash commitments increase the risk to the business of having inadequate working capital. Developing world purchases are rarely made in Pounds sterling. Therefore, exchange risk has to be managed on the USD 1.8 million and EUR 0.2 million of foreign currency denominated purchases. This is hedged through taking out forward exchange purchase contracts to cover between twelve and eighteen months of future purchases. Aside from price changes caused by exchange rates, underlying price risk for input costs is considered to be relatively low. The fair trade system ensures a lower risk to producers when market prices fall below sustainable production costs and this correspondingly reduces the variability of food commodity prices that the company pays. Additionally, transportation, conversion and packaging costs form a significant part of the cost of many of the company’s products and these are subject to a broader range of drivers and competitive pressures. All these factors reduce much of the input cost drivers to general inflationary pressures. The company also operates in relatively mature consumer retail markets and so sales price risk is stable and low, with clear benchmarks for food products being led by the grocery retail sector. The company sells to businesses and a majority of its individual resellers on credit terms. Credit risk is deemed to be relatively low, with the majority of these customers operating on ethical principles, either by business mission or through links with churches. Bad debts have been insignificant historically and there is only material exposure to one company, Oxfam Trading UK. Traidcraft’s public credit rating is at an acceptable level and it does not anticipate a change to its historical ability to secure normal trade credit terms from it suppliers, once a relationship is established. In response to the trends identified above, Traidcraft has begun to refocus its commercial operations. There would be a future risk to the organisation’s viability if it were not able to keep Traidcraft’s commercial business model aligned with trends in consumer behaviour (online versus physical retail trends) and in maintaining and developing the product assortment that meets both UK consumer preferences and producer impact criteria. Because the net cash position