3.1 Risk factors

3.1.1 RISKS ASSOCIATED WITH THE GROUP’S BUSINESS ACTIVITY

3.1.1.1 PANDEMIC (COVID-19)

The Covid-19 epidemic which first emerged in China at the beginning of 2020 and quickly spread across the globe had far-reaching impacts on the Group’s business activities, albeit variable from one business to the next.
Like the transport and tourist industry as a whole, Lagardère Travel Retail was particularly hard hit by the slump in global air traffic (down almost 60% worldwide). Over the year as a whole, revenue was approximately 60% lower than in 2019, and the Group reported an operating loss of around €353 million versus operating profit of €152 million in 2019. Business recovery depends on the extent to which the pandemic is under control, the removal of travel and mobility restrictions (such as during quarantine periods), the reopening of airlines and patterns of passenger flows and consumption at airports. The development and roll-out of vaccines across the globe should help spur and potentially accelerate this recovery. In contrast, any events that prolong or worsen the pandemic such as Covid-19 variants (e.g., as found in the United Kingdom), poor organisation and management by local governments (e.g., in the United States and Brazil), and vaccine scepticism among the population (e.g., in France), could postpone any recovery in Lagardère Travel Retail’s business, particularly if these events affect the countries in which it operates.
Lagardère Publishing was also affected by the pandemic, but its business model proved extremely resilient, thanks mainly to a solid performance from General Literature. As a result, its revenue for 2020 was down just 0.8% year on year, while its operating profit rose 12% on the 2019 figure. The impact of the pandemic varied depending on the region and the characteristics of the local market.
In France, revenue for the division contracted owing to the closure of points of sale in the wake of lockdown measures, only to rebound sharply in June (up 21% year on year) and December (up 45% year on year). In English-speaking countries, where e-books are better established, revenue for 2020 climbed 9.9% in the United Kingdom and 3.9% in the United States. Lagardère Publishing’s exposure to any prolongation or worsening of the pandemic appears moderate.
In Spain/Latin America and for Partworks, revenue fell by 16.4% and 9.5%, respectively.
The Group’s Other Activities, which represented 5% of revenue in 2020, were also hard hit by the Covid-19 pandemic, with revenue down 20.5%.
Besides directly affecting its business activities, Covid-19 indirectly impacted the Group, as described later in this chapter. The associated risks relate to changes in consumer behaviour, the Group’s financing and counterparty solvency.
Despite the aforementioned vaccine development, as of the date of this Universal Registration Document, it is too early to precisely determine how the pandemic will evolve and what its impacts on the Group’s businesses will be. The Group will provide up-to-date reports of these impacts in press releases available on www.lagardere.fr.
In light of the above, the Lagardère group considers this risk to be high overall in terms of its financial impacts on its business activities, with the exception of Lagardère Publishing, for which the risk is moderate.

3.1.1.2 RISKS ASSOCIATED WITH MAJOR CONTRACTS

Some contracts in the form of concession agreements managed by Lagardère Travel Retail provide for the payment of guaranteed minimum amounts to the concession grantor. This can entail financial commitments for the Group representing several hundred millions of euros over a number of years.
The profitability of these contracts may prove lower than that expected by Lagardère Travel Retail over the long term, for example if passenger traffic or spend per passenger are lower than forecast at the time the concession was awarded, meaning that the Group is unable to satisfactorily fund the guaranteed minimum amounts due to the concession grantor.
When these concession agreements expire, they are mostly put up for tender by the concession grantor, and there is no guarantee that Lagardère will be awarded the contract again. Several adverse situations may arise, for example the Group may lose the tender to a competitor, or the concession grantor may split the contract into several distinct parts, leading to a reduction in the share of the concession awarded.
The Travel Retail segment represented around 39% of Group revenue in 2020 (compared to 59% in 2019, this decrease resulting from the sharp downturn in the wake of the Covid-19 crisis).
The risks described here also concern, on a smaller scale, certain contracts that Lagardère Publishing has entered into with authors and rights holders, or for the distribution of third-party publishers.
In light of the above, the Lagardère group considers this risk to be high overall and therefore regularly reviews the value of its contracts reported in its financial statements, in accordance with applicable accounting standards.

3.1.1.3 IMPACT OF CHANGING CONSUMPTION PATTERNS ON THE GROUP’S BUSINESS MODELS

The Group is faced with changes in its customers’ consumption habits as digital and mobile technologies develop, and this also has a significant effect on its commercial positions.
New ways of purchasing and distributing books (paper, e-book, audio book), bypassing traditional bookstore networks, have led to a concentration in the book distribution industry. This situation affects the profitability of traditional book sales networks, which could result in the decline of these networks and therefore in lower sales for the Group.
In parallel with greater industry concentration, publishers’ margins are also coming under increasing pressure, and can only be protected through regular negotiations by Lagardère Publishing teams with the distributors concerned.
Trends in the education market are sensitive to the pace and scale of curriculum reform, as well as the gradual transfer of content to digital formats. A reduction in the pace of curriculum reform or in State education budgets, especially in France and Spain, could reduce Lagardère Publishing’s profitability in this segment, which represented around 7.5% of Group revenue in 2020.
For Lagardère Travel Retail, online products facilitate price comparisons and the emergence of new commercial offerings outside airports. By intensifying competition, this could adversely impact the Duty Free and Travel Essentials businesses, which represented approximately 30% of Group revenue in 2020.
Significant changes in the consumption habits of certain large customer categories, linked to a change in their travel destinations or to a decline in their purchasing power (e.g., adverse exchange rate fluctuations), could lead to a loss of revenue for Lagardère Travel Retail at certain airports.
Lagardère Travel Retail’s business more generally is extremely sensitive to all events affecting regional or global air traffic. Its revenue could also be impacted by an economic crisis that affects leisure or business travel. As described above, the Covid-19 pandemic prompted a slump in passenger traffic in 2020. Besides its economic impact on business, Covid-19 may also cause a prolonged reduction in business travel, as companies develop new ways of remote working and look to cut their overhead expenses.
For the media assets retained by the Group, which represented around 4.6% of consolidated revenue in 2020, digital media exercise strong competitive pressure on print media, impacting both sales and advertising revenue. Across the French market, for example, paid circulation decreased by 1.5% in 2020, while the written press advertising market declined by 24.4% over the first nine months of the year, and the radio business recorded a 12.6% fall. The profitability of media businesses also depends on maintaining a wide audience. The rally in audience numbers for the Europe 1 radio station is important for the Group, since the station’s revenues are directly related to its audience figures.
In light of the above, the Lagardère group considers this risk to be high overall.

3.1.1.4 RISKS ASSOCIATED WITH STRATEGY IMPLEMENTATION

The Group’s strategy evolved in 2018 to focus on two major business divisions, Lagardère Publishing and Lagardère Travel Retail, while retaining certain media businesses. The Group’s plannedfor disposals of its Lagardère Active and Lagardère Sports and Entertainment divisions were completed in 2020.
To meet its strategic goals, the Group also regularly carries out acquisitions and enters into partnerships in its Publishing and Travel Retail businesses. Two major acquisitions were carried out in recent years in Travel Retail: Hojeij Branded Foods (HBF), acquired for USD 330 million in 2018, and International Duty Free (IDF), acquired for €250 million in 2019.
The success of these acquisitions and disposals depends on the Group’s ability to identify attractive opportunities, effectively negotiate and smoothly integrate any new businesses into its portfolio. Failure to do so could have a negative impact on the return on investment and ultimately on the Group’s net worth.
The Lagardère group considers this risk to be moderate overall. This risk is lower than in 2019, insofar as the disposal program initially drawn up by the Group has been completed.

3.1.2 LEGAL AND REGULATORY RISKS

3.1.2.1 RISK OF ADVERSE CHANGES IN REGULATIONS APPLICABLE TO THE GROUP

The Group is bound by strict and complex regulations put in place by various national and international authorities and organisations. Any major change in these laws and regulations could impact Group revenue and/or the profitability of the businesses concerned. This is particularly relevant in the cases described below.
The World Health Organization’s Framework Convention on Tobacco Control recommends various measures to reduce the supply and demand of tobacco, in particular, banning or restricting duty-free and tax-free sales of tobacco products to international travellers.
In response to this Framework Convention as well as to other measures, stricter regulations are being put in place regarding the sale of tobacco. The introduction of new local regulations aimed at reducing tobacco consumption could lead to a decline in profitability for certain Lagardère Travel Retail concessions.
Some countries have also introduced environmental protection measures (e.g., product recycling) that may affect Lagardère Travel Retail points of sale by limiting sales of certain products.
For example, since August 2019, no water can be sold in plastic bottles at San Francisco airport. These types of measures reflect the public’s growing concern for the environment and could become increasingly widespread in the next few years.
The Directive on Copyright in the Digital Single Market adopted in April 2019 by the European Commission aims at providing consumers with greater choice and access to online goods and services. The Directive encourages Member States for example to make compulsory certain exceptions to copyright, especially where the content is for teaching, research (text and data searches, as already envisaged in the French Loi Lemaire) or cultural purposes.
Although the Directive does not call into question the situation of rights holders like Lagardère Publishing, there is uncertainty about how it will be transposed into French law in the next year. It could weaken the position of rights holders and hence give rise to a decline in profitability at Lagardère Publishing in France.
The Lagardère group considers this risk to be moderate overall.

3.1.2.2 RISKS ASSOCIATED WITH LITIGATION IN PROCESS

In the normal course of their business, Lagardère and/or its subsidiaries are involved in a number of disputes. Where necessary, the Group sets aside adequate provisions to cover risks arising from both general and specific disputes. The total amount of these provisions is set out in note 27 to the 2020 consolidated financial statements.
The main litigation cases involving the Group are presented in note 34 to the 2020 consolidated financial statements (see chapter 5).
To the best of the Group’s knowledge, in the 12 months immediately preceding publication of this Universal Registration Document, there were no other governmental, legal or arbitration proceedings (including pending or threatened proceedings, of which the Group is aware) which may have or have had a significant impact on its financial position or profitability.
The Lagardère group considers this risk to be low overall.

3.1.3 OPERATIONAL RISKS

3.1.3.1 BUSINESS CONTINUITY RISK

One-off events can disrupt the effective operation of the Group’s businesses, by making certain production facilities temporarily unavailable. Incidents with the greatest potential impact are those that could result in the prolonged unavailability of Lagardère Publishing and Lagardère Travel Retail warehouses, or of cash tills at a series of stores, or radio studios.
There are many different potential causes of the above. Information systems failure would be the most common cause, as they are critical to the Group’s ability to conduct its business and are increasingly exposed to the risk of hacking (see the following risk). Other possible causes of business interruption include fires, flooding (e.g., century-high water levels in Paris), sabotage and terrorist attacks.
Lagardère Travel Retail’s business relies on the effective operation of airports, railway stations and other means of transport. Weatherrelated events, accidents, strikes and more generally, any event that could restrict or even interrupt passenger traffic in the Group’s stores, could affect its revenue (as described above in the section on pandemic risk).
In France, the Group is dependent on a partner in its Press Distribution activity. If its partner were to suspend or cease trading, this could have an impact on sales of written press, magazines and partworks, and on the revenue earned by Lagardère Travel Retail’s stores selling press titles in France, as seen in 2020 with the liquidation of Presstalis.
In light of the above, and excluding the impacts of the Covid-19 pandemic discussed above, the Lagardère group considers this risk to be moderate.

3.1.3.2 RISKS ASSOCIATED WITH BUSINESS ETHICS

The Lagardère group does business in many different countries subject to anti-corruption regulations (e.g., US Foreign Corrupt Practices Act, UK Bribery Act, France’s Sapin II law), as well as regulations in terms of international economic sanctions and anticompetitive behaviour.
Failure to comply with these regulations or with the ethical rules of conduct set by the Group could lead to substantial penalties, a deterioration in the Group’s image, the conviction of its senior executives, the termination of certain contracts and even a forced exit from certain markets, or a deterioration in the Group’s relationships with its banking partners.
Corruption risk is higher for certain businesses, particularly those which involve contracts signed by public officials or calls for tenders. This is notably the case for airport concessions operated by Lagardère Travel Retail.
Compliance with competition law is also an issue in the education sector at Lagardère Publishing. The Group could, for example, be (justly or unjustly) accused of having been awarded a contract due to anticompetitive behaviour (e.g., an alleged cartel). It could also be accused of having entered into a contract restricting competition on its market, potentially leading the scope of the contract to be revised. Several disputes described in note 34 to the consolidated financial statements involve alleged anticompetitive behaviour.
Some businesses are particularly exposed to the threat of international economic sanctions ⁽¹⁾, for instance, the supply of Lagardère Travel Retail stores and licensing agreements (especially for the Elle brand).
The Group considers these risks when conducting its business and has rolled out Compliance programmes as described in section 3.2.6.6 of this chapter.
However, there is growing pressure from the relevant supervisory authorities as to how these regulations are applied, and heavy sanctions have been imposed on businesses.
Despite its best efforts, the Group cannot rule out the possibility of facing proven or unproven allegations that it has failed to comply with ethical rules of conduct, and this could have a negative impact on its reputation, growth outlook and financial performance.
In light of the above, the Lagardère group considers this risk to be moderate.

3.1.3.3 RISK ASSOCIATED WITH PRODUCTS DISTRIBUTED

Within the scope of the Foodservice business line of Lagardère Travel Retail, the Group could be faced with an incident involving the quality of its food products. In such a situation, it could be declared liable, which would impact its reputation with concession grantors and the brands concerned. This risk is set to grow as Lagardère Travel Retail develops its business in this sector, for example, with the acquisition of Hojeij Branded Foods in the United States in 2018. The Foodservice business generated around 8% of total Group revenue in 2020.
To a lesser extent, this risk also covers physical products delivered with books and partworks sold by Lagardère Publishing subsidiaries (accessories, games, etc.), where failure to comply with applicable standards and regulations may cause harm to consumers and to the image of Lagardère Publishing.
In light of the above, the Lagardère group considers this risk to be moderate.

⁽¹⁾ Governments and/or international bodies (e.g., the UN) can adopt restrictive financial or commercial measures against individuals or legal entities. These measures take the form of bans or restrictions on the trade of specific goods, technologies or services with certain countries, frozen funds and financial resources, and sometimes restricted access to financial services.

3.1.3.4 RISKS ASSOCIATED WITH DATA SECURITY

The Group’s information systems contain confidential data related to how its businesses are run, notably details of major contracts (see above). They also contain personal data on Group employees and third parties, including for example magazine and partworks subscribers, the travelling public (duty free) and website visitors (media, education). In the event of challenges to the confidentiality, integrity or availability of this data, the Group could be exposed to various risks in terms of image, loss of revenue, third party disputes and fines.
These challenges are growing as systems become increasingly complex, computer hacking more prevalent and regulatory requirements weigh more heavily on the Group, in particular, the General Data Protection Regulation (GDPR) which entered into force on 25 May 2018.
In light of the above, the Lagardère group considers this risk to be moderate.

3.1.4 FINANCIAL RISKS

The Covid-19 pandemic had a significant impact on the Group’s liquidity requirements and on the financing arrangements for its business activities. As discussed above, the pandemic severely impacted the Group’s business, automatically reducing its cash inflows. The Group’s operations consumed €256 million of free cash flow in 2020, whereas they generated €294 million of free cash flow in 2019. Consolidated net debt increased by €272 million to €1,733 million at 31 December 2020. At the same time, certain short-term funding markets commonly used by the Group reduced their scale and restricted access to credit (e.g., commercial paper).
It should be noted that the Group is not rated by a financial ratings agency. The Group’s challenge going forward is to secure its sources of financing over the long term in the pandemic environment.
Despite all of the measures taken as described in section 3.2.8.3.A, significant uncertainties remain as to the duration of the pandemic. Accordingly, the Group considers this risk to be high.
Besides liquidity risk, financial risks facing the Lagardère group arise from the usual conduct of its business. The Group does not engage in speculative trading:

• credit and counterparty risks arise on trade receivables and cash investments. By weakening the financial position of some of the Group’s partners, the Covid-19 pandemic has triggered a rise in counterparty risk. However, this risk remains moderate;
• interest rate risk arises on the Group’s position as a net borrower with regard to banks and the market. In the context of the pandemic, banks introduced stricter lending conditions in terms of margins applied: interest rate risk is considered to be a moderate risk;
• foreign exchange risk arising on commercial transactions is limited, since the Group’s activities are generally carried out locally; accordingly, foreign exchange risk is considered a low risk;
• a portion of the Group’s equity (around one-third) is denominated in pounds sterling owing to the historic earnings derived from its businesses in the United Kingdom. This gives rise to an asset value foreign exchange risk against the euro. This is considered a low risk:
• market risks arise on the Group holding treasury shares and pension plan assets invested in equities – albeit for a limited amount. This is considered a low risk.

All of the aforementioned risks are described in further detail in note 29, chapter 5 of the Universal Registration Document.

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