BDO risk report: Growth opportunities fueling new concerns for retailers

Chicago -- General economic conditions, federal, state and/or local regulations, and retail competition/consolidation ranked as the top three risk factors cited by retailers, according to a survey by BDO USA. Rounding out the top five: U.S. and foreign supplier/vendor concerns and labor (health coverage, union concerns, staffing) concerns.            
 
The 2014 BDO Retail RiskFactor Report, the firm’s eighth annual analysis of the top risks impacting the retail industry (based on analysis of 10-K filings from the 100 largest U.S. retailers) also found that a different set of top challenges — those more closely associated with growth initiatives — are emerging in the retail industry as retailers focus on more upbeat economic news.

This year, 78% of retailers noted risks related to U.S. growth, up 22 percentage points from 2013; 74% cited merger and acquisition risks, up 20 percentage points from 2013. Retailers are finding that a competitive market and growing consumer demands for an omnichannel shopping experience require expanding distribution channels and updating storefronts, web presence and IT systems, whether through strategic acquisitions or careful capital investments. However, both approaches involve financial and organizational challenges, and 89% of retailers indicated concerns about successfully implementing their business strategy.

The study also found that retailers contending with growing workforce challenges, including attracting and retaining store associates and distribution center workers. In addition, the cost of labor is a top concern as retailers contend with calls for minimum wage increases and the growing costs of benefits. Labor concerns reached the top five risk factors overall for the first time this year, with 94% of retailers citing it as a risk.

Additional findings in the BDO report include:

Interest Rates Take Over as Top Economic Risk. For the first time in the study’s history, interest rates (80%) overtook fuel prices (74%) and unemployment (70%) as the most frequently cited economic concern.

While the slowly improving job market bodes well for retailers, it is heightening concerns that the Federal Reserve may move to increase interest rates after five years of historic lows. In addition to the potential impact on consumer spending and sales, retailers also express concern that changes in interest rates could impact their debt financing and pension plan assets.

Breach Concerns are Universal. Risks related to IT systems and data breaches are at an all-time high. Since 2009, the number of retailers citing concerns over data security has more than doubled, and now nine-in-ten note it as a risk factor. While the industry continues to invest in security improvements, growing concerns over litigation (91%) suggest that failures can be costly beyond the harm to brand reputation and customer loyalty.
 
International is a Risky Area for Growth. Eight-in-10 retailers cite international operations risks including managing a dispersed workforce and complying with international laws and regulations like the Foreign Corrupt Practices Act. While most retailers source internationally in U.S. dollars, international sales expose companies to currency exchange rate fluctuation risk, which was cited by 67% as an economic concern, up from 40% in 2013.
 
Regulation is a Growing Concern. Eighty-seven percent of retailers noted concerns related to accounting standards and regulations, up from 69% in 2013, and the most in the report’s history. Much of this pressure can be attributed to a renewed focus by companies, auditors and regulators on internal controls, including the new COSO internal control framework published in 2013.

BDO US is a professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies.

 

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