Chicago -- General economic conditions and federal, state and/or local regulations rank as the top two risks facing the retail industry, according to a new report by BDO USA. The report, an analysis of the risk factors listed in the most recent 10-K filings of the largest 100 public U.S. retailers, found that federal, state and local regulations have increased as a risk among the nation’s largest retailers.
Nearly all retailers (97%) cite regulatory risks as they navigate the effects of government deficits, payroll tax increases and internet sales tax legislation on their businesses and on consumer spending. The risk was cited by the most retailers in the study’s seven-year history and was second only to general economic conditions (100%). Retailers also note increased concern over environmental (57%) and accounting (69%) regulations.
The BDO RiskFactor Report for Retail Businesses also found that retailers are increasingly concerned over the protection of their crucial IT systems and customer and company data. Verizon’s 2013 Data Breach Investigations Report recently found that the retail industry accounted for 24% of data breaches in 2012, second only to financial services. And in the wake of several high-profile industry security breaches, IT and data security risks were cited by the most companies in the study’s history at 89% and 85%, respectively.
“Data protection is critical given that retailers process and retain a tremendous amount of sensitive data through credit card transactions, loyalty programs, online shopping and social media,” said Doug Hart, partner in the retail and consumer products practice at BDO USA. “Further, the increasing reliance on cloud computing solutions to process and store this data adds another dimension to this security and privacy risk.”
Additional findings in the 2013 BDO RiskFactor Report for Retail Businesses:
Labor concerns rise: The number of retailers citing risks related to labor increased 10% this year, making it the sixth most cited risk. Two critical external factors are likely contributing to the jump. Given the large retail workforce, retailers are wary of the increases to the cost of labor that the Affordable Care Act will impose when it enters into full force in 2014. The number of retailers noting healthcare costs as a risk more than doubled this year (43% to 20%). At the same time, a slightly-improved job market means that competition for qualified employees is rising.
Supply chain and international risks remain prevalent: After ranking second for the past three years, supply chain risks fell slightly to the third most cited concern among retailers. This is partly due to decreased concerns over commodity costs, as 72% of those who disclosed supply chain risks cited commodity costs as a risk this year, down from 81% in 2012 and 84% in 2011. But despite stabilizing costs, increasingly global retail supply chains are causing an uptick in international operations risks (cited by 76% of retailers, up from 68% in 2012). Moreover, growing international operations expose retailers to volatile foreign currency exchange rates, which were noted by 40% of retailers as a risk.
Hurricane Sandy brings insurance risks into focus: More retailers are focusing on their business interruption plans and insurance coverage. A vast majority of retailers (83%) note concerns over natural disasters, and this year 37% more retailers specifically point to the cost and reliability of insurance to cover potential losses.
Omni-channel growth impacts strategic growth risks: A vast majority of retailers (85%) note concern over their ability to respond to changing consumer interests and demand. Concerns over executing business strategy (79%) and U.S. expansion plans (56%) remain high, but expansion risks have declined since 2010 and 2011 when many retailers began to transition away from rapidly adding new stores as their primary growth strategy.