Despite a readiness to capitalize on increased consumer confidence with investments to fuel growth, retailers are citing concerns over interest rates, Target-sized security breaches and the potential minimum wage hike among the top current challenges they must contend with.
In its eighth annual Retail Risk Factor Report for 2014, which looks at risk factors cited in the most recent 10-K filings of the 100 largest U.S. public retailers, accounting and financial advisory firm BDO USA found that risks emerging in the industry today are tied more closely to growth initiatives.
“Now that we’re a few years removed from the recessionary low point in consumer confidence and spending, we’re seeing retailers pursue growth opportunities more aggressively,” Doug Hart, partner in the Retail and Consumer Products practice at BDO USA, LLP said. “But new investments are inherently risky. Retail leaders are tasked with finding the right avenues for growth, whether it’s acquiring new technology, investing in their workforce, upgrading their supply chain or exploring new channels, all while knowing that a sudden change in regulation or consumer trends could stymie their plans and profitability.”
The study analyzed the 100 largest retailers by revenue, including Walmart, Target, CVS, Walgreens, Macy’s and Gap Inc.
In 2014, 78 percent of retailers noted risks related to U.S. growth, up 22 percentage points from 2013, and 74 percent cited merger and acquisition risks, up 20 percentage points from 2013.
For the first time in the study’s history, interest rates overtook fuel prices and unemployment as the most frequently cited economic worry, with 80 percent of retailers noting it as a 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,” the report noted.
“If consumer interest rates continue to increase, there will be less left over for discretionary spending,” Hart said.
Large-scale data breaches like Target’s have roiled the retail industry of late, and 91 percent of retailers mentioned growing concerns over litigation and suggested that security failures could be costly beyond just monetary terms, but to the brand’s reputation and customer loyalty.
“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. And there’s good reason: Verizon reports that there were 467 security incidents in the retail industry in 2013, with point-of-sale intrusion and Web application attacks being the most common threats,” according to the report.
“We see continued investment in alternative sales channels and information systems–as evidenced by concerns about security breaches,” Hart said.
Many retailers, like Gap, are looking to expand into international markets, but as labor conditions overseas demand increased scrutiny due to often under par standards, international growth has become more risky. Eight in 10 retailers mentioned concerns over international operations risks, like managing a dispersed workforce and complying with international laws and regulations. Although most retailers source overseas in U.S. dollars, international sales mean companies are subject to currency fluctuations, an economic concern cited by 67 percent of retailers, up from 40 percent last year.
Hart said, for retailers that do have a foreign presence, growth in China and other BRIC (Brazil, Russia, India, China) countries appears to be subsiding.
The report also noted that federal regulation is still top of mind for retailers as the government considers minimum wage and data privacy legislation. The cost of labor is a concern as calls for minimum wages hikes and labor-related risks were noted among the top five worries for the first time this year, with 94 percent of retailers citing it as a risk.