Retailers Navigate Risk Overseas Amid Geopolitical Change
Since the beginning of 2017, the effects of Brexit, the French election, potential U.S. import and trade policy changes and other geopolitical events have been under a global microscope—and retailers are glued to the lens. Whether by virtue of their physical store locations, supply chains or e-commerce sales, nearly all retail players are exposed to some degree of international risk. This year, 89 percent of retailers cite international operations risks as a potential impediment to their business in their 10-K filings, up from 73 percent last year. Meanwhile, more retailers are wary about expanding their global footprints this year, as the pace of store closures accelerates domestically and abroad.
Concern about the impact of Brexit was specifically named by one in four retailers that cited global operations risks more broadly, or 22 percent of all retailers included in the analysis. Among the companies that cited Brexit as a risk in their 10-Ks, 95 percent have UK operations. In the immediate aftermath of the vote, both the UK and U.S. experienced currency volatility, a risk which remains top of mind for 79 percent of retailers, compared to 61 percent last year.
The long-term picture remains uncertain as the UK negotiates the terms of its withdrawal from the European Union, and as the potential for a “Soft Brexit” came to light after the Parliamentary election in June. Still, Prime Minister Theresa May’s trigger of Article 50 of the Lisbon Treaty at the end of March formally set UK’s divorce from the EU in motion and initiated a two-year limit to finalize negotiations…The clock is ticking.
The unprecedented move has retailers re-evaluating their workforce strategies, as Brexit may mean the end of EU free movement and the subsequent loss of non-UK workers. Without free trade with the EU, an increase in cost of goods purchased overseas is also likely, which would require UK arms of U.S. retailers to offset higher prices by either passing them on to consumers or absorbing losses.
However, until the terms of Brexit are agreed upon—and the extent to which Britain is authorized to participate in the EU single market is made clear—it’s largely business as usual for the retail sector. Almost all (99 percent) retailers cited risks associated with suppliers and vendors in the U.S. and internationally. When it comes to international supply chain operations, U.S. retailers are gearing up for potential disruption driven by trade policy changes and proposed tax reform plans to encourage U.S.-based manufacturing. With a median 10-K filing date of March 1, 2017, nearly six weeks after President Donald J. Trump’s inauguration, just under half (44 percent) of retailers alluded to concerns about a potential destination-basis tax system
with border adjustments. Specifically, companies wrote that significant changes in tax or trade policies, tariffs or trade relations between the U.S. and other countries, such as the disallowance of tax deductions for imported merchandise, could result in significant cost increases and limited access to suppliers.
The absence of the border tax adjustment from the initial White House tax plan raises questions about whether it will ultimately come to fruition. But import/export controls and other potential trade policies aren’t the only regulations that present compliance challenges for retailers that function overseas. International relationships also expose U.S. retailers to risks around the Foreign Corrupt Practices Act, which was cited in more than one-third (36 percent) of the 10-Ks analyzed.
Beyond the clear-cut regulatory lines that retailers must walk, conducting business abroad opens the door to more intangible vulnerabilities, from acceptance of products and offerings in local markets to adapting to local business customs.
The lure of globalization is compelling as retailers seek growth and diversification, but success abroad varies widely. Looking ahead, businesses will need to strike a careful balance between the risks and rewards of operating overseas, along with political currents drifting toward national trends and interests at home.
This is an excerpt from BDO’s 2017 Retail RiskFactor Report. Click through to the full report to learn more about the top risks facing retailers this year: 2017 BDO Retail RiskFactor Report