Retailers Economic & Security Concerns Evolve

As we highlighted last week in our infographic, retailers’ chief concerns related to the economy are changing.
Our annual analysis of the top risk factors cited in the 100 largest retailers’ annual filings unpacks the key economic concerns retailers point to. This year, we found that interest rates (cited by 88 percent) came in as the most frequently cited economic concern for the second year in a row. The risk topped concern over fuel prices (cited by 83 percent) and unemployment (cited by 73 percent), which have been retailers’ most noted economic risk for much of the study’s nine year history.
 With unemployment now well below six percent, both retailers and consumers are closely watching the Federal Reserve. A key question is whether the Fed will curtail its easy-money policy and increase what have been historically low interest rates. If it does normalize rates, companies are well aware of the potential negative impact on consumer spending, as well as their debt financing. Still, reports this week suggest that the strong dollar may delay rate increase plans a bit further.
That strong dollar is also driving currency concerns. According to the Wall Street Journal, the dollar climbed by about 13 percent compared to several other currencies over the six months ending March 31. As a result, currency rate risks and their impact on profits and revenues are top of mind this year for a full 82 percent of retailers, up from 67 percent last year. For retailers with stores in European and BRIC countries—or who are eyeing opportunities for growth abroad—converting foreign sales to U.S. dollars currently can cut deep into margins, and sourcing internationally in U.S. dollars can have the same costly effect.
When we look at evolving risks across the study overall, perhaps no shift has been as notable as cybersecurity. Nearly all retailers (99 percent) cite concerns related to a data breach or hack this year, a stark contract to 2007 when just 26 percent of retailers flagged cybersecurity issues in their 10-K. The reasons for this evolution are clear. Although IBM calculated that the number of cyber breaches against retailers actually declined in 2014, the high legal, operational and reputational costs associated with point-of-sale intrusions and web application attacks understandably keep retailers up at night, especially as they expand their digital offerings and become increasingly cloud-based in the year ahead. Our survey of retail CFOs earlier this year found that they are taking action to mitigate risks: a majority of retailers (56 percent) are investing more into their cybersecurity measures this year, according to BDO data, but heightened concerns over legal proceedings (95 percent) point to the significant, wide-reaching damage that IT failures can inflict on retailers.