Regulations Are Among the Top Risks for Retailers

For the past seven years, we’ve combed through the 10-K filings of the 100 largest retailers to determine what risks are impacting the industry the most. Over the years, the survey has provided a pulse on how retailers are feeling about internal and external threats to their business, and we’ve seen consumer spending and labor risks rise and fall as the economy retracted and recovered.

This year, a number of interesting shifts emerged. Concerns over federal, state and local regulations reached an all-time high, with 97 percent of retailers citing them as a risk. In fact, the risk was second only to risks related to the state of the economy. It’s clear that the industry is concerned over potential effects from changes as a result of government deficits, payroll tax increases and internet sales tax legislation. Retailers also note increased concern over environmental (57 percent) and accounting (69 percent) regulations.

Another major trend is the escalation of data security and IT systems risks. Verizon’s 2013 Data Breach Investigations Report recently found that the retail industry accounted for 24 percent 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 percent and 85 percent, respectively. Retailers process and retain a tremendous amount of sensitive information through transactions, loyalty programs, online shopping, and mobile and social media use, and it’s becoming increasingly challenging to protect that information as threats mount. Many retailers are looking to the cloud to store data, which adds another dimension to this significant risk.

We also saw some interesting shifts in labor risks this year.The number of retailers citing risks related to labor increased 10 percent 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 percent to 20 percent). At the same time, a slightly-improved job market means that competition for qualified employees is rising.