Growth Opportunities Fuel New Risks in Retail Industry

Higher levels of consumer confidence and stable sales results have retailers feeling fairly optimistic about growth in 2014. In fact, according to our eighth annual analysis of the top risks impacting the nation’s 100 largest retailers, a new set of challenges are emerging as retailers appear ready to make smart investments.

This year, two of the biggest shifts among the top concerns were seen in risks related to U.S. growth and expansion (which was cited in 10-K filings by 78 percent of retailers, up from 56 percent in 2013), and risks related to mergers and acquisitions (noted by 74 percent of retailers, up from 54 percent in 2013). The competitive market, coupled with growing consumer demands for an omnichannel shopping experience are pushing retailers to expand distribution channels and upgrade store technologies, websites and IT systems, whether through strategic acquisitions or careful capital investments. Still, both approaches come with many financial and organizational challenges, and as a result, 89 percent of retailers cite concern over their ability to successfully execute their business strategy.

Having the right talent—both at the top and in stores—is a major component of growth for retailers, and accordingly, a rising concern this year. Labor concerns moved to the fifth most-cited risk factor this year, with 94 percent of retailers noting them as a concern. A number of issues are at play when it comes to the workforce. The retail industry is the nation’s largest private employer, but attracting and retaining store associates and distribution center workers is becoming more challenging. The 6.3 percent unemployment rate is the lowest in five years and good news for consumer spending, but it is causing increasing competition for workers. In addition, the cost of labor is a top concern as retailers contend with calls for minimum wage increases and the growing costs of benefits. As reported by The Wall Street Journal, the retail sector has one of the biggest pools of minimum-wage workers, and an increase in the wage rate could impact hiring plans in the industry.

Although the economic picture is looking brighter, the downturn remains a recent memory in the minds of retailers, as is evident from the fact that 100 percent of the companies in our study cite general economic conditions as a risk factor. Looking deeper at the specific challenges retailers cite under general economic conditions, we found that for the first time in the study’s history, interest rates (80 percent) overtook fuel prices (74 percent) and unemployment (70 percent) as the most frequently cited economic 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.

Stay tuned to the Consumer Business Compass blog for more on the findings from the 2014 BDO Retail RiskFactor Report, including insights on risks related to security breaches, international operations and regulation.