Operational Risks Grow for Retailers

As I noted last week, retailers’ renewed optimism around 2014 gains has spurred an increase in concerns over strategic growth initiatives. But aside from broader risks associated with economic conditions and the competitive landscape, companies looking to achieve growth are also increasingly worried about their own operational capabilities and hazards. According to our eighth annual analysis of the top risks impacting the nation’s 100 largest retailers, concerns over cybersecurity, the regulatory landscape and international operations are all on the rise.

In September 2013, three months before the cybersecurity breach at Target, BDO’s Jeff Hall posted on the growing risk of data breaches facing retailers. Since then, several costly and high-profile incidents at major retailers—including eBay most recently—have thrust the issue into the public spotlight, prompting retailers’ concerns over cybersecurity to hit an all-time high. As it turns out, there are plenty of reasons for concern: Verizon reports there were 467 security incidents in the retail industry in 2013, with point-of-sale intrusion and Web application attacks being the most common variety of threats.

This year, a full 92 percent of retailers also cite risks related to the implementation of IT system and technology in their 10-K filings, while nine-in-ten reference concerns over data security, nearly twice the amount that did in 2009. In response to this growth in cyber threats, companies and industry groups are locking down their systems and banding together to reduce their exposure. Our 2014 Retail Compass Survey of CFOs found that 27 percent of U.S. retailers are investing the most capital into their IT systems and technology this year. At the same time, brands such as Walgreen’s, Nike and Lowe’s are teaming up to share and analyze intelligence on cyber risks, and the NRF has launched its Cyber Security Platform to help provide real-time intelligence on emerging threats.

Aside from risks in the digital landscape, new and changing regulations are also top of mind for retailers. This year, virtually all (99 percent) cited changes in federal, state and local regulations as a risk. On one hand, the ongoing debate around raising the federal minimum wage to $10.10 has prompted a highly-publicized political stalemate, as well as widespread protests by unions and employees. On the other hand, regulators are also increasing scrutiny on internal controls, and retailers have taken note: 87 percent cited concerns related to accounting standards and regulations this year, a significant rise from 2013 (69 percent).

Meanwhile, regulations are also central to retailers’ concerns around international operations. Facing increased costs and nascent compliance programs, 42 percent of companies called out concerns related to the Foreign Corrupt Services Act, up from 27 percent in 2013. Overall, supply chain risks  were the fourth-most cited concern this year, while eighty percent of retailers note concerns over international operations and nearly half (46 percent) cited concerns over international expansion. With additional growth in concerns over fluctuations in commodity costs and foreign currency exchange rates, retailers appear highly aware of their exposure to risks in and around their overseas operations.

Make sure to stay posted to the Consumer Business Compass blog in the weeks ahead as we release the complete 2014 BDO Retail RiskFactor Report analysis and infographic . In the meantime, here’s a look at the list of top 25 risks:
 
2014 Rank   2014 2013 2012 2011 2010
1. General Economic Conditions   100% 100% 99% 97% 96%
2. Federal, State and/or Local Regulations 99% 97% 85% 92% 72%
3. Competition and Consolidation in Retail Sector   98% 94% 94% 95% 85%
4. U.S. and Foreign Supplier/Vendor Concerns                96% 95% 97% 95% 86%
5. Labor (health coverage, union concerns, staffing) 94% 86% 78% 84% 70%
6. Dependency on Consumer Trends 93% 85% 83% 87% 63%
7. Implementation and Maintenance of IT Systems 92% 89% 83% 73% 64%
8. Privacy Concerns Related to Security Breach 91% 85% 72% 55% 51%
8t. Consumer Confidence and Spending    91% 84% 81% 77% 83%
8t. Legal Proceedings 91% 78% 73% 84% 62%
11. Credit Markets/Availability of Financing and Company Indebtedness 89% 86% 82% 86% 84%
11t. Failure to Properly Execute Business Strategy 89% 79% 68% 80% 43%
13. Natural Disasters, Terrorism and Geo-Political Events 87% 83% 84% 83% 70%
13t. Changes to Accounting Standards and Regulations 87% 69% 58% 72% 58%
15. International Operations 80% 76% 68% 70% 55%
16. Loss of Key Management/New Management 79% 68% 63% 73% 49%
17. Impediments to Further U.S. Expansion and Growth 78% 56% 46% 67% 57%
18. Mergers and Acquisitions and Joint Ventures 74% 54% 54% 62% 47%
19. Environmental Laws, Regulations & Liability 71% 57% 42% 43% 23%
19t. Goodwill Impairment 71% 37% 39% N/R N/R
21. Intellectual Property Infringement 67% 50% 40% 37% 36%
22. Insurance Costs and Uninsured Liabilities 66% 63% 46% 53% 40%
23. Consumer Credit and/or Debt Levels 65% 61% 59% 65% 69%
24. Advertising, Marketing and Promotions 64% 41% 35% 45% 29%
25. Seasonality and Cyclicality 61% 44% 49% 48% 44%


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