Retailers Top Risks Signal Questions around Avenues for Growth

As many retailers report earnings this week, analysts will be looking for guidance around what’s behind the slower-than-expected start to the year in retail sales. Despite lower gas prices, stronger consumer confidence and a host of positively trending economic indicators, consumer spending has been fairly steady. In this backdrop, retailers are increasingly unsure about how to strategically invest for growth in the new U.S. retail marketplace.

This concern was a key finding in our ninth annual analysis of risk factors listed in the most recent 10-K filings of the 100 largest U.S. retailers. In fact, 92 percent of retailers point to risks related to U.S. growth and expansion, making the jump from the 20th most cited risk in 2013 to the 12th in 2015. And amid further industry consolidation, 76 percent of retailers cite risks related to mergers and acquisitions.

It’s clear that retailers are aggressively eyeing opportunities to grow their brands and provide consumers with speed and convenience across platforms. But even with stronger cash flows at their disposal, many of these new capital investments bring greater risks and less tangible ROIs. A full 92 percent of companies this year cite risks around failure to execute business strategy. And with margins already compressed, the stakes are high: 71 percent note failure to successfully invest capital as a concern.

Behind these concerns is the new retail reality that opening new stores is no longer the default option for growth. Retailers have to get more creative and innovative to attract and retain consumers. In many cases, this means investing more in digital commerce channels, optimizing supply chain networks and getting smart about IT and data. But the ROI on that spending is less proven, and the risks are therefore higher.

As retailers look to their supply chain as a potential area for improvement and growth, sourcing and supplier/vendor risks are top of mind. With the recent West Coast sourcing issues having just recently been resolved, nearly all of retailers (98 percent) note supply chain risks, including shipping and import issues. These exposures, combined with rising labor and import costs from traditional sourcing regions like China, have prompted more retailers to consider near-sourcing as a strategic approach to reducing costs and liabilities (a finding consistent with our 2015 Retail Compass Survey of CFOs).

For the full list of top 25 industry risks, see our 2015 Retail RiskFactor Report summary here. Stay tuned for more analysis of the leading economic risks, including interest rates, labor issues and currency, as well as a conversation on the rise of cybersecurity as a key risk.

Blog-subscribe-ad_CB.JPG