As Retailers Assess Sandy’s Damages, a Few Tips for Recovery

During the holiday season, retailers need to keep their goods moving. Across the nation, retail employees work overtime to get inventory onto store shelves in time for the holiday rush. With a 4.7 percent increase forecasted for holiday sales this year, according to our Retail Compass Survey of CMOs, retailers will need to be functioning at full speed to meet demand.

Unfortunately, Superstorm Sandy did not have this in mind.

According to IHS, the research and economic analysis firm, Sandy could result in up to $50 billion in economic losses, including between $10 and $30 billion in lost business, underlining the significant business interruption challenges for retailers.

Out of necessity, these companies will have to rebuild—and rebuild better, with improved infrastructure, more adequate insurance policies and a bit of additional foresight. This process will be specific to each company, but here are a few lessons that retailers may want to consider in the wake of Sandy:

1. No location is free from a catastrophic risk. The sentiment of “this will never happen here” needs to be replaced with “if this happens here, what is the impact?” It is the risk management department that should be identifying the potential risks and working with finance and operations to assess if the costs of limiting the risks outweigh the likelihood of the risk occurring. It is a cost/benefit affair. Clearly, with Superstorm Sandy, the costs of preventing storm surge in New York City would be massive but moving critical equipment from at-risk floors may have saved hundreds of millions of dollars. Sometimes common sense preventions are the best mitigating factor to a risk from a cost perspective.

2. Create an emergency energy plan (or refine the current one) that accounts for total loss of the energy needed for your retail operations. An energy plan may call for alternative energy capacity from generators for retailers’ distribution centers. Also, most retailers lease their retail space, so as part of an energy plan, they should consult with their landlords to better understand any existing energy contingency plans that the landlord already has. Finally, it may be the case that more astute retailers will be back to business while their neighbors are still dealing with disaster recovery. Hillary Clinton famously stated, “It takes a village,” which also applies to retailers as neighboring businesses help attract customers to that retailer. As a result, a detailed energy plan should also involve thorough consultation with neighbors on their recovery response plans.

3. Be aware of any changes to insurance and regulatory policies that go into effect after a disaster. Rationing, curfews and specific business requirements may all affect daily operations and should be consistently monitored. In New Jersey, for instance, Governor Chris Christie signed an executive order directing “insurers to be flexible on due dates for claim filings and premium payments; and lenders to be flexible on due dates for loan payments, and on late fees.” Similarly, several state insurance regulators stated that Sandy was not a hurricane when it made landfall and hurricane deductibles should not apply. It should be noted that a Named Storm may not be defined as a hurricane in many policies. Situations like these are critical to understanding the insurance provisions and should be accounted for as businesses seek to recoup losses.

4. Create a fall-back system for internal and external communications. Regular updates should be available to employees across various channels in case traditional communication channels are lost. During Superstorm Sandy, many people experienced loss of cellular service but still had access to visit a company’s website for updates. Likewise, many people lost connection to company servers, which is why personal emails should be kept on file. External communications can be crucial as well. After Sandy, many produce retailers were forced to throw away large amounts of food for insurance purposes (to limit litigation risk of someone falling ill to contaminated food). However, by failing to effectively communicate that message to their customers and the general public, they invited harsh criticism from those who thought the goods should have been donated. Having a communication plan for these types of scenarios will limit the risk of reputational harm.

5. Consider inventory and supply chain strategies. In the case of disasters, inventory can be similar to a financial portfolio – the more diverse, the less risk. Retailers that house their inventory in multiple locations and various regions are less vulnerable to the adverse effects of one local event. By regionalizing supply chains, companies can plan for unaffected regions to compensate for impacted locations that have been debilitated.

6. Assess insurance policies to determine whether or not mitigation actions are covered by your provider. Business interruption policies can cover lost profits, extra expenses incurred to mitigate losses, expenses for relocation and certain fixed costs due to a disaster. Retailers should start by assessing their current plan and, using lessons learned from past events, determine the best insurance policy for their specific business needs.