Retailers Weigh High Risks with High Rewards – BDO USA Report

July 2017

Alana Gold
Bliss Integrated Communication
212-840-1661
alana@blissintegrated.com


Shifting regulatory priorities, real estate and cyber risks are top concerns

CHICAGO - Disrupted by technology, slowing foot traffic and consumers’ evolving tastes, retailers are hustling to keep up with swift changes driven by industry modernization and broader economic forces. If you follow the headlines, the outlook can seem bleak.
 
To be sure, there are challenging business issues to navigate: retailers are scaling back their headcount amid slow sales and reporting challenges with competition from peers and agile e-commerce platforms in earnings reports. But, the 2017 BDO Retail RiskFactor Report reveals how today’s largest retailers are weighing their challenges and adapting accordingly.
 
“Retailers’ top risks show their eyes are wide open to the new wave of emerging and evolving risks, from widespread store closures and bankruptcies, to uncertain regulatory changes and mass digital disruption and its associated security threats,” said Jennifer Valdivia, partner in BDO’s Consumer Business practice. “While awareness is a key first step, retailers’ proactive responses to these vulnerabilities will ultimately determine their fate.” 
 
The following chart ranks the top 20 risk factors cited by the 100 largest U.S. retailers:

Top 20 Risks for Retailers
2017   2016   2015
General Economic Conditions   #1 100%   #1 100%   #1 100%
Security Breaches #1t 100%   #1t 100%   #4 99%
Federal, State and/or Local Regulations #1t 100%   #4 96%   #1t 100%
Industry Competition and Consolidation #4 99%   #3 98%   #1t 100%
Suppliers and Vendors #4t 99%   #6 93%   #6 98%
Labor #6 98%   #9 91%   #7 96%
Natural Disasters, Terrorism and Geo-Political Events #6t 98%   #5 94%   #7t 96%
Legal Proceedings, Litigation #8 97%   #6t 93%   #9 95%
Implementation and Maintenance of IT Systems #8t 97%   #6t 93%   #4t 99%
Credit Markets/Availability of Financing and Company Indebtedness #8t 97%   #13 85%   #11 94%
Dependence on Consumer Trends, Client Demand #11 93%   #11 88%   #9t 95%
Consumer Confidence and Spending #12 90%   #12 87%   #15 89%
International Operations #13 89%   #16 73%   #17 86%
Loss of Key Management, New Leadership #14 85%   #16 73%   #19 80%
Impediments to U.S. Expansion and Growth #15 84%   #10 90%   #12 92%
Marketing, Advertising, Promotions, Public Relations #16 83%   #18 66%   #25 68%
Failure to Properly Execute Business Strategy #17 80%   #14 82%   #12t 92%
U.S. Accounting Standards and Regulations, Internal Controls #18 76%   #15 76%   #14 90%
Cost and Reliability of Insurance #19 74%   #22 59%   #20 77%
Intellectual Property Rights, Trademarks #20 70%   #28 50%   #22 72%
 
Additional findings from the 2017 BDO Retail RiskFactor Report:
 
Trump Moves Raise Regulatory Flags
With a median 10-K filing date of March 1, 2017, nearly six weeks after President Donald J. Trump’s inauguration, 16 percent of retailers specifically cite concerns around the new administration. Overall, federal, state and local regulations are tied as the #1 risk, as retailers consider existing and anticipated regulatory and compliance requirements across business functions.
 
  • 44% cite concerns around potential border tax
  • 76% reference U.S. accounting rule changes, internal controls and financial reporting risks
    • 12% are concerned about Revenue Recognition standards
    • 10% cite the new Lease Accounting standards as a risk
  • 36% list FCPA as a risk factor
 
Navigating Risk Overseas Amid Geopolitical Change
Since the beginning of 2017, the effects of Brexit, the French election, potential U.S. import and trade policy changes and other geopolitical events have been under a global microscope—and retailers are glued to the lens. Whether by virtue of their physical store locations, supply chains or e-commerce sales, nearly all retail players are exposed to some degree of international risk.
 
  • 89% cite international operations as a risk, compared to 73% in 2016
  • 41% reference impediments to international expansion, up from 30%
  • 22% of retailers mention Brexit in their 10-Ks, 95% of which have UK operations
 
Clicks Outpace Bricks: Physical Stores on Shaky Ground
Retail space overcapacity is a pressing issue. As e-commerce continues to accelerate, the pressure is on for retailers to reassess and optimize their real estate portfolios. As the industry’s evolution continues to make headlines, retail real estate is seeing something of a revolution. The battle cry? Right-size, reimagine and refocus.
  • 84% cite impediments to U.S. expansion as a risk
  • 69% reference risks associated with owning and leasing real estate, up from 54% last year
  • Failure to invest new capital in new stores or projects was cited by 63% this year
  • 44% are concerned with risks associated with mall traffic and competition for prime real estate
 
Retailers on Cyber Regulation Watch 
The industry is no stranger to cybersecurity risks, as hackers have long been targeting retailers’ systems. As companies grow more knowledgeable about their unique vulnerabilities and are increasingly held accountable for safeguarding sensitive data, they anticipate more cybersecurity guidance from regulators. 
  • 100% of retailers cite cybersecurity for the second year in a row
  • 78% point to risks associated with data privacy and security regulations
  • 30% name Payment Card Industry standards and EMV compliance as a concern
 
Laboring Over Labor Obstacles
Overall, job gains have averaged 185,000 over the first four months of 2017, in line with the first four months of 2016, according to the Bureau of Labor Statistics. On the other hand, widespread store closures have led to job losses in the industry, including over 6,000 in May. 
 
  • Among the 98% of retailers who cite labor concerns as potential risks,
    • 49% point to minimum wage increases
    • 26% list pension costs
  • 85% are concerned about the loss of key management or new leadership, up from 73% last year
  • 58% cite healthcare reform and benefits risks
 
Reliance on Discretionary Spending Incites Risk
Understanding the factors that underlie consumer spending is critical to success. Consumer confidence remains strong, but retailers are closely monitoring general economic conditions that could have a destabilizing effect.
 
  • 100% of retailers cite general economic conditions a top risk for the 9th consecutive year
  • Consumer confidence and spending concerns are cited by 90%
  • 65% identify risks associated with changing internet trends and retailers’ e-commerce initiatives 
 
For more information on the 2017 BDO Retail RiskFactor Report, view the full report here.

About the Consumer Business Practice at BDO USA, LLP
BDO has been a valued business advisor to consumer business companies for over 100 years. The firm works with a wide variety of retail and consumer business clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.

About BDO
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 63 offices and more than 450 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,408 offices in 154 countries.
 
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: www.bdo.com.