Retailers See Tax Reform Boost, but 2018 could be Make-or-Break for Brands – BDO Survey

February 2018

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


Bankruptcy, tax reform & industry competition pave an uncertain path 

Chicago, IL – Industry disruption, mounting debt, and tax reform’s sweeping changes continue to widen the gap between traditional economic predictors and the retail industry’s current financial reality. Retailers’ expectations for the year ahead remain moderate, with C-suite executives forecasting a 3.2 percent increase in total sales for 2018, according to a mix of 100 retail CEOs, CFOs, and CIOs in the first annual 2018 BDO Retail Compass Survey of CxOs.
 
At the same time, the industry is generally bullish for tax reform. When considering tax changes, more than one third (34 percent) of retailers agree that a reduction in the U.S. corporate tax rate would have the greatest impact on their business, followed by a reduction in the U.S. individual income tax rate, changes to state and local taxes, and cross-border tariffs. The ways retailers adjust their financial and tax strategies to maximize returns will define how much money they will be able to spend on initiatives that can help them compete.
 
“The reduced corporate rate from 35 percent to a flat rate of 21 percent is the most obvious win—the savings will be valuable for the already cash-strapped industry,” says Scott Ziemer, tax partner in BDO’s Retail and Consumer Products practice. “However, the limitations on interest deductibility, for instance, could impact retailers who are using debt to fund new store openings within the same taxable entity, possibly resulting in higher taxable income.”
 
Brands Invest to Meet New Standards
Demanding, tech-enabled consumers and aggressive competition are driving retailers to make operational improvements. To do so, some are tapping public or private capital, and others are absorbing businesses to fill gaps in their offerings. On the other end of the spectrum, highly-leveraged and underperforming retailers are filing for bankruptcy as sales and margins fizzle.
 
“In 2018, retailers need to focus on their differentiators, or invest to secure one,” says Natalie Kotlyar, national leader of BDO’s Retail & Consumer Products Practice. “Positive economic trends are not translating into huge sales increases, and the industry is being squeezed on all sides. Many retailers are seeking PE investment or acquiring outside companies with complementary capabilities, while others are throwing in the towel. There’s no room for brands to coast.”

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The in-store-online balancing act. Just over half (51 percent) of executives surveyed say they intend to invest more capital in e-commerce and mobile commerce in 2018 than 2017. At the same time, 39 percent of retailers will invest more in redesigning or remodeling their stores.
 
Digital investments rise. For businesses, both consumer-facing and in-house innovation is a mandate, not an amenity. As brands are expected to offer unprecedented degrees of convenience and speed, over one-third of retailers are planning to invest in initiatives that enable Internet of Things (40 percent) and automation (34 percent) adoption in the year ahead.
 
CIOs lead cybersecurity charge. As retailers plan to invest in more digital transformation, they’re also allocating more dollars to secure these initiatives in the year ahead. Seventy-three percent of CIOs surveyed say they used new software security tools in the last twelve months, while fifty-nine percent of CIOs created a response plan for security breaches and twenty-six percent hired an external security consultant.
 
The 2018 BDO Retail Compass Survey of CxOs is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly with 100 chief executive officers, chief information officers and chief operating officers in Q4 2017. The survey was conducted within a scientifically developed, pure random sample of the nation’s leading retailers. 
 
About BDO USA
 
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 more than 60 offices and over 500 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.