Retail Industry Growth Opportunities Fuel New Risks – BDO USA Report

- Steadier economy allows retailers to focus on domestic growth -

CHICAGO--(BUSINESS WIRE)--Despite lingering concerns over another downturn in the economy, retailers appear ready to capitalize on higher levels of consumer confidence with smart investments to fuel growth. BDO USA, LLP’s eighth annual analysis of the risk factors listed in the most recent 10-K filings of the 100 largest public U.S. retailers found that a different set of top challenges—those more closely associated with growth initiatives—are emerging in the retail industry. This year, 78 percent of retailers note risks related to U.S. growth this year, up 22 percentage points from 2013, and 74 percent cite merger and acquisition risks, up 20 percentage points from 2013. Retailers are finding that a competitive market and growing consumer demands for an omnichannel shopping experience require expanding distribution channels and updating storefronts, web presence and IT systems, whether through strategic acquisitions or careful capital investments. However, both approaches come with many financial and organizational challenges, and 89 percent of retailers indicate concerns about successfully implementing their business strategy.

As retailers focus more on strategic initiatives amid more upbeat economic news, the 2014 BDO Retail RiskFactor Report found that they are also contending with growing workforce challenges. The retail industry remains the nation’s largest private employer, but attracting and retaining store associates and distribution center workers is becoming more challenging. The 6.3 percent unemployment rate is the lowest in five years and good news for consumer spending, but it is causing increasing competition for workers. In addition, the cost of labor is a top concern as retailers contend with calls for minimum wage increases and the growing costs of benefits. Labor concerns reached the top five risk factors overall for the first time this year, with 94 percent of retailers citing it as a risk.

“Now that we’re a few years removed from the recessionary low point in consumer confidence and spending, we’re seeing retailers pursue growth opportunities more aggressively,” said Doug Hart, partner in the Retail and Consumer Products practice at BDO USA, LLP. “But new investments are inherently risky. Retail leaders are tasked with finding the right avenues for growth, whether it’s acquiring new technology, investing in their workforce, upgrading their supply chain or exploring new channels, all while knowing that a sudden change in regulation or consumer trends could stymie their plans and profitability.”

The following chart highlights the top 25 risk factors cited by the 100 largest U.S. retailers:

2014 Rank		2014	2013	2012	2011	2010	2009
1.	General Economic Conditions	100%	100%	99%	97%	96%	96%
2.	Federal, State and/or Local Regulations	99%	97%	85%	92%	72%	66%
3.	Competition and Consolidation in Retail Sector	98%	94%	94%	95%	85%	87%
4.	U.S. and Foreign Supplier/Vendor Concerns	96%	95%	97%	95%	86%	86%
5.	Labor (health coverage, union concerns, staffing)	94%	86%	78%	84%	70%	74%
6.	Dependency on Consumer Trends	93%	85%	83%	87%	63%	63%
7.	Implementation and Maintenance of IT Systems	92%	89%	83%	73%	64%	61%
8.	Privacy Concerns Related to Security Breach	91%	85%	72%	55%	51%	46%
8t.	Consumer Confidence and Spending	91%	84%	81%	77%	83%	74%
8t.	Legal Proceedings	91%	78%	73%	84%	62%	47%
11.	Credit Markets/Availability of Financing and Company Indebtedness	89%	86%	82%	86%	84%	93%
11t.	Failure to Properly Execute Business Strategy	89%	79%	68%	80%	43%	32%
13.	Natural Disasters, Terrorism and Geo-Political Events	87%	83%	84%	83%	70%	64%
13t.	Changes to Accounting Standards and Regulations	87%	69%	58%	72%	58%	44%
15.	International Operations	80%	76%	68%	70%	55%	47%
16.	Loss of Key Management/New Management	79%	68%	63%	73%	49%	48%
17.	Impediments to Further U.S. Expansion and Growth	78%	56%	46%	67%	57%	50%
18.	Mergers and Acquisitions and Joint Ventures	74%	54%	54%	62%	47%	41%
19.	Environmental Laws, Regulations & Liability	71%	57%	42%	43%	23%	15%
19t.	Goodwill Impairment	71%	37%	39%	N/R	N/R	N/R
21.	Intellectual Property Infringement	67%	50%	40%	37%	36%	27%
22.	Insurance Costs and Uninsured Liabilities	66%	63%	46%	53%	40%	36%
23.	Consumer Credit and/or Debt Levels	65%	61%	59%	65%	69%	49%
24.	Advertising, Marketing and Promotions	64%	41%	35%	45%	29%	42%
25.	Seasonality and Cyclicality	61%	44%	49%	48%	44%	44%
*t indicates a tie in the risk factor ranking

Further findings in the 2014 BDO Retail RiskFactor Report:

Interest Rates Take Over as Top Economic Risk. In addition to top industry risks, the BDO study looks at specific challenges retailers cite under general economic conditions. For the first time in the study’s history, interest rates (80%) overtook fuel prices (74%) and unemployment (70%) as the most frequently cited economic concern. While the slowly improving job market bodes well for retailers, it is heightening concerns that the Federal Reserve may move to increase interest rates after five years of historic lows. In addition to the potential impact on consumer spending and sales, retailers also express concern that changes in interest rates could impact their debt financing and pension plan assets.

Breach Concerns are Universal. As large scale data breaches have become increasingly frequent in the retail industry, risks related to IT systems and data breaches are at an all-time high. Since 2009, the number of retailers citing concerns over data security has more than doubled, and now nine-in-ten note it as a risk factor. And there’s good reason: Verizon reports that there were 467 security incidents in the retail industry in 2013, with point-of-sale intrusion and Web application attacks being the most common threats. The NRF recently announced a new Cyber Security Platform designed to provide real-time information about threats and reduce widespread hacks. While the industry continues to invest in security improvements, growing concerns over litigation (91 percent) suggest that failures can be costly beyond the harm to brand reputation and customer loyalty.

International is a Risky Area for Growth. Along with Gap and several teen apparel retailers, many companies are also looking abroad for opportunities to introduce or expand their brand. However, retailers who source or sell internationally face significant challenges Eight-in-ten retailers cite international operations risks including managing a dispersed workforce and complying with international laws and regulations like the Foreign Corrupt Practices Act. While most retailers source internationally in U.S. dollars, international sales expose companies to currency exchange rate fluctuation risk, which was cited by 67 percent as an economic concern, up from 40 percent in 2013.

Regulation is a Growing Concern. Federal regulation remains top of mind for retailers as the government considers data privacy and minimum wage legislation. At the same time, public retailers are also seeing regulators place increased scrutiny on internal controls. This year, 87 percent of retailers noted concerns related to accounting standards and regulations, a significant increase from 2013 (69 percent) and the most in the report’s history. Much of this pressure can be attributed to a renewed focus by companies, auditors and regulators on internal controls, including the new COSO internal control framework published in 2013.

The 2014 BDO Retail RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. retailers; the factors were analyzed and ranked by order of frequency cited.

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