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Risk Factors for Retail Businesses


May 18, 2011 (SmartPros) Retailers are paying close attention to consumer behavior this year as climbing sales indicate consumers are spending more freely, according to a study by BDO USA, LLP.



The RiskFactor Report for Retail Businesses, which examines the risk factors listed in the most recent SEC 10-K filings of the largest 100 public U.S. retailers, found consumer confidence and spending is less of a concern this year as it fell from the fifth most cited risk factor in 2010 to the 11th. Retailers are more concerned over consumer demand and interest (87%), a jump from 2010 (63%), as they shift their focus to gaining the consumers’ attention with attractive merchandise offerings. Despite general economic conditions remaining the top risk (97%), the decline in risks associated with consumer spending indicates retailer confidence in the recovery is increasing.
 
Regulation risks are also on the rise. With healthcare costs and the deficit gap looming, 92 percent of companies cite concerns over federal, state and local regulations, reflecting a 28 percent increase, and 20 percentage point increase, over 2010 (72%). Risks associated with accounting standards and regulation saw a 24 percent jump this year (72%, up from 58% in 2010) as concerns over the new lease accounting standards, among other regulations, mount.
 
“Retailers are shifting away from the defensive recessionary mode. They are paying more attention to controllable risks, as opposed to external factors like economic conditions,” said Doug Hart, partner in the Retail and Consumer Product Practice at BDO USA. “Consumer balance sheets are stronger, and retailers see a critical opportunity to sharpen inventory and offer a breadth of merchandise. Still, concerns persist in the boardroom over potential increases in taxes and regulation and whether consumers will continue to withstand price increases this summer and the upcoming back-to-school season.”
 
The 2011 BDO RiskFactor Report for Retail Businesses examined 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.
 
The following is a list of the Top 20 Risk Factors of the Largest U.S. Retailers:
 

Rank

2011

1.

General Economic Conditions 97%

2.

U.S. and Foreign Supplier/Vendor Concerns      95%

2t.

Competition & Consolidation in Retail Sector   95%

4.

Federal, State and/or Local Regulations 92%

5.

Dependency on Consumer Trends 87%

6.

Credit Markets/Availability of Financing & Company Indebtedness 86%

7.

Labor (health coverage, union concerns, staffing) 84%

7t.

Legal Proceedings 84%

9.

Terrorism, Natural Disasters & Geo-political events 83%

10.

Failure to Properly Execute Business Strategy 80%

11.

Consumer Confidence and Spending    77%

12.

Implementation of IT Systems 73%

12t.

Loss of Key Management/New Management 73%

14.

Changes to Accounting Standards and Regulations 72%

15.

International Operations 70%

16.

Impediments to Further U.S. Expansion 67%

17.

Consumer Credit and/or Debt Levels 65%

18.

Mergers & Acquisitions, Joint Ventures 62%

19.

Privacy Concerns Related to Security Breach 55%

20.

Inventory Balance 54%
 
Further findings in The 2011 BDO RiskFactor Report for Retail Businesses:
 
Rising Commodity Costs Escalate Supply Chain Risks. Nearly all (95%) companies note concerns over supplier and vendor issues, and among those companies, pricing pressures due to rising commodity costs are a top risk (84%). Given the increasing importance of leverage in negotiations with manufacturers, more retailers (47%, up from 22% in 2010) note risks associated with the loss of exclusive and proprietary brands. Markedly more retailers see risk in inventory levels this year (54%), reflecting a 54 percent increase and 19 percentage point increase over 2010 (35%).
 
Increased Internal Pressures on Business Strategy. Retailers have turned back to internal factors which are now more crucial to their success as consumer spending stabilizes and there is greater need to fend off competition (95%, up from 85% in 2010). Significantly more companies (80%) note concern this year over the failure to execute business strategy. This represents an 86 percent jump over 2010, when retailers were focused on external economic factors and just 43 percent cited it as a concern.
 
Recovery Causes Rising Personnel Risks. Amid several executive leadership changes, risks associated with the loss of key personnel saw a notable 49 percent increase this year. Seventy-three percent of retailers cited it as a concern. However, increased risk of management turnover points toward recovery, as executives are less likely to change jobs in a down economy. Still, in anticipation of rising healthcare costs, labor concerns persist outside of the C-suite for a vast majority (84%) of retailers.
 
Return of Mergers, Acquisitions and Growth Plans. The recovery of both consumer spending and corporate bond markets has contributed to a recent spate of retail acquisitions by private equity firms. As a result, risks associated with mergers and acquisitions and joint ventures are back on the rise (62%), up from 47 percent in 2010 and 41 percent in 2009. Retailers are also returning to expansion plans with an eye towards updated store formats and concepts. With the renewed focus on expansion, 67 percent of companies cite risks associated with U.S. growth plans, an 18 percent increase over 2010 (57%).
 
Privacy of Customer Data Remains a Concern. Recent security breaches of consumer information involving Sony Playstation and Michael’s are a reminder of the importance of securing confidential customer information. With many retailers maintaining large volumes of customer data, it is no surprise that privacy concerns increased from 51 percent in 2010 to 55 percent in 2011.
 
Economy Still Top of Mind, But Concern Over Financial Turmoil Declines. While nearly all (97%) retailers cite general economic conditions as a risk, concerns over leading indicators of economic conditions declined this year. Financial market turmoil risks saw the largest decline with just 31 percent of retailers citing it as a concern, down from a high of 97 percent in 2009 and 49 percent in 2010. Fewer retailers also noted concerns over unemployment (61%, vs. 70% in 2010) and interest rates (52%, vs. 56% in 2010).

2011 SmartPros Ltd. All rights reserved.

Source: BDO USA, LLP

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