The top 10 risks for retail sector
- Low-growth consumer markets
Despite growth returning to the world economy following the recession of the last three years, this risk remains significant. The recession underlined a structural shift to a low-demand growth environment in the developed world: retailing in Europe is “a zero-sum game where a player’s gain is another’s loss.”
- Regulation and compliance
Traditional regulatory interactions centered on the rate case are being supplemented by often-contradictory pressures regarding environmental impact, efficiency and security of key infrastructure.
- Inability to control costs/rising input prices
As an economist we interviewed noted, “Low margins mean that costs [have] major effects on profitability.” Seventy-three percent of retail respondents had focused on cutting sales, general and administrative (SG&A) expenses, while 11% had targeted costs of goods and services (COGS).
- Inability to benefit from e-commerce
The objective of lowering carbon emissions from power generation continues to drive the transformation in the industry, but the failure of governments to meet key emissions objectives means that policy is at a crossroads. Market-based approaches to carbon pricing are losing out to direct regulation of emissions.
- Wrong price image
Price image can often be more important in determining sales than actual product prices. Adjusting complex pricing and branding strategies to adapt to trends such as shifting consumer behavior is therefore a constant challenge.
- Supply chain disruptions
Recent “black swan” events have highlighted the vulnerability to supply chain disruptions of companies in both the developed world and in emerging markets. Some companies may elect to reverse some cost saving procedures to attain more supply chain control and flexibility.
- Inability to penetrate emerging markets
“Especially for Western companies, understanding emerging markets is an undeniable (but blatantly obvious) opportunity,” as one retail panelist noted. However, in order for foreign retailers to operate efficiently in emerging markets, they need to achieve a critical mass in terms of stores and revenues.
- Failure to respond to shifting consumer behavior
During the recent recession, consumers reduced consumption, cut back on lavish and impulsive shopping behavior, and increasingly used online price-comparison sites. This change in behavior may be so far off the trend line that a return to pre-recession consumption patterns may no longer be realistic.
In a less globalized world in which all retailers in a market tended to source their products from the same country, sudden location-specific risks had little impact on the relative competitiveness of market players. However, in a globally diverse market where retailers tap into different geographical locations, sourcing risks can have large impacts on costs, profitability and market position.
- Volatility in commercial real estate markets
Retailers are impacted both directly and indirectly by real estate market volatility. In addition, retailers need to stay ahead of real estate trends, such as the demand for commercial real estate shifting toward more dynamic, smarter, greener facilities.
Risks on the radar for retail sector
Our risk radar is a simple device that allows us to present a snapshot of the top 10 risks in the retail sector as listed above. The radar is divided into four sections that correspond to the EY Risk Universe™ model are follows:
- Compliance threats: originate in politics, law, regulation or corporate governance.
- Financial threats: stem from volatility in markets and the real economy.
- Strategic threats: are related to customers, competitors and investors.
- Operational threats: affect the processes, systems, people and overall value chain of a business.
Center of the Radar Risks: those that the commentators we interviewed, on average, thought posed the greatest challenge to the retail sector in the years ahead.
Arrows: Arrows indicate whether the commentators surveyed thought the risk would rise or fall in importance by 2013.