Interest rates top retail’s concerns
In its eighth annual study of the risk factors cited in 10-K annual filings by the 100 largest publicly traded U.S. retailers, BDO USA found that interest rates jumped to the No. 1 economic risk for U.S. retailers.
Eight in 10 retailers mentioned interest rates as an economic concern, up from 50 percent in 2009. It was the first time in the study’s history that interest rates rated the top concern, overtaking fuel prices (74 percent) and unemployment (70 percent)
In a statement, BDO said that 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, changes in interest rates could impact retailers’ debt financing and pension plan assets.
Other rising concerns:
Breaches: 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. BDO reported that Verizon found 467 security incidents in the retail industry in 2013, with point-of-sale intrusion and web application attacks being the most common threats. Growing concerns over litigation (91 percent) also appear to reflect potential liabilities around breaches.
International: Eight-in-ten retailers cited international operations risks, including managing a dispersed workforce and complying with international laws and regulations like the Foreign Corrupt Practices Act. That’s up from 70 percent in 2013 and 47 percent in 2009. The increase was said to be tied to international expansion by many chains over the past few years as well as retailers that source or sell internationally facing greater challenges. Currency exchange rate fluctuation risk was cited by 67 percent as an economic concern, up from 40 percent in 2013.
Regulation: 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. BDO traced the increase to discussions around data privacy and minimum wage legislation as well regulators place increasing scrutiny on internal controls.
Discussion Questions
Which of the four rising concerns mentioned in the BDO report — interest rates, breaches, international and regulation — should retailers be most concerned about? Is there another risk that should earn equal or greater attention?
Retailers should absolutely FEAR rising interest rates the most. It is a major factor that represents a double whammy:
1. Rising Interest rates will have an immediate impact on consumer purchasing power. Even if employment increases, consumers will have less to spend as they struggle with the impact of interest sucking up spendable income.
2. Most retailers finance significant portions of their inventory, especially for the all important holiday season. Rising interest rates make obtaining lines of credit more difficult, and suck up retailers’ open to buy for inventory.
Concerns: #1 – the customer and loyalty. This area is where retailers need to move faster and change the way that the store teams think, learn, and serve shoppers. Every sale must be treated like the only sale. Every shopper must be treated like your only buyer. Areas that impact this this are data security and interest rates. The Fed report rolls out today and if rates rise, the shopper’s potential spend drops. This will be especially true with the older shoppers as they watch their cash flow. Data security – hoards of things and studies to read – retailers need to treat customer data like it is their own personal info and step up their security at all levels.
All in all – none of the risks matter if you do not quit reading the overflow of retail industry studies and metrics and start focusing MORE on the shopper.
Why am I rampant on this? I was just in an auto parts retailer (large national chain) and needed some help with specific grease gun related issues. Not ONE of the people in the store knew a thing about grease guns. A fellow shopper did and we figured out the best answer. 7 store employees – no knowledge about some of the basic products they sell.
The shopper – the retailer’s answer to all problems….
Prevailing economic conditions are consistently at the top of retailers list of concerns which is appropriate. It also isn’t too surprising to see Security Concerns show up as the fastest growing concern (from 46% in 2009 to 91% in 2014).
What surprises me the most is who are the 9% of retailers who still AREN’T concerned about data breaches!?!?
How to ramp up their eCommerce initiatives more quickly so they can compete more effectively with the online retailers. Few brick & mortar retailers can keep up online with eTailers, and none with Amazon so far, so personally I would put that at the top of their to do list.
Retailers should be most concerned about breaches. Every breach erodes consumer confidence in retail’s ability to keep their information safe. Retailers who experience breaches lose sales. Sales are built on trust. Retailers need to maintain consumer trust.
The answer is breaches. Have dinner with a retail CISO and you’ll hear all about how data protection dollars aren’t sufficient and aren’t being spent in the right places. Retail boards of directors need to get involved, ask questions, and seek out the most talented companies to help — not just purchase the latest box.
You have to look at what you can help control. Interest rates? Not so much. Regulation? Lots of lobbying required. International? Definitely some control here by executing on a clear competitive strategy. Not easy to do, however, it is very doable.
And then we have data security. This is far and away the one challenge that retailers and CPG brands can help control the best out of the ones mentioned. Regardless of what hackers come up with as new threats appear, there are definitive strategies and tactics to execute those strategies that will help make data secure in an ongoing fashion. This is the one to put “all hands on deck” to accomplish.
Rising interests rates affects the purchasing power of both the retailer and consumer. In addition, it’s the factor on which the merchant has the least control.
Although breaches are a definite concern, there are steps that can be taken to minimize them. Something can be done if one is diligent.
I don’t see international ops or regulations as being in the same category as items 1 and 2.
I agree with Tom Redd. Customer loyalty should be retailers’ main concern. The scenario of uninformed, under-trained and under-paid sales staffs is too common an occurrence. Companies should stop looking crossed-eyed at data and numbers and focus more on customer relationships. If they did that, none of these other concerns, though a factor, would be able to topple the firm foundation of putting the customer’s needs and desires first.
Privates are the lowest ranking and lowest paid soldiers, however, no self-respecting officer would send a private into battle without the proper training and equipment. Every day, retailers send their lowest ranking and lowest paid employees into the field of engagement with little training and out-dated equipment. It seems that more attention should be paid to placing a higher level of value on the people who have the most direct responsibility for creating a positive customer experience.
Like Tom, I’ve often found fellow customers more informed and helpful than the people who work at stores. Fix this first, then worry about interest rates, security risks and regulations.
I’ll spare readers a rant on the absurdity – and lack of any apparent overall benefit – to having kept rates so low for so long (though it’s apparent when people are “concerned” about them returning to what would historically be considered “normal”), but I would hope we can all agree the picture presented is incomplete. What about the additional finance revenue retailers will earn off their charge accounts, or the additional spending – particularly from retirees – that higher savings rates will generate? (Assuming, of course, deposit rates follow loan rates)
But enough of my not-a-rant rant. I’ll vote for regulation; rising concern/disgust over lagging incomes, and continued – and highly publicized – security breaches are both likely to create intervention (minimum wage increases and encryption requirements), not to mention the ongoing ACA issues…”regulation” is always a good beat, since it can cover practically everything.
On March 27, the Fed announced an expected increase in Spring 2015, and the topic was raised months earlier, so no puzzle about this finding. At 0.25% the Federal Funds rate allows a very low prime rate of 3.25%. I suppose if it can’t go lower only one direction is left. It was as high as 5.00% in 2006 through early 2008, but it hasn’t budged in 6 years. Any business making economic plans based on the assumption that the Fed rate could possibly stay put for much longer is delusional or incompetent.
One thing about interest rate changes – they affect all businesses simultaneously. The “risk” lies in not managing the changes as well as your competitors, or in having weaker fundamentals. Shoppers already are victims of huge gaps between savings and revolving credit rates, so a quarter-point jump may not chill consumer spending as some fear. Just my opinion.
Data breeches are probably a more sensational concern, which may affect some companies worse than others. Big companies are more tempting targets, but they also have more resources to prepare defenses. I think we can expect much mayhem in this regard, and it could hamper retailers’ abilities to use technology to better the shopper experience.
I think international operations risks top my list however — at least for those very large retailers who have grown large enough to operate across borders and oceans. So many variables involved, all of which nourish our greatest enemy: complexity.