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Poll shows top 20 business risks

June 19, 2010

BDO Study Identifies Leading Risk Factors At 100 Largest Public Retailers
By BDO

The following is the list of the Top 20 Risk Factors of the Largest U.S. Retailers:

1.  General Economic Conditions 96%
2.  U.S.& Foreign Supplier/Vendor Concerns 86%
3.  Competition & Consolidation in Retail Sector 85%
4.  Credit Markets/Availability of Financing & Company Indebtedness 84%
5.  Consumer Confidence and Spending 83%
6.  Changes to Federal, State and/or Local Regulations 72%
7. tie  Labor (health coverage, union concerns, staffing) 70%
7. tie  Terrorism, Natural Disasters & Geo-political events70%
9.  Consumer Credit and/or Debt Levels 69%
10.  Implementation of IT Systems 64%

11.  Dependency on Consumer Trends 63%
12.  Legal Proceedings 62%
13.  Changes to Accounting Standards and Regulations 58%
14.  Impediments to further U.S. Expansion 57%
15.  International Operations 55%
16.  Privacy Concerns Related to Security Breach 51%
17.  Loss of Key Management/New Management 49%
18.  Mergers & Acquisitions 47%
19.  Seasonal Flux in Sales 44%
20.  Failure to Properly Execute Business Strategy 43%

Chicago, IL, – Research released today by BDO, a leading professional services firm, identifies general economic conditions (96%) as the leading risk factor by far among the 100 largest public U.S. retailers for the second year in a row. Despite this, of the retailers who cite general economic conditions as their chief concern, only 49 percent cite financial market turmoil, a drastic reduction from the 97 percent of retailers who cited it as a concern in 2008. This year retailers are more concerned over unemployment (70%), interest rates (56%) and inflation (41%). Concerns over U.S. and foreign suppliers and vendors jumped to the second spot this year (86%) while credit availability and company indebtedness (84%) dropped in importance (#4), but remains a critical concern for retailers in 2010.

“Although the economy has improved over 2009, retailers are still concerned about general economic conditions, unemployment and consumer credit. The April 2010 sales results confirmed that the consumer rebound is still a work in progress. Until consumer spending is fueled from actual income growth and not savings accounts, retailers have modest expectations for a consumer comeback,” said Doug Hart, a Partner in the Consumer Practice at BDO. “In the interim, retailers need to continue focusing on the fundamentals of cost control and careful inventory management, while selectively looking for strategic growth opportunities.”

These are just a few of the findings in The 2010 BDO RiskFactor Report for Retail Businesses. The report examined the risk factors listed in the most recent SEC filings of the largest 100 publicly traded U.S. retailers; the factors were analyzed and ranked by order of frequency cited.

Further findings in The 2010 BDO RiskFactor Report for Retail Businesses:

General Economic Conditions. Of the 96 percent of retailers that cite general economic conditions as a concern, unemployment (70%) and energy/oil (70%) are most frequently cited followed by interest rates (56%), financial market turmoil (49%), inflation/deflation (41%), the housing market (37%) and currency risk (25%). In 2009, of the 96 percent of retailers that cited general economic conditions as a concern, financial market turmoil was most frequently cited (97%) followed by energy and oil (69%), unemployment (62%), interest rates (50%), inflation/deflation (33%), the housing market (31%) and currency risk (16%).

Consumer Credit and Debt Levels are Red Flags. Evidence indicates that the source of the recent surge in consumer spending was savings, not consumer credit or income growth, driving the personal savings rate to 2.7 percent – the lowest level since September 2008. While consumer borrowing rose unexpectedly in March, it was only the second gain in the last 14 months. Uncertainty over consumer spending sustainability is likely driving the vast majority (69%) of retailers to be acutely concerned over consumer credit and debt levels. In 2009, almost half (49%) of retailers cited it as a concern; still a big increase from the 26 percent of retailers who cited it as a concern in 2008. Consistent with 2009, sixty-three percent of retailers focus on consumer trends and demand this year, a continued increase from 45 percent of retailers who cited it as a concern in 2008.

Proposed Accounting Changes Seem Daunting. More than half (58%) of retailers show an increased concern over U.S. accounting standards and regulations this year, up from 2009 (44%), 2008 (36%) and 2007 (32%). Retailers are especially concerned about the proposed lease accounting rules that will cause their debt levels to increase at a time when credit is already tight.   This regulation will also require them to bring these leases onto their balance sheets currently based on very rough estimates of long-term future sales, which often drive the amount of store rent.

Sourcing is an Increasing Concern. Foreign and U.S. sourcing moves up to the #2 concern from #4 in 2009. Given U.S. retailers’ reliance on China and other foreign country vendors, they are acutely aware of Chinese labor cost inflation and U.S./China business relations, which have recently been strained. Retailers also realize that many of their vendors and transportation partners have reduced capacity during the downturn. Therefore, if consumer demand returns, some retailers are concerned about whether their current supply chain can quickly resume to its previous levels.

Downplay on U.S. Expansion Efforts. Fifty-seven percent of retailers cite impediments to U.S. expansion as a concern, a significant drop in importance (#14) compared to 2009 (#11), 2008 (#4) and 2007 (#3). Most retailers are in “hunker down” mode and look to expand when operations show real, live turnaround. While a few retailers are expanding, their efforts are focused on opening 5-10 stores as opposed to the 500 store openings retailers may have considered in brighter economic periods. Some retailers do see an opportunity for new locations, taking advantage of a cheap retail lease market.

Credit Market Availability is Returning. In 2009, credit market availability rose to #2 from being the #11 risk in 2008. While company financing is still a sensitive area (#4), it appears to be improving as evidenced by the declining number of recent retailer bankruptcies.

Strategy Execution is Key Focus. Almost half (43%) of retailers express concern about business strategy execution this year, signifying a dramatic increase from 2009 (32%) and 2008 (4%). Because of the recession, retailers are renewing their focus on fundamentals including inventory, operating expenses, capital expenditures, accounts payable and credit facilities.

  
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