Regulatory Environment Poses a Top Threat to Retail Industry, BDO USA Report Finds

- IT Systems and Data Protection Risks Reach All-Time High -

CHICAGO--(BUSINESS WIRE)--Retailers are feeling pressure from a heightened regulatory climate. A new BDO USA, LLP analysis of the risk factors listed in the most recent 10-K filings of the largest 100 public U.S. retailers found that federal, state and local regulations have increased as a risk among the nation’s largest retailers. Nearly all retailers (97 percent) cite regulatory risks as they navigate the effects of government deficits, payroll tax increases and internet sales tax legislation on their businesses and on consumer spending. The risk was cited by the most retailers in the study’s seven-year history and was second only to general economic conditions (100 percent). Retailers also note increased concern over environmental (57 percent) and accounting (69 percent) regulations.

The BDO RiskFactor Report for Retail Businesses also found that retailers are increasingly concerned over the protection of their crucial IT systems and customer and company data. Verizon’s 2013 Data Breach Investigations Report recently found that the retail industry accounted for 24 percent of data breaches in 2012, second only to financial services. And in the wake of several high-profile industry security breaches, IT and data security risks were cited by the most companies in the study’s history at 89 percent and 85 percent, respectively.

“Data protection is critical given that retailers process and retain a tremendous amount of sensitive data through credit card transactions, loyalty programs, online shopping and social media,” said Doug Hart, partner in the Retail and Consumer Products practice at BDO USA, LLP. “Further, the increasing reliance on cloud computing solutions to process and store this data adds another dimension to this security and privacy risk.”

The following chart highlights the top 20 risk factors cited by the 100 largest U.S. retail companies:

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

Further findings in the 2013 BDO RiskFactor Report for Retail Businesses:

Labor Concerns Rise Amid Increased Competition & Costs. The number of retailers citing risks related to labor increased 10 percent this year, making it the sixth most cited risk. Two critical external factors are likely contributing to the jump. Given the large retail workforce, retailers are wary of the increases to the cost of labor that the Affordable Care Act will impose when it enters into full force in 2014. The number of retailers noting healthcare costs as a risk more than doubled this year (43 percent to 20 percent). At the same time, a slightly-improved job market means that competition for qualified employees is rising.

Supply Chain & International Risks Remain Prevalent. After ranking second for the past three years, supply chain risks fell slightly to the third most cited concern among retailers. This is partly due to decreased concerns over commodity costs, as 72 percent of those who disclosed supply chain risks cited commodity costs as a risk this year, down from 81 percent in 2012 and 84 percent in 2011. But despite stabilizing costs, increasingly global retail supply chains are causing an uptick in international operations risks (cited by 76 percent of retailers, up from 68 percent in 2012). Moreover, growing international operations expose retailers to volatile foreign currency exchange rates, which were noted by 40 percent of retailers as a risk.

Hurricane Sandy Brings Insurance Risks into Focus. After Hurricane Sandy disrupted Northeast retail operations and shipping, more retailers are focusing on their business interruption plans and insurance coverage. A vast majority of retailers (83 percent) note concerns over natural disasters, and this year 37 percent more retailers specifically point to the cost and reliability of insurance to cover potential losses.

Omnichannel Growth Impacts Strategic Growth Risks. A vast majority of retailers (85 percent) note concern over their ability to respond to changing consumer interests and demand. Customer preferences are driving the growing focus on omnichannel strategy, leading many retailers to expand their online and mobile channels. Concerns over executing business strategy (79 percent) and U.S. expansion plans (56 percent) remain high, but expansion risks have declined since 2010 and 2011 when many retailers began to transition away from rapidly adding new stores as their primary growth strategy. For some brands, building out e-commerce and mobile capabilities may be a more efficient investment, as it can be less capital-intensive.

The 2013 BDO RiskFactor Report for Retail Businesses 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.

About BDO

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 45 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,204 offices in 138 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.