Lupin 2023

There’s no lack of challenges for mass retailers

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Chain drug store operators and other mass market retailers have much to contemplate as they look to the future. Numerous signs of potential promise and peril appear on the road ahead, challenging executives to discern which of them point to developments that will turn out to have a major impact on their business.

A new study by professional services firm BDO USA provides insights into what’s on the mind of business leaders today. Based on an analysis of risk factors cited in the most recent 10-K filings of the hundred biggest publicly traded retail companies in the United States, the report reveals a broad range of concerns — everything from the fitful economic recovery and the availability of financing to competition and consolidation in the retail sector, and natural disasters and terrorism.

It comes as no surprise that general economic conditions ranked as the top issue for the fifth year in a row, with fully 100% of the companies citing it in their latest filing with the Securities and Exchange Commission. Despite the robust health of the stock market and some other positive trends, retail executives are more concerned about the business climate now than they were in 2009, when 96% of the companies mentioned the issue in their 10-K.

While worry about the state of the economy has remained constant, other issues have steadily gained prominence. Government regulations — whether at the federal, state or local level — ranked second in the new BDO study, with 97% of the companies citing them. That was the highest level for that factor in the report’s seven-year history, up from only 66% in 2009. BDO says retailers are particularly concerned about the impact of budget deficits, payroll tax increases and sales tax legislation aimed at Internet purchases.

Technology has emerged as another focal point, placing fifth among issues cited. Implementation and maintenance of such systems followed a trajectory in the rankings similar to governments regulations; it was mentioned by 61% of companies five years ago and 89% today.

The related issue of privacy concerns linked to breaches in security tied for eighth. It’s on the radar screen at 85% of the companies, almost double the 46% registered in 2009.

“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,” notes Doug Hart, a partner in the retail and consumer products practice at BDO USA. “Further, the increasing reliance on cloud computing solutions to process and store this data adds another dimension to this security and privacy risk.”

The issue that tied for eighth place, dependency on consumer trends, has also shot up in importance. Eight-five percent of retailers now view it as a risk factor, up from 63% in the 2009 study.

BDO attributes the shift to the evolution in consumer attitudes, with more and more people demanding the means to shop whenever, wherever and however they want to. That mind-set puts intense pressure on retailers to develop competitive omnichannel capabilities, which include robust e-commerce, mobile and social media elements.

For traditional brick-and-mortar merchants the new realities can require a bold conceptual leap, which some are making more successfully than others. The difficulties inherent in that transition may well account for another entry on BDO’s list of risks — failure to properly execute business strategy. Seventy-nine percent of companies expressed concern about that this year, up from 32% in 2009.

In one sense, it’s surprising that a focus on responding to consumer trends and execution didn’t rank higher than they did. Unlike many of the threats identified in the BDO research, those two factors are, to a large extent, within the control of a given company.

In the pharmacy space, for example, it’s up to other chains to decide how to react to the innovations embodied in Walgreens’ flagship stores; figure out what can be done to counter CVS Caremark’s increasing skill at leveraging synergies between the drug store and PBM aspects of its operation; and develop the means to blunt Amazon and other Web-based merchants’ incursion into traditional “drug store” categories.

Those are the kinds of competitive challenges retailers have always had to cope with. While it’s vital for them to understand macroeconomic and governmental factors that affect business and do what they can to influence them, retailers should concentrate, first and foremost, on what they must do to keep consumers who have more options than ever satisfied.


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