Industry Views

Retail and Consumer Goods

Key Issues for the Industry Currently Reflected in the Risk Selection

Supply chain risk and cyber risks, especially those associated with digital-transformation strategies, continue to create challenges for the industry. When combined with business interruption, these top risks point to retailers’ ongoing concerns about keeping operations running smoothly while minimizing financial surprises such as a long-term reduction in demand due to lasting pandemic effects. Even a relatively early resumption of peak operations is likely to come with a lasting shift to more online purchasing, moving omnichannel strategies to center stage as a way to expand customer reach.

Increased competition in the retail industry remains a top priority. The changes thrust upon the traditional retail business model by the pandemic significantly influenced the pace at which retailers were forced to find innovative solutions to meet their customers’ needs, specifically in areas such as staffing, e-commerce and delivery of goods.

Surprises in the Top 10 Risks Selected

Pandemic risk ranks lower than expected considering the impact it has had on demand and supply chains. Additionally, failure to innovate ranks surprisingly low, given the negative impact of the pandemic’s disruption on retail organizations with inflexible, one-dimensional strategies — for example, relying on stores only rather than also selling online.

Workforce shortages, in roles ranging from strategists to drivers, warehouse staff and temporary workers, could become a major risk as peak operations resume. Respondents may not have cited this as a top risk because they believe it is temporary and will abate as the pandemic recedes.

Most Underrated Risks

Failure to innovate or meet customer needs arguably should be a top three risk. The sector is transforming quickly, and retailers that are slow to innovate will continue to lose market share. For example, Amazon has changed customer expectations regarding delivery time, and retailers that do not recognize and adapt to those new expectations are at risk. To meet customer needs and remain relevant, companies must include omnichannel strategies in the conversation.

Workforce shortages associated with a historically tight labor market are forcing retailers to close stores completely or operate with reduced hours. Distribution center (DC) workers and truck drivers are also in high demand, as are technical staff needed to install, maintain, troubleshoot and repair complex and increasingly automated DC and e-commerce equipment. Collectively these shortages are exacerbating supply chain risk and business interruption risk.

ESG risk is underrated. This could be because retailers are preoccupied with resuming operations disrupted by the pandemic, or because they feel they already have plans in place to manage it.

Challenges the Industry Will Face in the Next 3 Years and What Organizations Can Do to Address Them

The road to retail recovery lies in continued and speedy reinvention as the sector embraces the rapid and seismic shift to online channels. Retailers around the globe are working hard to transform their operations to meet online demand, fast-track digital integration and innovation initiatives to retain customer and shareholder loyalty, and meet increasing revenue projections. Retailers will find it challenging to consolidate business models to craft and implement sustainable, omnichannel strategies and deliver high-level returns to stakeholders.

As reliance on e-commerce grows, the retail sector will confront increasing concerns about cyber risk and ransomware. To address these risks, retailers will need to bolster IT resilience, identify vulnerabilities and assess the potential financial impact of events. Vulnerability of key suppliers and raw materials is expected to undergo even more scrutiny by retailers.

Retailers will also need strategies to become an employer of choice in their geographies, while making investments in labor that have a positive impact on broader financial results. Competition for nontraditional retail talent — such as drivers, technology workers and those with skills to repair and maintain more automated equipment — will intensify as the industry continues to reduce its reliance on brick-and-mortar stores.

Finally, retailers that fail to continually innovate and adapt — especially smaller retailers that may lack available capital — will face significant challenges.

How New Challenges Will Require Companies to Change Their Approaches to Risk Management and Mitigation

Too many retailers approach risk management only through the lens of cost management. Few have invested in enterprise risk management resources to support risk outside of the typical insurance programs managed by the risk management function. On the plus side, some organizations are starting to see risk leaders as strategic business partners.

Meanwhile, cyber risk management will require companies to invest in additional resources and systems to proactively reduce exposures, because cyber insurance could become unaffordable or even unavailable due to insurers’ concerns about the ability to control this exposure.

Broadly speaking, market conditions are prompting more discussions about alternative risk financing options as many organizations see their risk transfer costs surge. The trend toward increased retentions will almost certainly lead to more extensive utilization of captives and captive-type vehicles, even by organizations that may have previously discounted this approach for reasons ranging from lack of scale to capital commitment. Given the current market conditions, now is the time for risk managers to rethink the captive concept.

Finally, the past year has demonstrated that businesses need to invest in expertise to manage risk and insurance internally, rather than relegating it to a function managed part time within the treasury, finance, safety or human resources department. Shareholders and investors will continue to intensify pressure on companies to demonstrate effective corporate governance.

Current Top 10 Risks

Predicted Future Risks

By 2024

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