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Deloitte
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Contact: Andrew Griffiths
Deloitte
Partner - Assurance & Advisory
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Deloitte
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Retailers have shifted the focus of the management agenda from profitable growth to the management and mitigation of the growing risks confronting the retail business, according to the latest Deloitte study on retail.
The study, titled "2006 Global Powers of Retailing" and completed in conjunction with Stores magazine, ranks the largest 250 retailers worldwide and examines the global economy and its anticipated impact on the year ahead. Also included in this year’s study is a discussion of the major risks facing retailers.
"Global sourcing and operations have not only become much more complex but much more precarious," observes Andrew Griffiths, Deloitte partner and retail specialist.
"Globalisation, along with industry consolidation, is not only creating intense competition and price pressure but also contributing to a high degree of sameness among retailers. The result of this is a very powerful and demanding consumer, creating a new agenda for today’s retailers.
"As Australia moves into 2006, retailers are looking at the impact that fluctuating petrol prices, a stagnating housing market, interest rates and other macro economic indicators will have on retail sales. In addition, cost control, particularly in the supply chain, and differentiations of the retail offering are also key factors that will impact retail performance throughout the year."
The 2006 study details seven major risk themes that are escalating up the list of the 21st century’s CEO agenda. They are:
1. Non-financial risks. Retailers have a uniquely intimate relationship with the end consumer. The public perception of a retailer, as a result, is crucial to protecting its brand. Increasingly, shareholder and other activist groups are scrutinising how a company’s behaviour affects the environment, how it treats its workers, and other elements of "corporate social responsibility." For retailers, being a good citizen is absolutely critical. The media profile of the most powerful retailers and fast moving consumer goods companies requires them to be responsible and positive contributors to society or risk consumer backlash, political repercussions, and regulatory change.
2. Globalisation. Because the world’s leading retailers procure and sell merchandise all over the world, in line with the increasingly varied demands of their customers, they are vulnerable to the uncertainties of the global economy. Of particular importance to retailers and their suppliers are uncertainty in the exchange rates, potential restrictions on trade, and movements in the price of oil.
3. Global supply chain. Global sourcing and increasingly global operations are resulting in more complex and fragmented supply chains. While service level versus cost remains the core issue for most retailers, a number of other factors are contributing to growing supply chain complexity, creating greater risk exposure for all participants.
4. Terrorism. For retailers, terrorism has several dimensions. Firstly, it involves securing existing facilities and protecting the lives of employees and customers against catastrophic attacks. It also involves the security of merchandise against attack—especially in the food chain. Failure to develop plans for business continuity can lead to business failure. Finally, the risk of terrorism means evaluating all major business decisions against this threat.
5. Brand management. As more and more retailers roll out their own "private" brands, they are taking on more responsibility for traditional brand-building activities. As they do so, they are also assuming brand and inventory management risks that historically have been the responsibility of the supplier. Key brand management risks include financial risks, brand reputation risks, and portfolio management risks.
6. Talent management. Growing retailers require more and more talented people to plan merchandise and to manage information, supply chains, and stores. Yet demographics in most major markets could make it difficult to meet such demands. The decline in the number of young adults bodes poorly for finding and retaining talent. Moreover, in emerging markets the current supply of skilled workers is already insufficient. The result is increasing costs of skilled labor and the increasing challenge in retaining talent. This is one of the greatest risks facing growing retail organisations—especially those growing in emerging markets.
7. New media. Technology has radically altered the media landscape. Retailers, who have long relied heavily on traditional media outlets such as television, radio, newspaper, and magazine advertising to reach consumers, now must adapt to new media such as the Internet, increasingly powerful mobile phones, and video games to break through a cluttered media landscape. As mass marketing and mass communication continue to erode, retailers risk losing control of the marketing message. At the same time, these new media provide retailers with new opportunities to reach consumers on a more customised and personalised basis, often with unprecedented efficiency and accountability.
Some of the report’s other major global findings include the following:
• Mergers and acquisitions activity produced considerable movement in the ranks beyond the top 10 retailers. In many cases, however, sales growth came at a price. Earnings were hit hard by integration and conversion costs, and the companies have struggled to extract maximum value from their acquisitions.
• Food-related stores still far outnumber other types of retailers. Nearly 60% of the Top 250, and nine of the top 10 retailers, sell food, with most operating a variety of formats.
• The increasing size and market penetration of the largest retailers are having a significant macro-economic impact: Intensifying competition among these major players is driving prices down and giving unprecedented power to value-seeking consumers.
