How to Manage and Overcome the Risks Inherent to the Retail Industry

How to manage and overcome the risks inherent to the retail industry

Jayne Gest 10:42pm EDT October 31, 2012 (edited by Mr. B)

With the retail industry facing challenging times, savvy risk managers are helping their companies manage costs while finding ways to stay ahead of market trends, says Lynn Serpico, managing director at Aon Risk Solutions.

“These risk managers have the opportunity to help shape the business as they manage operations and costs,” she says. “At most retailers, risk managers are responsible for mitigating — for keeping the operation efficient, making sure that the use of insurance, self-insurance and alternatives are in line with overall company objectives, and that the treatment of risk is agreed to by all internal stakeholders. At a retailer, these stakeholders can include treasury, legal, logistics, marketing, merchandising or IT.”

Smart Business spoke with Serpico about the current risks that retailers face and the best ways to mitigate them.

What is new in the retail industry with risk?

Aon compiles a retail industry analytics report annually, collected from proprietary data and client interviews, identifying the top 10 risks. Retailers say the global economic slowdown is the No. 1 risk. With consumer discretionary spending as the biggest driver of retail sales, the industry constantly battles variables that are out of its control, such as gas prices.

Second, retailers worry about damage to their reputation or brand. For any retailer, the worst possible scenario is that customers stop shopping in their stores. The third-biggest risk is a market of increasing competition, one of the biggest retail trends. How are people making their shopping decisions? What does this mean for retailers, and how can they respond?

Other risks include:  Distribution or supply chain failure.  Regulatory and legislative changes, particularly surrounding workers’ compensation, normally the largest contributor to a retail risk manager’s total cost of risk.  Technology failure.  Failure to innovate and meet customer needs.  Failure to retain top talent and, therefore, manage crime, theft, fraud and employee dishonesty. With plenty of turnover, there is a need for safety training and internal loss control to ensure not only a good store experience for customers but also employee safety and that employees are behaving in ways beneficial to the company. What risks are critical priorities to manage?

Most retailers have gotten really good at managing the more traditional risks — property, workers’ compensation and general liability. For example, they know how to get their stores running after a natural disaster and have programs to get associates back to work after an injury.

Emerging and changing risks are the new focus. Network security is key, as this feeds in to a retailer’s reputation. It has customer data, employee data, financial information and, in some cases, medical data, and the risk is ever evolving because bad actors are getting craftier and losses are high profile.

Vendor/supplier contract management also is critical. Finally, retailers must continuously innovate and drive down costs so savings can be passed on to customers.

What best practices address common mistakes for retail risk managers?

As an industry, margins are thin, so retail risk managers need to carefully analyze their portfolios to determine the best use of capital. For example, you might be buying too much insurance. Maybe there is a way to self-fund a certain amount of loss and buy excess capacity, which could reduce fixed costs. Is there an alternative that has not been considered?

If you have a loss that is not insured, have you vetted the process internally? Do you know how it will be funded?. Risk managers can also identify maximum capacity for loss.. It is important to get feedback internally, and ensure that all stakeholders understand decisions being made around insurance and the effect those have on the business from a financial perspective. Whenever there’s a loss, multiple internal stakeholders need to be involved in the process.

Lynn Serpico is a managing director and the National Retail Practice Leader at Aon Risk Solutions. Reach her at (203) 326-3464 or [email protected].

Insights Risk Management is brought to you by Aon Risk Solutions

Questions:

1. The author is with Aon Corporation. What is their primary line of business?

2. What is meant by the term mitigating risks? 3. What did the Aon survey list as the three biggest risks for a retailer and are they a major concern for a school store operation?

4. Five further risks identified in the survey are listed in bullet points. Which of those five are likely to be important issues for a school store. Provide an example of each issue you list as important.

5. The article lists network security as a “new” risk (back in 2010 when this was written…). Cite a recent example of a major retailer whose major breach in security is severely damaging sales.

6. Why does the author advise that purchasing the right amount of insurance is critical for retail operations? 