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

3:34pm EDT October 1, 2012
How to manage and overcome the risks inherent to the retail industry

In some grocery stores, your smartphone uses GPS to ping you when you’re near items on your shopping list. Other retailers allow customers to order something online, and when they arrive to pick it up from the store, the item(s) is already bagged and ready to go. Others still provide customers with options of where to buy, where to pick up or have delivered, and have price guarantees in order to create a positive customer experience and resulting sales.

With the retail industry facing challenging times, savvy risk managers are helping their companies understand how to manage costs and allocate capital strategically 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,” says Serpico. “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 and Todd A. Dillon, senior account executive at Aon Risk Solutions, 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. This is one of the biggest trends in retail. How are people making their shopping decisions? What does this mean for retailers, and how can they respond? For example, how do they prepare for a situation in which a customer walks into the store, and tries something on before buying it at a lower price on their mobile device?

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 they have programs to get associates back to work after an injury.

Emerging and changing risks are the new focus. These include network security, products liability for vendors, and wage and hour litigation. 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. A store might have products from 50 countries, so how does it control and manage contracts and litigation while understanding its exposure? Additionally, employment practices liability policies exclude wage and hour claims. However, this often drives a retailer’s exposure. 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, should you have higher retentions on certain programs because the loss history is predictable? Or perhaps you might be buying too much insurance on other programs. 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 are asking these questions as they work to create operational efficiencies for their companies. Asking questions helps avoid buying too much or too little insurance. Risk managers can also identify maximum capacity for loss across multiple lines of business. For instance, a $10 billion retailer may be able to absorb a penny per share of loss in a given year. However, you need to know what would happen if you have losses totaling five cents a share in a worst-case scenario year with a fire in your main distribution center, a customer death in a store and a security breach that compromises customer data. 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.

Know your overall retentions and whether they are aligned with the corporate strategy. Some companies are extraordinarily risk averse, so retentions are low, while others are very comfortable managing their own risk. It is up to risk managers to know the appetite of their company and make decisions that align with the financial objectives. In addition, 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 lynn.serpico@aon.com.

Todd A. Dillon is a senior account executive at Aon Risk Solutions. Reach him at (314) 854-0864 or todd.dillon@aon.com.

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