Risk management the cost of risk in retail industry
Risk Management: The Cost of Risk in the Retail IndustryIn a highly competitive market of price wars and shrinking profit margins, retailers mustholistically manage their risk management process to protect their sustainability and profitability.The retail industry is among the largest contributors to the U.S Economy and in 2010 accounted forover $3.7 trillion in sales and 14.5 million employees, second only to healthcare. Shoppers may notbe aware of it, but every time they frequent grocery stores, fill their vehicles with gas, shop forclothes at the mall or purchase a best seller from a bookstore, they are also contributing to insuranceand risk management costs. Included in the price consumer’s pay for these items is a small amountto cover risks borne by retailers. While a consumer may not be aware of a retailer’s risk and itsfinancial impact, retail companies most certainly do since they operate on smaller profit margins,often as low as 2%.The risks that affect retailers typically fall into three categories:Hazard RiskThe probability of loss inherent in an organization’s physical and human presence such as damageto property assets, occupational injuries, injuries to third parties, auto incidents, employment relatedlawsuits and faulty products.Business RiskThe probability of loss inherent in an organization’s quality of operations such as increasingcompetition, economic conditions, borrowing capacity, cash flow, key employees and businesscontinuity following a catastrophe.Strategic RiskThe probability of loss inherent in an organization’s business strategy such as consumerpreferences, product innovation, brand management, acquisitions and supply chain.The cost to insure hazard related risks for retailers can range anywhere from 0.6% to a staggering1.5% of total revenues. This means many retailers spend more on risk than the owners’ take homein a year. Lowering the cost of risk will allow retail organizations to optimize the bottom linewithout necessarily increasing sales, which is key in today’s economic climate. Let’s review somecost drivers in a retail company’s cost of risk:Hazard Risks:Workers’ Compensation■Largest Driver of Cost – Both Direct & Indirect Costs■Occupational Injuries Create Significant Indirect Costs■Significantly Impacted by Escalating Medical Costs■Driven by Slip, Fall & Strain Claims
General Liability■Significant Direct Costs■High Percentage of Litigation■Driven by Slip & Fall Claims■Claim Frequency is Decreasing but Severity is IncreasingEmployment Practices Liability■High Business Insurance Premiums■Costs Driven by Litigation■Frustrating & Time ConsumingProperty■Smaller Cost■Low Frequency but High Severity■Claims can be Significant & Effect OperationsThe cost of business and strategic risks, while harder to measure, can potentially be catastrophic andthese risks are typically either not insured or are uninsurable. In 2007, TJ Maxx uncovered a cyberattack that resulted in the hacking of over 45 million credit card numbers. Another example isemployee turnover. The National Retail Federation estimated industry turnover at 110% along witha conservative cost estimate of $3,500 per employee. Both of these examples threaten bothsustainability and profitability. We have all seen multiple small and big-box retailers shut theirdoors and file for bankruptcy after failing to properly manage and mitigate their business andstrategic risks. When we ask business owners what risks “keep them up at night” they frequentlymention these types of risks.Business & Strategic Risks:Brand Reputation■Significant Loss of Revenue Opportunity■Retailers Greatest Asset is its Brand■Lengthy Restoration PeriodCash Flow & Balance Sheet Protection■Prohibit Growth■Decrease Competitiveness■Decrease Shareholder Value■Fluctuating inputs like Gasoline & Diesel■Access to CapitalHuman Capital■High Employee Turnover – Typically Greater Than 100%■Low Employee Engagement – Typically Less Than 60% Engaged■Quality of Customer ServiceIn a highly competitive market of price wars and shrinking profit margins, retailers must holisticallymanage the cost of hazard, business and strategic risk, as well as their risk managementmethodology to protect their sustainability and profitability.