Retail sector risks in 2018: part 2

Retail sector risks in 2018: part 2

Recruitment challenges, changing buying habits, reputational risks and a lack of innovation will all pose an increasing threat to retailers.

Listed below are some of the key risks that Lockton expects retailers will face in the next year and beyond. While some retailers will struggle to manage these risks, other retailers will find within them opportunities for innovation and growth.

5. People risks
Failing to attract and retain top people is a continuing challenge for such a high-employing sector. A lack of suitable candidates can be a major problem at executive levels, with rapid personnel changes easily leading to gaps in retailers’ ability to define and execute strategy.

Inappropriate staff behaviour could prove a bigger risk as demonstrated by recent behaviour-led scandals afflicting a range of different companies.

Meanwhile, the introduction of higher minimum wage standards is influencing volume recruitment, as might the possibility of reduced immigration in the build-up to, and following, Brexit.

Inappropriate staff behaviour – and the media scrutiny it can attract – could also prove a bigger risk, as demonstrated by recent behaviour-led scandals afflicting a range of different companies.

On a related note, growth of the ‘gig economy’ (for example, the use of self-employed workers for roles such as delivery driver), could increase the risk of lower or less consistent standards among workers and, potentially, a greater risk of employee misbehaviour and reputational damage.

Growth of the gig economy also raises uncertainties surrounding retailers’ duty of care towards technically self-employed workers who, for example, might have a second job elsewhere and bring the ill-effects of that other job into the workplace (and their interaction with customers/the public).

Meanwhile, some retailers might face a relative shortage of HGV drivers, which could place a strain on driving standards and motor risk management. Retailers’ management liability may also rise: for instance, it is conceivable that one day a criminal charge could be brought against a company and its directors for knowingly associating with corrupt labour practices.

Closing any possible gender inequalities will be another growing consideration for retailers: females in the industry earn 19.4% less per year, according to data collated in 2017 by the Chartered Management Institute and XpertHR. Such inequalities will become ever less tenable.

6. Changing consumer patterns
Online sales growth continues to contrast with flat in-store sales. Internet sales in January 2018 were up 15.8% compared with the year before and now account for 16.5% of all retail, according to the Office for National Statistics.

Physical stores will have to work harder to offer experiences that online retailers cannot provide.

Large, fairly impersonal stores could be on the way out; if shops fail to offer either value, convenience or experience then they will struggle. Physical stores will have to work harder to offer experiences that online retailers cannot provide, such as fashion style talks, cookery classes and beauty treatments. Customer service might be even more important as a differentiator between online and in-store retail.

Sales channels are becoming increasingly blurred – beyond ‘click & collect’ – as online and offline become symbiotic. It is less easy to draw the line between ‘physical’ and ‘digital’ when the consumer is often checking prices/buying online while in-store.

Customers will continue to gravitate towards retailers that provide the best and most consistent multifaceted experience. Yet many retailers are still running legacy assets and online sales in parallel, and struggling to create a profitable omni-channel model.

Retailers will need to work hard to adapt to younger generations’ expectations of the buying experience. For example, 95% of millennials want to build meaningful interactions with brands on social media, and expect shopping experiences that are memorable and shareable. This will challenge the department store model and others where the brand does not actually control the customer proposition.

7. Reputational risks
With social media a part of everyday life, retailers run the risk that one post, video or comment from a Board member, customer or associate could affect sales or customer opinion.

Companies will need to be more vigilant in their monitoring of customer sentiment.

Embedding good governance will move from being aspirational to a necessary requirement for optimum decision-making and transparency. Companies will need to be more vigilant in their monitoring of customer sentiment, while their crisis management will have to be far more nimble and responsive.

Ethical considerations should rise even further up retailers’ agenda. It is not just retailers who have to been seen as ethical and encouraging good practices – so must their suppliers. Retailers must be mindful of changing consumer attitudes – for example, the growing interest in environmentally friendly production methods (as seen by the recent push-back over plastic straws and non-recyclable coffee cups).

Retailers’ broader support of healthy eating and healthy lifestyles will also become more important, as they manage the possibility/risk of being brought into broader societal debates about healthy living.

8. Lack of innovation
The retail sector is undergoing a high level of technological disruption. In the US, for example, Amazon recently opened a supermarket that has no checkout operators or self-service tills, and instead uses hundreds of ceiling-mounted cameras and electronic sensors to identify each customer and track the items they select. Purchases are billed to customers’ credit cards when they leave the store.

Many retailers will need to adopt a greater level of risk-taking than before.

To remain competitive, many retailers will need to adopt a greater level of risk-taking than before. This will be a difficult mental shift to make – especially when companies are under severe cost pressures.

From Tesco’s purchase of food wholesale Booker Group, Sainsbury's' Argos acquisition and prospective merger with Asda, through to Ikea trying its hand at tailoring, bold, unexpected market changes increasingly characterise the sector.

Retailers will need to make innovation integral to their business strategy. Some retailers are forming their own start-ups – either within a traditional business or by creating a secret competitor to the parent – which means being unafraid to cannibalise the core business. Retailers will need to think about talent – not just in terms of digital-savvy engineers, but also the people who can understand the customer and apply new technologies. For instance, since opening its technology hub in London in 2014, Argos has reportedly recruited almost 300 tech specialists across its IT, engineering and digital product teams and is now on the search for another 150 permanent technology and digital specialists.

Click here to read how retailers can build inner ‘resilience’ to help them to manage such risks and recover quickly from large-scale losses.