The retail industry is comprised of businesses that sell goods and services to consumers. Such businesses range in size and may specialize in a variety of product offerings (e.g., groceries, household items, toiletries, clothes, toys and technology). These businesses may conduct their sales within stores, online or through a combination of both methods. In any case, the retail sector plays a critical role in the U.S. economy by employing a substantial proportion of the nation’s workforce and fostering consistent financial growth.
This industry has faced various ups and downs in recent years, largely due to fluctuating consumer habits amid the COVID-19 pandemic, ongoing supply chain complications and rising inflation issues. Yet, the sector has still managed to promote economic growth. In fact, the National Retail Federation (NRF) confirmed that retail sales have risen by more than 7% each year since 2020, significantly surpassing average growth rates over the past two decades. While a slowing economy could limit profit margins going forward, widespread wage increases resulting from a competitive labor market will likely fuel continued consumer spending and boost overall sales.
Nevertheless, several industry trends could pose challenges for retail companies in the coming months and years, including organized retail crime (ORC) concerns, sustainability issues, labor shortages and cyber exposures. As such, it’s important for retail businesses to closely monitor these sector developments and adjust their risk management practices as needed. This article provides more information on retail industry trends to watch.
ORC Concerns
ORC—which refers to large-scale shoplifting incidents or other illegal (and sometimes violent) acts conducted by groups of criminals with the purpose of stealing mass amounts of merchandise—has become a growing concern across the retail sector. According to NRF data, ORC costs retail businesses an average of $700,000 for every $1 billion in sales.
This surge in ORC has predominately been caused by criminals looking to capitalize on the accelerated shift to e-commerce brought on by the pandemic. Specifically, criminals are stealing large amounts of goods off store shelves and reselling them to unsuspecting online shoppers at reduced prices. Additionally, some criminals are infiltrating retail companies’ supply chains and stealing merchandise before it even can reach store shelves to redistribute these items on the black market.
Altogether, the NRF reported that ORC has increased by 26.5% since 2020, serving as a primary driver of retail shrinkage (inventory losses caused by anything other than actual sales) and contributing to nearly $100 billion in annual sector losses. Compounding concerns, ORC will likely become even more prevalent as the economy worsens. After all, financial experts have asserted that retail theft incidents typically jump during periods of economic downturn, as evidenced by an uptick in ORC during the Great Recession from 2007-2009.
In an effort to help minimize ORC concerns, the federal government is in the process of finalizing the Combating Organized Retail Crime Act of 2023. This legislation would provide funding for the creation of a national ORC Coordination Center, as well as allocate resources aimed at establishing theft prevention protocols, technical assistance, employee training and incident response measures at retail companies across the country. In addition to this federal initiative, 34 states have recently passed laws of their own pertaining to ORC prevention and penalties, with more states expected to follow suit.
Apart from this legislation, there are several steps that retail businesses can take to help mitigate ORC concerns, such as conducting preemployment criminal background checks to limit the likelihood of internal theft incidents; enhancing customer service measures (e.g., having employees stationed throughout the store floor and encouraging them to engage with customers) to ensure shoppers are adequately monitored at all times; implementing restricted merchandise return policies to reduce the risk of fraudulent returns; leveraging merchandise sensors, security systems, surveillance cameras and warning signage to deter criminals from stealing items and better identify perpetrators if incidents occur; and training employees on how to detect signs of retail theft and properly respond to these incidents without threatening their personal safety.
Sustainability Issues
Both stakeholders and regulators have placed greater emphasis on environmental, social and governance (ESG) initiatives over the last few years, thus seeking more transparency from businesses regarding their company values and commitments to ethical practices. According to a recent survey conducted by professional services network Deloitte, 6 in 10 retail executives said they believe businesses within the sector will face elevated scrutiny related to their ESG decisions in the year ahead.
Primarily, stakeholders and regulators have begun holding retail businesses to higher standards over the sustainability of their operations. For instance, consumers and investors have grown more conscious of retail companies’ impacts on the environment, including their greenhouse gas emissions and waste management protocols. Additionally, federal regulators have implemented legislation requiring certain businesses to disclose further information on their respective carbon footprints. With this in mind, retail companies that neglect to prioritize sustainable operations could be more susceptible to reputational damage, lost business, litigation issues and compliance concerns.
In order to keep sustainability top of mind and reduce the risk of ESG scrutiny from various parties, retail businesses should consider investing in energy-efficient technology and clean energy sources; implementing green materials and product packaging (e.g., recycled cardboard, corrugated bubble wrap and biodegradable plastics); upholding effective waste management procedures and leveraging recycling, upcycling and composting initiatives to limit total operational waste; evaluating vendors’ ESG practices and adding sustainability requirements to contracts as needed to ensure eco-friendly supply chains; documenting sustainability measures and making this information accessible to other parties; and consulting legal counsel to maintain compliance with applicable ESG legislation.
Above all, retail businesses should prioritize sustainability practices that will help deliver both short- and long-term environmental benefits. Yet, these practices need to be feasible, as setting unrealistic sustainability standards or making unattainable commitments could ultimately pose heightened ESG concerns. In some cases, doing so could even lead to allegations of greenwashing—sharing misleading information regarding the environmental advantages of a product—and subsequent litigation.
Labor Shortages
The past few years have been met with labor shortages across industry lines. Further, the pandemic motivated many employees to reevaluate their job expectations, thus prompting additional workforce adjustments and exacerbating such shortages. The retail sector is no exception to this trend. According to the U.S. Bureau of Labor Statistics, the industry is currently short 870,000 workers. What’s more, the aforementioned Deloitte study revealed that 7 in 10 retail executives believe labor shortages will be their top challenge in the year ahead.
As a result, it’s critical for retail businesses to invest in measures aimed at attracting and retaining employees. These measures may include offering more competitive wages and benefits packages; providing flexible shifts and work arrangements (e.g., hybrid or remote capabilities) when possible; implementing employee assistance programs and other workforce well-being initiatives; and establishing professional development and advancement opportunities (e.g., ongoing skills training, mentorships and promotions) that empower workers to pursue long-term careers in the retail field.
In addition to prioritizing employee attraction and retention strategies, retail companies may also want to utilize technology to increase operational efficiencies and, in turn, mitigate labor concerns. Examples of such technology include self-checkout stations that permit customers to make purchases without employee assistance, mobile applications that allow shoppers to receive automated customer service and digital solutions that permit workers to better track inventory.
Cyber Exposures
As workplace technology continues to advance and e-commerce surges in popularity, cybersecurity has become a rising concern throughout the retail industry. In particular, point-of-sale systems, consumer-facing websites, mobile applications and other software leveraged to conduct retail transactions typically hold a wide range of sensitive customer data (e.g., financial details and contact information), therefore making this technology more likely to be targeted in security breaches, ransomware attacks and other cyber incidents. Additionally, shifting data privacy regulations at both the federal and state levels have begun holding businesses more accountable for their cybersecurity failures.
Amid this evolving risk landscape, retail companies that don’t adopt effective cyber incident prevention and response measures could encounter serious consequences, including lost or damaged technology and data, prolonged business disruptions, reputational issues, stakeholder litigation and large-scale penalties from regulators. To avoid these consequences, retail businesses should consider tactics such as implementing advanced data protection protocols (e.g., access controls, multifactor authentication and encryption); segmenting networks to reduce the likelihood of lateral infiltration; providing routine cybersecurity training to all employees; establishing proper cyber incident response teams and making documented plans for different attack scenarios; partnering with vendors that value cybersecurity; consulting legal counsel to ensure compliance with applicable data privacy laws; and purchasing sufficient coverage to protect against potential cyber losses.
Conclusion
Overall, there are several trends currently impacting the retail sector. By staying on top of these developments and taking steps to mitigate their associated exposures, retail businesses can effectively position themselves to maintain long-term growth and operational success.
For additional, industry-specific risk management guidance, contact us today.