As global events continue to shape consumer trends and impose ever increasing supply chain disruption, retailers are driven to shift their strategies which, in turn, can quickly expose them to unforeseen and emerging risks.
At no point in the last decade have consumer demands and needs accelerated as they have done in the last two years. Factors such as the response to COVID with consumers switching to online spending, the shifting macroeconomic picture in terms of inflation, rising interest rates and the growing cost of living, and ESG (environmental, social and governance) concerns, are all exerting a powerful influence on retail business strategy.
As retailers pivot their business models at speed to capitalise on these and to stay relevant to new consumer trends, it is critical for them to recognise that as their strategy changes, so does their risk profile. And with a change in risk profile, it’s more important than ever to understand what those risks look like throughout their value chain – from product design through to customer fulfilment – and how these risks can be evaluated, mitigated, and transferred (if necessary).
Meeting customer needs – an increased risk
Retailers see the failure to innovate and meet customer needs as fifth in their current top ten risks, rising to second in their assessment of future risks, according to Aon’s latest Global Risk Management Survey. Retail organisations know they need to keep investing in, and changing their strategies if they’re to maximise new opportunities and respond quickly to global events.
The consequences of this shift are already being seen with examples of big brands like Nike choosing to go direct to the consumer rather than exclusively through high street intermediaries. Conversely, even some ecommerce brands are embracing a ‘back to the future’ tactic where bricks and mortar become part of their selling strategy – Gym Shark, for example, is due to open an 18,000sqft store in London’s Regent Street in the summer of 2022. The hybrid model is an opportunity for many, but the operational challenges are also growing, not least in the additional pressure on efficient fulfilment as customers demand goods quicker.
All this change brings more risk. If you look at a retailer’s product journey from the design stage or sourcing, through to manufacturing, transit, and fulfilment, and then to the consumer (whether that’s wholesale, direct to consumer, bricks and mortar, or ecommerce) there are key risks that can influence any stage of that journey; from cyber, protecting new complex automated fulfilment systems, through to supply chain, workforce issues, pricing, and reputation. Importantly the ESG position across this product journey clearly needs to be carefully considered prior to implementation.
Accelerated digitalisation brings cyber vulnerability
Cyber continues to be a fundamental exposure and ever evolving risk – ranked highest by retailers for future risk in the Aon Global Risk Management Survey – and can impact a retailer at any stage of the product journey from how the retailer interfaces with the customer, through to automation in the distribution centre, right back to engagement with the supply chain. Many retailers have accelerated their digitalisation programmes as part of their focus on growth and relevance to their customers, but these digital transformations may not have been as comprehensively stress tested in the desire to go to market quickly. This opens the possibility of increased vulnerability to cyber attack or incidental risks such as dependency on third parties.
Strengthen the chain
Supply chain is also one of the most significant risks for retailers, as shown over the last 12-24 months, with many experiencing supply volatility whether it’s through driver shortages, shipping challenges, or pandemic disruption. The Suez Canal, for example, is estimated to carry US$1 trillion of goods a year, which meant its blockage in 2021 proved to be a major headache for many UK retailers shipping manufactured goods from Asia. It’s a powerful illustration of why supply chain or distribution failure is currently listed as retailers’ biggest risk in Aon’s Global Risk Management Survey. The current geopolitical instability in Ukraine and resultant expanding sanctions placed on Russia will undoubtedly create further stress points. The complexity of this risk is growing for retail organisations and has the potential to inflict significant business interruption costs as well as the loss of customers in a hyper competitive market.
Elsewhere on Aon’s top ten retail risks, commodity price risks/scarcity of materials also features and is predicted to be in the top five future risks. Surprisingly workforce issues don’t appear in the top ten even though a possible consequence of the pandemic is a more fluid and less loyal workforce than before which could store up future staffing issues. We saw some signs of this with HGV drivers being brought into an increasingly competitive market for services owing to a shortage of qualified workers and retailers need to fulfil customer orders.
Any sign of ESG?
Another big risk area that doesn’t feature explicitly in the top ten is ESG (environmental, social and governance). This is probably a function of where the retail segment is now; retailers are having to prioritise more operational risks, and they’re still focused on that need to reset strategy post-pandemic and how they look to move forwards.
It’s also evident that many will see ESG as implicit within other risks like supply chain and meeting customer needs, rather than as a separate area, as well as recognition that many retailers are already doing more around issues like sustainability and their impact on their communities.
Safeguard the brand
Sitting behind almost all these risks is the threat to a retailer’s brand and reputation. Retailers list the risk as fourth in their top ten which is no surprise given it can be damaged almost at any point in the product journey, whether it’s a hack leading to the paralysis of an automated fulfilment centre; the use of unethical labour practices in the supply chain; or a faulty product sold to a customer.
Damage to brand or reputation is a complex risk to protect against and is why retailers will need to reassess all the risks they face as their business strategy changes. This will enable them to make better decisions on how to manage those risks, whether through mitigation and/or risk financing, and ensure that none have the ability to ultimately damage and devalue their brand, and derail their new strategy as they negotiate this fast-changing retail environment.
Now is the time for businesses to reassess risk management practices and controls to ensure the business is resilient and informed to make better decisions. For more information on the issues discussed in this article, please contact Dan Fox
Whilst care has been taken in the production of this article and the information contained within it has been obtained from sources that Aon UK Limited believes to be reliable, Aon UK Limited does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the article or any part of it and can accept no liability for any loss incurred in any way whatsoever by any person who may rely on it. In any case any recipient shall be entirely responsible for the use to which it puts this article.
This article has been compiled using information available to us up to 30/03/22.