Five Things Keeping Retailers Up at Night

Retail Nightmare

That sound of nervous pacing you hear every night at 3:00 a.m.? It’s America’s retail executives. They’re feeling the pressures of a rapidly evolving sales landscape and trying to figure out how to stay one step ahead—or just keep up. From demanding consumers who expect a bargain at every turn to new technologies, from an aggressive e-commerce marketplace to a U.S. economy that refuses to kick into gear with any consistency, the challenges retailers are facing demand a shift in thinking and strategy.

FTI surveyed 100 retail executives across the country to discover what their top concerns are going into the next 12 to 18 months. The results paint a picture of an industry in flux, but they also offer a blueprint of sorts for adapting to the new reality. Retailers who can make the transition stand the best chance for getting a good night’s sleep.

1. Cybersecurity

Who can blame retailers for tossing and turning over cybersecurity concerns? The growing focus on the omnichannel experience—whereby customers can purchase online, through mobile or in-store—can expose personal data to a variety of attack points for hackers. Add in cloud-based data storage, plus a shift in fraud liability to stores that still haven’t converted credit card readers from swipe to chip, and you’ve got the makings of a restless retailer. Consider this: In 2015 the number of reported cyber incidents in the retail sector skyrocketed by 154% over the previous year. That resulted in a 159% rise in financial losses. Finally, managing reputation and restoring customer confidence following a cyber attack can be a major challenge and a distraction for senior management teams.

2. The State of the U.S. economy

Even the Fed is losing sleep over the economy. After feeling confident enough last December to raise the base interest rate for the first time since 2006, Federal Reserve chairperson Janet Yellen hinted at more rate hikes in 2016. Now? Not so much. Though long-term growth prospects remain favorable, weak productivity (see item 3 below) and slower employment gains have caused the Fed to hold off on anticipated rate hikes to date. Meanwhile, retailers are stuck on a rollercoaster of consumer spending inconsistencies—In April, retail sales had their largest gain since March 2015 but first quarter reports from major retailers, including Macy’s and Nordstrom, largely fell short of expectations and disappointed investors.

3. Employee productivity

Retailers are watching the proposed Raise the Wage Act, which would see the federal minimum wage rise to $12 per hour by 2020, with a skeptical eye. On the one hand, the Act would impact their operational costs materially. On the other hand, a raise could result in increased productivity—most economists believe that higher wages normally lead to greater productivity (measured as goods and services produced per hour worked.) Yet that correlation has not been so hot recently. Between 2011 and 2015, productivity inched up just .34%, far below the 1.93% mark of 1990-2010. Further, productivity is expected to decline slightly in 2016. Economists disagree about the cause, but one thing is clear: it has some retailers jittery. Similarly, the full impact of Wal-Mart’s experiment with higher wages for 1.2 million associates, including its effect on store productivity, is also being closely watched by industry insiders.

4. Competitive pricing/promotion pressure

Every brick-and-mortar retailer has seen it: The savvy customer standing in the aisles engaging in real-time comparison-shopping on their smartphone. (See item 1.) With empowerment like that, it’s no surprise that storeowners feel the pressure of pricing—not just to appeal to customers, but to compete with the vendor down the street and with e-commerce sites too. Another cause of insomnia: the ability of some giant retailers to thrive on slim profit margins, like Walmart’s 2.66%, or threadbare margins, like Amazon. Brick-and-mortar retailers who can collect, quantify, and utilize customer data and price dynamically can rest assured they’re on the right track to competing.

5. Evolving consumer demographics

Keeping up with the wide range of shopping habits—and expectations and behaviors—of an increasingly segmented consumer base is a nightmare. The Millennial generation, 75 million strong, is now the largest demographic group among the U.S. population. They set the trend for a new kind of shopping by relying on social media as a primary source for product information, aggressively hopping from site to site in search of the lowest prices, and clicking-to-buy with their smartphones more than other groups. But they’re a hard nut to crack for retailers given their sizable student debt burden combined with stagnant wages. They also tend to put off purchasing big-ticket items like houses and cars. Meanwhile, baby boomers hold 70% of the nation’s wealth and four out of five retailers say that half of their sales come from this group. They’re known for being brand loyalists. Marketing and merchandising to these two distinct groups—and those in between—is a neat trick sure to bring sweet dreams.

© Copyright 2016. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

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