Risk Management: The Cost of Risk in the Retail Industry

March 12, 2012 - PRLog -- The retail industry is among the largest contributors to the U.S Economy and in 2010 accounted for over $3.7 trillion in sales and 14.5 million employees, second only to healthcare. Shoppers may not be aware of it, but every time they frequent grocery stores, fill their vehicles with gas, shop for clothes at the mall or purchase a best seller from a bookstore, they are also contributing to insurance and risk management costs. Included in the price consumer’s pay for these items is a small amount to cover risks borne by retailers. While a consumer may not be aware of a retailer’s risk and its financial impact, retail companies most certainly do since they operate on smaller profit margins, often as low as 2%. http://www.gibraltarrisk.com/solutions/our-approach

The risks that affect retailers typically fall into three categories:

Hazard Risk
The probability of loss inherent in an organization’s physical and human presence such as damage to property assets, occupational injuries, injuries to third parties, auto incidents, employment related lawsuits and faulty products.

Business Risk
The probability of loss inherent in an organization’s quality of operations such as increasing competition, economic conditions, borrowing capacity, cash flow, key employees and business continuity following a catastrophe.

Strategic Risk
The probability of loss inherent in an organization’s business strategy such as consumer preferences, 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 staggering 1.5% of total revenues. This means many retailers spend more on risk than the owners’ take home in a year. Lowering the cost of risk will allow retail organizations to optimize the bottom line without necessarily increasing sales, which is key in today’s economic climate. Let’s review some cost 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 Increasing
Employment Practices Liability

■High Insurance Premiums
■Costs Driven by Litigation
■Frustrating & Time Consuming
Property
■Smaller Cost
■Low Frequency but High Severity
■Claims can be Significant & Effect Operations

The cost of business and strategic risks, while harder to measure, can potentially be catastrophic and these risks are typically either not insured or are uninsurable. In 2007, TJ Maxx uncovered a cyber attack that resulted in the hacking of over 45 million credit card numbers. Another example is employee turnover. The National Retail Federation estimated industry turnover at 110% along with a conservative cost estimate of $3,500 per employee. Both of these examples threaten both sustainability and profitability. We have all seen multiple small and big-box retailers shut their doors and file for bankruptcy after failing to properly manage and mitigate their business and strategic risks. When we ask business owners what risks “keep them up at night” they frequently mention these types of risks.

Business & Strategic Risks:

Brand Reputation
■Significant Loss of Revenue Opportunity
■Retailers Greatest Asset is its Brand
■Lengthy Restoration Period
Cash Flow & Balance Sheet Protection
■Prohibit Growth
■Decrease Competitiveness
■Decrease Shareholder Value
■Fluctuating inputs like Gasoline & Diesel
■Access to Capital

Human Capital
■High Employee Turnover – Typically Greater Than 100%
■Low Employee Engagement – Typically Less Than 60% Engaged
■Quality of Customer Service

In a highly competitive market of price wars and shrinking profit margins, retailers must holistically manage the cost of hazard, business and strategic risk to protect their sustainability and profitability. For more information, visit: http://www.gibraltarrisk.com/team/risk-specialists

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The Gibraltar Group is a full-scale insurance and risk management consulting
firm dedicated to building relationships and creating and delivering customized, comprehensive programs professionals serve local, national and international organizations, taking a proactive, service-focused approach that yields the greatest value for clients and their businesses. The Gibraltar Group also offers educational resources through GibraltarU, which provides companies and individuals with the tools and information to reduce risks and prevent loss experiences. For more information on The Gibraltar Group, please visit http://www.gibraltarrisk.com