Top Risks Facing Retail and Consumer Goods Organizations

By its nature, the retail and consumer goods sector is inextricably linked to everyone’s lives. That makes the industry continually vulnerable to not only macroeconomic shifts that affect businesses but also developments that affect consumers. Consumers are starting to expect an increasingly sophisticated retail experience that involves social commerce, hybrid shopping, augmented reality and personalization enabled by artificial intelligence (AI), and efficient, frictionless purchasing and delivery. Retailers are also incorporating influencer and other curated content to create inspirational purchase journeys and fulfill consumers’ increasing desire for escapist indulgence and luxury items. For consumers with the means, eco-friendly items and favorable sustainability credentials are becoming progressively more important.

Around the world, consumer spending is being challenged by an increasing cost of living. In the U.S., spending is on the rise in spite of higher prices, with median household spending increasing by 5.5 percent in August 2023 compared to the same time in 2022. In Canada, interest rate increases intended to curb inflation have led to a decline in consumer spending. UK consumer spending has risen slightly after taking a hit during the summer, while high prices in Europe are causing growth rates to fall short of forecasts. Meanwhile, it is expected that Asia will account for more than half of global economic growth in 2023, but that surge in growth is showing signs of slowing down. Despite inflationary pressures, consumers continue to prioritize customer service, perks such as rewards programs and product quality. 

Along with economic effects on their consumers, retailers face increased costs of doing business. Higher expenses for wages, energy, logistics and more are compounding these effects, tightening margins further and intensifying vulnerability to risks ranging from supply chain disruptions to commodity price increases to brand damage — and beyond.

Consider two of the top five risks uncovered by our 2023 survey. Cyber attack or data breach, the industry’s top risk again in 2023, affects businesses in large swaths of the economy. It’s a risk that appears more than any other in the top spot across industries. Economic slowdown or slow recovery continues to appear in the industry’s top five; any changes in economic conditions that affect consumers’ wallets will in turn affect the retail and consumer goods sector. Add to that the need for constant reinvention to stay competitive, and leaders in the sector have their hands full.

Current Risks

Cyber attack or data breach, supply chain or distribution failure, damage to brand or reputation, economic slowdown or slow recovery and business interruption are the top five risks in the retail and consumer goods sector in 2023. Except for damage to brand or reputation, these were the risks in the industry’s top five in the 2021 edition of our survey.

Top 10 Current Risks

1. Cyber Attack or Data Breach
2. Supply Chain or Distribution Failure
3. Damage to Brand or Reputation
4. Economic Slowdown or Slow Recovery
5. Business Interruption
6. Failure to Innovate or Meet Customer Needs
7. Increasing Competition
8. Rapidly Changing Market Trends
9. Commodity Price Risk or Scarcity of Materials
10. Tech or System Failure

Three factors are behind these highly interconnected and interdependent risks. First, because preferences and discretionary income can change rapidly, the environment for the industry has become more competitive. This dynamic has squeezed margins and made it more difficult for companies in the sector to operate efficiently, and the pace of change has created an overall sense of disruption in the industry. From a reputation and brand perspective, the growing demand among consumers for socially and environmentally conscious products could result in negative attention if retailers mishandle messaging or fail to adequately meet consumers’ demands. Furthermore, consumers who expect more personalized or frictionless shopping and delivery options may turn away from retailers that don’t have the means to provide them, which can widen the gap between established and emerging retail companies.  

A retailer’s geographic footprint can amplify exposure to the risks identified in our survey. Negative or disruptive events in the world, such as natural catastrophes, tangled supply chains and geopolitical disruptions — even conflicts — are likely to affect a retailer at some level. 

And of course, cyber security continues to be the top concern. E-commerce and technology all but guarantee that it will remain an important risk going forward. As retailers deploy more and newer technology tools to drive personalization for potential and existing customers, more volatility and risk may enter the distribution chain. Technological innovations such as AI and the metaverse can provide the retail industry with many opportunities for growth, but they can also become major drivers of risk, especially because regulatory responses often lag behind such developments. While there has been an uptick in C-suite engagement in shoring up cyber security, it remains evident that a vast number of brands haven't truly assessed and quantified their changing risk profiles. Given this fact, alongside retailers’ increased vulnerability to risk from the myriad macroeconomic pressures they face, many of their balance sheets may not be equipped to tolerate a major loss.

Underrated Risks

Three perpetual risks for the sector failed to make the top 10 in 2023: theft, workforce shortage and failure to attract or retain top talent. 

Retail branches of all kinds attract theft and coordinated thefts, some organized by crime rings, which have had a material impact on retailers’ earnings. The National Retail Federation’s 2023 Retail Security Survey noted the negative impacts of retail crime, theft and violence on the U.S. industry: The average shrink rate (loss of inventory) for 2022 was 1.6 percent, or $112.1 billion in lost retail sales. This is an increase over fiscal year 2021. That survey also cited that internal and external theft accounted for two-thirds of retailers’ shrink in 2022, and more than 70 percent of shrink in some sectors. And these issues are not unique to U.S. retailers.

Managing the people-related risks from workplace violence is a growing concern for retailers; assaults and abuse of retail employees are on the rise in both the UK and the U.S. The trend was sparked by collective agitation and anxiety at the start of the pandemic and has escalated amid long-term inflation and social tensions. The British Retail Consortium’s 2023 Crime Survey reported that there were 867 incidents of violence and abuse against retail employees every day in 2021 and 2022 in the UK, nearly double pre-pandemic totals. In the U.S. several retail locations have been the targets of mass gun violence, and according to FBI data, more than half of the 61 active shooter incidents in 2021 (28 percent in 2022) occurred in places of commerce. Fears of violence and heightened stress have both contributed to high employee turnover in the industry.

While workforce shortage fell just shy of the top 10 risks, it is an ongoing challenge that has squeezed the sector. The talent shortage has forced many retailers to operate at suboptimal levels, with reduced store hours and even store closures common. Taken together, these factors reduce consumer engagement and risk triggering a cycle of worse experiences that leads to further reductions in consumer engagement, which then lead to worse performance.

Competition is indeed intense for skilled cyber experts, digital leaders, drivers, in-store staff, skilled support and warehouse workers and others. For instance, the pivot toward e-commerce created a substantial need for skilled tech workers to ensure operations run smoothly and data analysts to improve efficiency and lower overheads, yet there is a sizable shortage in the supply of available talent in many regions. Some predictions suggest that more than 85 million jobs could be unfilled globally over the next decade due to the lack of talent.

Understanding the drivers behind a retailer’s total cost of risk from the pre-loss, risk transfer and post-loss perspectives will remain a priority in the day-to-day activities of risk management departments. For example, the challenging U.S. legal environment has continued to make liability claim costs a material concern for many retail and consumer goods firms with U.S. operations. So-called nuclear verdicts, in which juries award exceptionally high settlements, have increased exponentially from both traditional exposures such as automobile and general liability to include emerging risks such as “forever chemicals” — materials containing per- and polyfluoroalkyl substances. 

Because retail sector mergers and acquisitions activity gained momentum in 2023 and is expected to continue to rise, companies on both sides of such transactions will need to consider and evaluate the wide range of M&A-associated risks.

Future Risks

Given the information available, the industry’s future risks are largely the same as those that concern leaders today. Industry respondents ranked cyber attack or data breach a top concern in the future because it is difficult to completely manage — and because bad actors are motivated to remain one step ahead of businesses. Retailers have to add this predator-prey dynamic to the mix with costs and what their competitors are doing when making decisions about investments in cyber risk management.

Top 10 Future Risks

1. Cyber Attack or Data Breach
2. Increasing Competition
3. Economic Slowdown or Slow Recovery
4. Supply Chain or Distribution Failure
5. Business Interruption
6. Damage to Brand or Reputation
7. Commodity Price Risk or Scarcity of Materials
8. Rapidly Changing Market Trends
9. Failure to Attract or Retain Top Talent
10. Failure to Innovate or Meet Customer Needs

Increasing competition jumps five spots in the industry’s top 10, going from the number seven current risk to the number two future risk. This highlights how rapidly changing consumer preferences and the availability of discretionary income are leading to a more volatile competitive landscape. The ability to provide popular offerings such as sustainable products, personalized and inspiration-led shopping experiences and seamless delivery will be a major differentiator for retail companies, especially as new AI-powered technologies offer different avenues of modifying the shopping experience, such as through metaverse integration and augmented reality. Despite AI’s anticipated central role in the sector, its use will shape risk management on several fronts, including cyber security, workforce, governance and third-party accountability. However, if organizations fail to provide such perks to their consumers or invest in commerce technology that fails to provide returns, they may lose out to their competition. 

High economic volatility and ongoing uncertainty will remain significant concerns for retail and consumer goods organizations looking to meet their financial objectives along the dimensions of cost and revenue. Both high inflation and high interest rates could potentially dampen consumer spending, so either outcome has the potential to negatively affect the retail and consumer goods industry. 

Supply chain or distribution failure and damage to brand or reputation both fell in the rankings, from second and third to fourth and sixth, respectively, which suggests that the relative urgency of increasing competition and economic slowdown are drawing attention away from these risks. While awareness may now be focused on more pressing concerns, the potential threat that distribution failure and reputation pose to retailers is still formidable. This can be seen in the way that the two risks overlap with the other top future risks: supply chain or distribution failure can influence economic slowdown as well as the price and availability of commodity goods. Meanwhile, damage to brand or reputation can escalate the risk of increased competition. 

Nuclear verdicts are a growing source of potential reputational damage as well as balance sheet risk. According to a recent analysis by Marathon Strategies, the total dollar amount of nuclear verdicts in U.S. courts quadrupled between 2020 and 2022, from $4.9 billion to more than $18.3 billion, while the median verdict amount increased by 95 percent. We expect this trend to continue in the U.S. and potentially spill over into other regions.

How Can Retail and Consumer Goods Organizations Mitigate These Risks Effectively?

The main way retailers can manage the industry’s top current and future risks is to optimize risk capital. To mitigate their risks, organizations may consider using analytics and modeling tools to quantify the likelihood and impact of cyber risk, reputational risk and business interruption losses. The results can help decision makers determine the most appropriate approach for their organizations. 

Any strategy put in place to mitigate cyber risk should start by identifying and assessing exposures, using data-driven insights to understand where vulnerabilities lie and what their potential cost impact would be. Following that, organizations should regularly test and update business continuity and disaster recovery plans so they are prepared if an attack occurs and continuously evaluate threats and acquire quantifiable data on the effectiveness of current controls to mitigate cyber risk. Finally, organization-wide cyber defense training should be employed, with an emphasis on building a culture of cyber awareness. Following these procedures can help a business navigate cyber risks and incorporate cyber risk resilience in business strategies. 

Risks associated with the failure to attract or retain top talent are of growing concern in the industry. Taking steps for proactive mitigation now could pay off significantly in the future. An effective method for avoiding talent deficits and attracting skilled employees is to reimagine the employee value proposition (EVP). Instead of taking a one-size-fits-all approach, the EVP should be customizable and flexible enough to adapt to the needs of a diverse workforce. This can be done by using a data-driven strategy to matching personalized EVPs with employee personas derived from common characteristics and desires of talented workers. Furthermore, reskilling and upskilling can help narrow capacity gaps amid a talent drought while providing career development opportunities for existing employees.

Organizations should develop, maintain, regularly test and review enterprise risk management and business continuity programs. Robust programs can help a retail organization remain agile enough to identify and prioritize risks, respond to risks and disruptions, minimize financial damage and return to normal operations.

Of course, planning for things to go wrong is often a wise approach. Retail organizations should consider putting claims specialists in place to optimize coverage and financial recovery in the event of incidents that result in cyber, property and other material claims to insurers. As an alternative, decision makers could also explore solutions such as captive and parametric insurance. 

General Disclaimer
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent, or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss caused by reliance on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.