A:

The retail sector consists of companies operating in multiple industries such as specialty retail, general retail, food and grocery, consumer electronics and discount stores. Due to a challenging economic environment and new transformational trends, many retailers face headwinds in their growth prospects and expose investors to new risks. The primary risks associated with the retail sector are negative economic conditions; federal and state regulation; increased competition and consolidation in the sector; and channel disruption.

Economic Conditions

Exposure to changing economic conditions is one of the biggest risks for retailers. If there is an economic slow-down or downturn and many companies lay off workers, cut their budgets and implement a salary freeze, consumer spending tends to slow down or even decrease, which has an immediate negative effect on the retail industry. Also, if there is a high consumer debt burden, consumers tend to shift their funds away from spending toward paying off debt, which also decreases consumer discretionary spending on retail goods.

Regulation

Federal and state regulations pose another significant risk to the retail sector. As many retailers rely on labor that earns hourly salaries close to minimum wage rate, any increases in the minimum wage can adversely affect profitability in the retail sector.

Competition and Consolidation

High competition and consolidation in the retail sector is another big risk that investors should consider. Because of proliferation of e-commerce, a person does not necessarily need a brick-and-mortar store to start a retail business. As certain retailers have been slow in embracing e-commerce, their sales and profitability have suffered as a result of consumers shifting away towards competitors that offer goods through the Internet that can be shipped anywhere. Also, as the retail sector consolidates, there are more concentrated companies with very large resources and increased competitive advantages.

Channel Disruption

Disruption or failure of the supply channel represents another important risk in the retail sector. For example, the labor strikes of 2014-2015 at the U.S. West Coast ports disrupted the supply of inventory for many retailers, negatively affecting their sales.

RELATED FAQS
  1. What has the retail sector evolved to its current structure?

    Find out about the retail sector, the size of United States and global retail markets and why online retailers are changing ... Read Answer >>
  2. What factors are the primary drivers of share prices in the retail sector?

    Find out which factors investors need to consider when evaluating companies in the retail sector, including the basic fundamentals. Read Answer >>
  3. How does stock evaluation of an electronic retailing (e-tailing) business differ ...

    Learn how stock evaluation of an Internet retailer differs from a brick-and-mortar retailer. Since 2005, online commerce ... Read Answer >>
  4. How does government regulation impact the retail sector?

    Learn about the types of federal agencies and regulations that retail businesses have to deal with, including inconsistent ... Read Answer >>
  5. What profit margin is usual for a company in the retail sector?

    Find out the typical profit margin for a major retail company, and learn how it compares to the profit margins for other ... Read Answer >>
  6. What portion of the global economy is represented by the retail sector?

    Learn the size of the global retail sector and how fast e-commerce is catching up; find out how close China is to overtaking ... Read Answer >>
Related Articles
  1. Investing

    Retailers Slicing Jobs to Employment Bone

    The retail sector, which is expected to report dismal first-quarter results, is aggressively reducing its workforce to cut costs.
  2. Investing

    Jumping On Retail With ETFs

    Retail ETFs offer limited trading and investment choices, with two primary funds and a single illiquid leveraged fund.
  3. Investing

    Retail CFOs Expect 5% Sales Growth This Year

    Execs are optimistic that consumer confidence and digital sales will keep retail healthy this year.
  4. Investing

    Choosing The Winners In The Click-And-Mortar Game

    E-tailing has changed the way consumers do nearly everything. Do you know how to pick the best retailer?
  5. Investing

    Do Store Closures Hurt Retail Stocks? (WMT,SHLD,M)

    These eight retailers are closing stores. How many have seen stock depreciation over the past year?
  6. Investing

    The Top 5 Dividend Paying Retail Stocks for 2016 (M, GPS)

    Learn about five retail merchants that have dividends policies with attractive dividend yields after a sell-off of stocks in the retail sector.
  7. Investing

    The Top 5 Retail ETFs for 2016 (RTH, PMR)

    Explore detailed analyses of the top exchange-traded funds holding retail-related stocks for 2016, and learn about the characteristics of the funds.
  8. Investing

    Retail Bankruptcies Soared by 110% This Year

    What does this mean for investors and the retail industry specifically?
RELATED TERMS
  1. National Retail Federation - NRF

    A retail trade association with members from all phases of retail ...
  2. Retail Credit Facility

    A financing method which provides loan services to retail consumers ...
  3. Retail Sales

    An aggregated measure of the sales of retail goods over a stated ...
  4. Disruptive Technology

    A technology that significantly alters the way that businesses ...
  5. Core Retail Sales

    U.S. aggregate retail sales excluding automobile and gasoline ...
  6. Chain Store Sales

    An indicator that provides information on the monthly sales volumes ...
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  3. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  4. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  6. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
Trading Center