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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.

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