New research by Marsh, the world’s leading insurance broker and risk adviser, reveals that senior executives at Europe’s leading retail and consumer brands businesses will be concerned by risks such as cash flow, credit risk and trade credit over the next 18 months.

An overwhelming 75% of respondents to the survey, commissioned by Marsh, expressed a high level of concern about cash flow over the next 18 months while credit risk was identified by many respondents as their top concern. Over half of respondents also identified a significant concern over customer-associated risks.

While financial and macroeconomic risks were more top of mind, supply chain risk was identified as the top future strategic and operational risk by respondents. Slowing or falling demand, coupled with the recession, has exacerbated significant concerns about the supply chain: the current level of risk associated with suppliers ranked high among 45% of participants. In a list of seven key industry-specific risks 68% of respondents ranked it as a significant near-term priority just behind cash flow and ahead of trade credit. Business continuity risk was also rated significant at 67%.

Commenting on the research, Adrian Donald, European Retailers and Consumer Brands Practice Leader at Marsh, said: “Given the impact the recession has had on consumer spending across Europe, risks associated with working capital and customers present the biggest threats to retailers and consumer brands over the next 18 months.

"Supply chain management and the related issue of business continuity will remain a key area of concern for retailers. Supply chains have become increasingly complex and often have limited in-built slack or tolerances, so how well these are managed is crucial to the recovery of firms as we emerge from recession.”

Marsh’s research found that the recession has increased risk awareness across the sector: two-thirds of respondents say that risk has become more important at board level and two-thirds of companies have reviewed their approach to risk. One-third of companies are anticipating increasing their risk management budget over the next 18 months, at a time when many are reducing other costs and budgets.

However, increased risk awareness does not necessarily translate into a diminishing appetite for risk. While one-third of respondents (36%) have become more risk averse, the risk appetite in 41% of companies remains unchanged and 17% say they are actively seeking opportunities arising out of the recession.

Stephen Roberts, Leader of Marsh’s UK Strategic Risk Practice, added: “A commitment to developing more robust risk management and improved risk reporting on the part of senior management is to be welcomed. An enhanced understanding of how strategic risks affect their organisation is more important during a downturn.

"In the current climate, it is also vital for companies to focus on managing their trade credit risks: reduced days of sales outstanding, increased cash flow or improved credit risk mitigation may be achieved with careful management.

"Through using risk profiling in a proactive way senior management groups within the retail and consumer brands sector are equipping themselves with quality information on which to make more effective and robust decisions about the business.”

Marsh’s new report, New risk management insights for retailers and consumer brands, is one of the most comprehensive risk management research studies in the European retail and consumer brands sector since the financial crisis began. Senior risk and insurance professionals in 119 firms across Europe with turnover greater than €100 million were interviewed to examine their attitudes towards risk management in the current economic downturn.

In addition, Marsh’s new Retail and Consumer Brands Industry Risk Footprint and Food and Beverage Industry Risk Footprint identify the most common strategic, operational, regulatory, hazard and financial risks that feature in the risk registers of retail, food, beverage and consumer brands firms across Europe, such as failure in the distribution network, product recall, and ethical and social issues.

Recommended actions:

• Understand your risk: Companies should conduct an end-to-end review of their risks across the distribution and supply chain, both upstream and downstream.
• Understand your tolerance and appetite for loss: Understanding its risk tolerance will provide a company with a framework to review its overall ‘threshold of pain’ based on the impact of a major loss event on key financial ratios. Risk tolerance levels should be reviewed regularly. 
• Create a robust business continuity strategy: The supply chain should be examined end-to-end. A business continuity strategy should be developed that will afford the very best opportunity to survive a loss event, reduce reputational risk and capitalise on any opportunities that may then emerge. These plans should be tested, reviewed and challenged regularly.
• Review risk financing: Managing risk can create valuable upside when it is done effectively. A company that understands how risk might impact its key performance indicators can move more effectively to seize opportunities. The strategies that companies develop for financing risk are an important part of this process. By simply procuring insurance, companies could miss an opportunity to extract better value from capital in their business. In the most serious cases, sub-optimal decisions on financing risk can impact key financial indicators and erode margins.