Risk Management Mentors
Small is beautiful in terms of locally produced food. It is also big business, and grocery-store chains are making their supply chain and risk management process more flexible and innovative as they compete against street-corner markets and local retailers.
A report from the Food Marketing Institute indicates that between 2012 and 2013, three-quarters (76 percent) of all supermarkets added more locally supplied items. Interestingly, for independent grocers an even greater percentage, 92 percent, said they did so.
It was several years ago, said Rod Parker, general manager for E.A. Parker & Sons in Oak Grove, Va., that big grocery chains began “the push” to have local produce in their stores. Parker Farms processes, inspects and ships fresh-grown produce to major retail and wholesale outlets.
At that time, he said, “there was a big question about who would be able to play and who would not among growers. We decided early that we wanted to play, so we did what we had to [related to insurance and risk management programs]. It was expensive and difficult, but we did it.
“Our liability insurance has gone up from $2 million to $5 million to $10 million,” he said, noting that the organization did not need much help in attaining the insurance it needed.
“Grocery stores and the big-box retailers, especially those with a house brand, want to push the recall exposure down as far as possible.” — Florian Beerli, senior vice president of product recall, ACE Westchester
Citing competitive reasons, Safeway — widely considered a pioneer in this area — declined to talk about its local supply initiatives or the risk management programs behind them.
So, too, have other large grocery companies.
Industry experts said that Publix and Kroger have also made strides in this area, but both companies did not respond to inquiries. Whole Foods, another heavy promoter of local supply, has a policy of not talking to the trade press.
Walmart, in contrast, is considered a laggard in local-supplier outreach. That company made reference to an in-store merchandise-tracking device, but refused to discuss its supply or risk management.
The irony of the official reticence is that supply-chain and risk managers at several of those chains are reportedly exceedingly proud of how their companies have retooled after their initial efforts met mixed results.
“When we and other groups first wanted to stock local products, the supply-chain methodology at the time led us to say ‘no’ a lot,” said a food industry risk manager who asked to remain anonymous.
“Now, our methodology and those of a few others is to find a way to say ‘yes.’ ”
Sam Lefore Fruit Farms, a family owned farm in Milton-Freewater, Oregon, has been supplying tree fruit to Safeway grocery stores for more than half a century.
Over the past few years, Safeway has formalized its insurance and safety practice requirements, he said. “They got very serious and very organized. We pay for the auditors that they send, and meet with them annually and go over the score sheet.”
Safeway’s website provides some details about its local produce initiative as well as some supplier profiles.
In April, the company released its “Supplier Sustainability Guidelines and Expectations For Safeway Consumer Branded Items.” Those guidelines require, in part, that suppliers will:
• Favor domestic/local production where feasible;
• Implement measures to secure the supply chain;
• Comply with all applicable environmental regulations and laws in the areas they operate;
• Practice humane treatment of animals;
• Strive for “grass-fed,” “cage-free,” “no antibiotics administered,” certifications; and
• Focus on environmental health and safety internally and externally.
Initially, experts said, most big chains demanded the same high levels of insurance coverage and third-party auditing that they did for their major suppliers. Few local suppliers had the time, money, or staff to comply, and were shut out.
At the other extreme, some chains took local suppliers at face value, and accepted any liability as their own.
Neither situation made anyone happy, so a new collaborative approach evolved.
“Some products are inherently safer than others,” said the risk manager. “Salsa is one thing, spinach is entirely another. We first determine what is the inherent risk, then see what insurance and risk management the supplier already has. Sometimes, they are good and sometimes they are short.
“Next, we see what would it take to bring the supplier up to the proper levels, and if it is worth our while to work for that. If so, we consult on their processes, and may even recommend them to a broker to place additional coverage. It’s all very individualized,” the risk manager said.
“We are starting to see more of a thought-out approval process that includes insurance minimums, in which we have been helping the suppliers or co-packers,” said Florian Beerli, senior vice president of product recall at ACE Westchester, the company’s U.S.-based wholesale business.
While he couldn’t discuss specific grocery-chain referrals of suppliers, he said that product recall was a big emphasis and that “business in the recall market [is] being more and more contractually driven.”
“Grocery stores and the big-box retailers, especially those with a house brand, want to push the recall exposure down as far as possible,” but he noted there are practical limits to such an approach.
“There are various solutions. The most common recall limit is $5 million, although some stores do require $10 million regardless of the size of the supply contract. Some of the well-known brands buy their own coverage and require their co-packers to buy coverage to the self-insured retention (SIR).
For its own part, ACE focuses on the first-time buyers, so it is at a good vantage point to see the quick evolution of this sector.
“We have adopted a tailor-made approach in which we have base wording in the contract, and then everything else is added by endorsement,” Beerli said.
That puts the onus on the carrier’s underwriters, but “holding hands with the first-time buyers” is what Beerli said his firm does.
It also enables the company to conduct the education that he believes is also necessary.
“There is still work to do about recall protection,” he said.
Balance is the word used most often by Thomas Pegg, deputy director of casualty risk control at the Willis Group.
“Grocery stores are attempting to work more closely with local suppliers,” he said.
“They have found they need a bit more flexibility on contractual risk transfer, but that is very product specific.”
The need for balance in risk management is not just external, based on what is feasible with small suppliers, it is also an internal challenge, he said.
“I know of no other area of concern to these companies above brand protection from reputational risk,” Pegg said. “They have very high standards.”
But consumer buying habits prove that they want knobby heirloom tomatoes and corn with clods of dirt still on the stalks.
More to the point, they are willing to pay more for local produce. Hence, the need for a nuanced approach.
Pegg said that some grocery-store clients have supported their local suppliers in Pennsylvania to achieve the food-handling certifications offered by the state department of agriculture for workers and suppliers.
He also noted two other factors that play into the local produce trend: “Some of this is being driven, literally, by transportation costs.” Less expensive logistics are important to businesses with razor-thin margins.
At the other end, more customer loyalty programs make it easier to track purchases, which greatly aids in recalls or at least tracing and isolating problems.
“That is a very important development,” said Pegg, “and a critical piece of the supply chain.”
Hurdles Remain for Retailers
Like other forward-thinking U.S. retailers, Wal-Mart is actively trying to find new ways to reach out to current and prospective customers.
“Wal-Mart is trying to bridge physical and digital, and help our customers get what they want, when they want it and how they want it,” Brian Monahan, vice president of marketing for Walmart.com, said at a recent e-commerce trade conference.
Facing heightened competition as never before, retailers face major risks (as outlined in their Form 10-K filings with the U.S. Securities and Exchange Commission) as well as new opportunities.
Using that SEC data as well as surveys, reports and observations from experts, Risk & Insurance® has identified five top risks facing U.S. retailers in 2014.
1) The overall economy remains lackluster
Worries about general economic conditions rank as the No. 1 retailer concern, according to risk factors listed in the most recent 10-K filings of the 100 largest public U.S. retailers, compiled by BDO USA, a professional services firm. The economy was the top risk for the second straight year.
There appears to be light at the end of the tunnel, though.
Jan Hatzius, chief economist of global investment research at Goldman Sachs, observed: “We don’t think weakness in the first quarter was really representative of what’s going on economically. We actually are seeing clear acceleration in underlying growth both in the United States and Europe.”
BDO found that interest rates (80 percent) overtook fuel prices (74 percent) and unemployment (70 percent) as the most frequently cited general economic concern, for the first time in the study’s eight annual analyses.
While the slowly improving job market bodes well for retailers, it is heightening concerns that the Federal Reserve may move to increase interest rates after five years of historic lows.
“In addition to the potential impact on consumer spending and sales, retailers also express concern that changes in interest rates could impact their debt financing and pension plan assets,” the BDO report noted.
Al Ferrara, New York-based national director of the retail and consumer products practice at BDO, emphasized that he believed that the top general economic concern is $5 or more for a gallon of gas.
“If there’s anything that’s going to have an impact on Middle America, it’s the price of gas,” said Ferrara. “That just sucks money right out of the economy.”
Uncertainty about currency rate fluctuations is also a concern for global retailers.
According to Apple, demand for its products “could differ considerably as a result of currency fluctuations because the company generally raises prices on goods and services sold outside the United States to correspond with a strengthening of the U.S. dollar.”
Wal-Mart, the world’s largest retailer, noted that currency rate fluctuations negatively impacted its first-quarter financial results. The company said its net sales would have increased by 2.1 percent without currency rate fluctuations. With fluctuations, net sales were $1.6 billion lower.
The Kroger Co. grocery chain, one of the world’s largest retail chains, said volatility in the global economy has been due to uncertainties related to “energy prices, availability of credit, difficulties in the banking and financial services sectors, and the decline in the housing market, diminished market liquidity, low consumer confidence and high unemployment rates.”
As a result, consumers have become more cautious and have reduced spending and switched to less expensive mixes of products, it said.
“They also have been patronizing discounters and dollar stores to a greater extent, all of which has affected and could continue to affect our sales growth and earnings,” according to Kroger.
2) Inability to penetrate emerging markets
“Especially for Western companies, understanding emerging markets is an undeniable (but blatantly obvious) opportunity,” one retail panelist noted in an Ernst & Young LLP survey of top 10 risks facing the retail sector.
“The size of the global middle class is expected to triple between now and 2030,” said EY.
“Yet 29 percent of retail sector respondents to our global survey reported that their efforts to enter these markets had yet to produce any positive results,” according to EY.
That may be compounded by the risks involved in such expansion, according to BDO’s survey.
Eight in 10 retailers cite international risks, including managing a dispersed workforce and complying with international laws and regulations such as the Foreign Corrupt Practices Act, the report noted.
Nonetheless, it noted that “many companies are also looking abroad for opportunities to introduce or expand their brand,” including the Gap and several teen apparel retailers, the report noted.
Amazon, the world’s largest online retailer, said that while it is rapidly and significantly expanding its global operations, including its product and service operations, the expansion increases the complexity of its business and places significant strain on its management, personnel, operational systems, technological performance, financial resources and internal financial control and reporting functions.
Amazon noted, “We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results.”
However, Amazon added, “Our international activities are significant to our revenues and profits, and we plan to further expand internationally.”
3) Regulation and labor challenges
In its annual report, BDO noted that federal regulation remains top of mind for retailers, especially as the government considers data privacy and minimum wage legislation.
“At the same time, public retailers are also seeing regulators place increased scrutiny on internal controls,” the report said, with 87 percent of retailers noting concerns related to accounting standards and regulations, a significant increase from 2013 (69 percent) and the most in the report’s history.
Much of this pressure can be attributed to a renewed focus by companies, auditors and regulators on internal controls, including the new Committee of Sponsoring Organizations (COSO) internal control framework published in 2013
“The increasing costs and other effects of compliance with U.S. and overseas regulations affecting our workforce and our labor practices … ” are major concerns. — McDonald’s
McDonald’s also cited compliance as a concern, and noted it faced often conflicting standards imposed by local, state and federal authorities in the United States. Unsuccessfully complying with such regulations, it said, can adversely affect popular perceptions of its business and expose it to litigation or government investigations or proceedings.
“The increasing costs and other effects of compliance with U.S. and overseas regulations affecting our workforce and our labor practices, including regulations relating to wage and hour practices, workplace conditions, healthcare, immigration, retirement and other employee benefits and unlawful workplace discrimination” are major concerns, the company said.
At Kroger, a majority of the company’s 343,000 full- and part-time employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 300 such agreements.
“These negotiations are challenging as the company seeks competitive cost structures in each market while meeting our associates’ needs for good wages and affordable healthcare,” the company said.
Prices of certain commodity products also affect government regulation and taxes, Costco noted.
“If there’s anything that’s going to have an impact on Middle America, it’s the price of gas. That just sucks money right out of the economy.” — Al Ferrara, national director, retail and consumer products practice, BDO
“They are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market fluctuation, government regulations, taxes and periodic delays in delivery,” the company said.
“Rapid and significant changes in commodity prices may affect our sales and profit margins,” it said.
BDO’s Ferrara noted that as long as the borders are open, and U.S. retailers are free to sell as well to buy, retailers are generally satisfied.
“Some of this is a big concern because retailers want to get the message out to regulators that their business could be hurt if the government ever starts to constrain imports — there could be some real issues on the supply chain,” Ferrara said.
4) Supply chain failure
EY noted that the supply chain presents a significant opportunity for retailers to reduce inefficiencies and compete on cost, which is increasingly crucial as companies in low-growth consumer markets battle for market share.
However, EY’s survey noted that recent unprecedented events have highlighted the vulnerability to supply disruptions of companies in both the developed world and emerging markets.
“Some companies may elect to reverse some cost saving procedures to attain more supply chain control and flexibility,” EY said.
Supply chain is a dual-edged tool, according to Jefferies, a New York-based retail brokerage.
The firm noted that in contrast to investors’ fears, the supply chain may be accelerating Apple’s innovation “with more than the usual number of prototypes floating around.”
In contrast, Jefferies said, Costco faces deceleration in top-line growth due to tough comparisons, weak hardline sales, margin weakness on price investment and increased store cannibalization overseas.
Also, there are significant benefits to local sourcing of products, according to EY. “They are often healthier, fresher and more environmentally friendly.”
The Retail Industry Leaders Association (RILA) and other business organizations plan to focus on the growing role of global value chains in increasing the ability of American companies to compete in the global economy, while benefitting workers and consumers in the domestic market.
“Retailers are well aware of the critical role imports play in the American economy,” said Stephanie Lester, vice president of international trade at RILA. “For the sake of American competitiveness, U.S. trade policy should also acknowledge the value of imports and work with the global economy instead of against it,” she said.
Lester said numerous economic studies have shown that exports and imports are closely related, and that American workers can add substantial value to imported products through the use of improved global value chains.
One study, “Analyzing the Value Chain for Apparel Designed in the United States and Manufactured Overseas,” found that U.S. workers add more than two-thirds of the actual retail sales value of apparel manufactured overseas.
The study also found that the U.S. value-add translates directly into well-paying American jobs in areas such as research, design, logistics, compliance, distribution and customer service.
5) The e-commerce challenge
Home Depot acknowledges that it faces growing competition for consumers and installers of home improvement products from online building supply outlets and, to a lesser extent, other retailers.
“The success of our business depends in part on our ability to identify and respond promptly to evolving trends in the business,” the company added.
Stores magazine noted that of the top 100 retailers it surveyed “the biggest losers were those that didn’t offer much in the way of exciting merchandise or have much e-commerce to speak of, such as Target.”
E-commerce has saved the day for Best Buy over the past year. Online sales exploded for the electronics retailer during its fourth quarter, rising by 25 percent year-over-year. A big part of that acceleration came from the company’s ship-from-store program, a significant departure from past practice for the company.
Ditto for Wal-Mart. A significant differentiator for Wal-Mart’s in-store pickup for e-commerce orders is the pay-with-cash option, in which customers do not need a credit card or debit card to complete the transaction.
The popularity of tablets will also make an impact on the retail market, as more retailers from furniture shops to airlines equip their sales forces with such tools.
Retailers are also increasingly using tablets to transform the in-store experience, giving consumers access to products not on display and managing long lines by allowing customers to designate purchases for home delivery, according to Deloitte.
“Some retailers are even making their own tablets, thereby increasing the number of touch-points that consumers have with the brand,” Deloitte said.
“As the tablet market fragments, consumer businesses will be required to analyze the data on their customers who shop via tablet in more detail,” according to Deloitte.
Mary Brett Whitfield, senior vice president at Kantar research firm, said that technology’s spread — specifically web and social media usage — has completely changed the availability of almost every type of information.
“The resulting changes in shopping behavior have intensified efforts to understand how shoppers have incorporated digital tools and technologies into shopping routines, and now, as smart phones and tablets permeate the environment, the horizon of retail opportunity has just moved again,” Whitfield observed.
Six Best Practices For Effective WC Management
It’s no secret that the professionals responsible for managing workers compensation programs need to be constantly vigilant.
Rising health care costs, complex state regulation, opioid-based prescription drug use and other scary trends tend to keep workers comp managers awake at night.
“Risk managers can never be comfortable because it’s the nature of the beast,” said Debbie Michel, president of Helmsman Management Services LLC, a third-party claims administrator (and a subsidiary of Liberty Mutual Insurance). “To manage comp requires a laser-like, constant focus on following best practices across the continuum.”
Michel pointed to two notable industry trends — rises in loss severity and overall medical spending — that will combine to drive comp costs higher. For example, loss severity is predicted to increase in 2014-2015, mainly due to those rising medical costs.
Debbie discusses the top workers’ comp challenge facing buyers and brokers.
The nation’s annual medical spending, for its part, is expected to grow 6.1 percent in 2014 and 6.2 percent on average from 2015 through 2022, according to the Federal Government’s Centers for Medicare and Medicaid Services. This increase is expected to be driven partially by increased medical services demand among the nation’s aging population – many of whom are baby boomers who have remained in the workplace longer.
Other emerging trends also can have a potential negative impact on comp costs. For example, the recent classification of obesity as a disease (and the corresponding rise of obesity in the U.S.) may increase both workers comp claim frequency and severity.
“The true goal here is to think about injured employees. Everyone needs to focus on helping them get well, back to work and functioning at their best. At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep.”
– Debbie Michel, President, Helmsman Management Services LLC (a subsidiary of Liberty Mutual)
“These are just some factors affecting the workers compensation loss dollar,” she added. “Risk managers, working with their TPAs and carriers, must focus on constant improvement. The good news is there are proven best practices to make it happen.”
Michel outlined some of those best practices risk managers can take to ensure they get the most value from their workers comp spending and help their employees receive the best possible medical outcomes:
1. Workplace Partnering
Risk managers should look to partner with workplace wellness/health programs. While typically managed by different departments, there is an obvious need for risk management and health and wellness programs to be aligned in understanding workforce demographics, health patterns and other claim red flags. These are the factors that often drive claims or impede recovery.
“A workforce might have a higher percentage of smokers or diabetics than the norm, something you can learn from health and wellness programs. Comp managers can collaborate with health and wellness programs to help mitigate the potential impact,” Michel said, adding that there needs to be a direct line between the workers compensation goals and overall employee health and wellness goals.
Debbie discusses the second biggest challenge facing buyers and brokers.
2. Financing Alternatives
Risk managers must constantly re-evaluate how they finance workers compensation insurance programs. For example, there could be an opportunity to reduce costs by moving to higher retention or deductible levels, or creating a captive. Taking on a larger financial, more direct stake in a workers comp program can drive positive changes in safety and related areas.
“We saw this trend grow in 2012-2013 during comp rate increases,” Michel said. “When you have something to lose, you naturally are more focused on safety and other pre-loss issues.”
3. TPA Training, Tenure and Resources
Businesses need to look for a tailored relationship with their TPA or carrier, where they work together to identify and build positive, strategic workers compensation programs. Also, they must exercise due diligence when choosing a TPA by taking a hard look at its training, experience and tools, which ultimately drive program performance.
For instance, Michel said, does the TPA hold regular monthly or quarterly meetings with clients and brokers to gauge progress or address issues? Or, does the TPA help create specific initiatives in a quest to take the workers compensation program to a higher level?
4. Analytics to Drive Positive Outcomes, Lower Loss Costs
Michel explained that best practices for an effective comp claims management process involve taking advantage of today’s powerful analytics tools, especially sophisticated predictive modeling. When woven into an overall claims management strategy, analytics can pinpoint where to focus resources on a high-cost claim, or they can capture the best data to be used for future safety and accident prevention efforts.
“Big data and advanced analytics drive a better understanding of the claims process to bring down the total cost of risk,” Michel added.
5. Provider Network Reach, Collaboration
Risk managers must pay close attention to provider networks and specifically work with outcome-based networks – in those states that allow employers to direct the care of injured workers. Such providers understand workers compensation and how to achieve optimal outcomes.
Risk managers should also understand if and how the TPA interacts with treating physicians. For example, Helmsman offers a peer-to-peer process with its 10 regional medical directors (one in each claims office). While the medical directors work closely with claims case professionals, they also interact directly, “peer-to-peer,” with treatment providers to create effective care paths or considerations.
“We have seen a lot of value here for our clients,” Michel said. “It’s a true differentiator.”
6. Strategic Outlook
Most of all, Michel said, it’s important for risk managers, brokers and TPAs to think strategically – from pre-loss and prevention to a claims process that delivers the best possible outcome for injured workers.
Debbie explains the value of working with Helmsman Management Services.
Helmsman, which provides claims management, managed care and risk control solutions for businesses with 50 employees or more, offers clients what it calls the Account Management Stewardship Program. The program coordinates the “right” resources within an organization and brings together all critical players – risk manager, safety and claims professionals, broker, account manager, etc. The program also frequently utilizes subject matter experts (pharma, networks, nurses, etc.) to help increase knowledge levels for risk and safety managers.
“The true goal here is to think about injured employees,” Michel said. “Everyone needs to focus on helping them get well, back to work and functioning at their best.
“At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep,” she said.
To learn more about how a third-party administrator like Helmsman Management Services LLC (a subsidiary of Liberty Mutual) can help manage your workers compensation costs, contact your broker.
Debbie discusses how Helmsman drives outcomes for risk managers.
Debbie explains how to manage medical outcomes.
Debbie discusses considerations when selecting a TPA.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Helmsman Management Services. The editorial staff of Risk & Insurance had no role in its preparation.