Geopolitical Risks in Retail

Like any other industry, the retail sector faces risks that can significantly impact business operations and profitability. One of the hazards that retailers must contend with today is geopolitical risk, which has emerged as a critical factor in shaping the global business landscape.

Geopolitical risk encompasses the potential impact of political, economic, social, and environmental events or developments on a country, region, or the entire international system. Such risks arise from changes or tensions among nations, governments, and various interest groups, creating uncertainty and instability in global markets and international relations.

In recent years, geopolitical risk has gained prominence for several reasons. One of the key drivers is the increasing interconnectedness and interdependence of economies worldwide. Retailers, especially those engaged in international trade or sourcing, are particularly vulnerable to geopolitical events and conflicts that disrupt supply chains or create trade barriers.

Political instability, regime changes, or trade disputes between countries can have profound implications for retailers. For instance, sudden shifts in government policies, such as new tariffs or trade restrictions, can increase costs for imported goods and impact profit margins. These changes can also disrupt the flow of goods and services, causing delays or interruptions in the supply chain and ultimately affecting product availability and customer satisfaction.

Additionally, geopolitical risks often extend beyond economic factors and include social and environmental aspects. Social unrest, protests, or conflicts in certain regions can directly impact retail operations by causing store closures, damaging infrastructure, or creating an unsafe environment for employees and customers. Additionally, environmental events such as natural disasters or climate change-related disruptions can pose significant challenges to retailers, affecting logistics, inventory management, and demand for specific products.

Retailers need to adopt proactive strategies and comprehensive risk management approaches to mitigate geopolitical risks. These activities should include closely monitoring political developments, staying informed about international relations, and maintaining solid relationships with suppliers and partners. Diversification of sourcing and production locations can also help reduce dependency on regions prone to geopolitical volatility.

Technology is also crucial in managing and mitigating geopolitical risks in retail. Advanced analytics and forecasting models can help identify potential threats, enabling retailers to take preemptive actions. Artificial intelligence‑powered supply chain management systems can provide real-time visibility and flexibility, allowing companies to adapt swiftly to changing geopolitical circumstances.

Active intelligence monitoring is also a must. Understanding what is occurring in real- time is one of the easiest ways retailers can be proactive.

8 Risks Threatening the Retail Sector

We live in a global economy; one of the key revelations from the COVID-19 pandemic was just how fragile our supply chain is. Imagine the effect on retail if we had massive civil unrest, global war, political jockeying for land and power, and economic upheaval. We don’t need to imagine; these things are already occurring. Here are examples of the geopolitical risks facing the retail sector:

• Armed conflicts or military tensions between countries.
• Political instability or regime changes within countries.
• Economic sanctions or trade disputes between nations.
• Territorial disputes and border conflicts.
• Terrorism, cyberattacks, and other security threats.
• Changes in international laws, regulations, or agreements.
• Environmental issues such as climate change or resource scarcity can lead to conflicts or tensions between nations.
• Humanitarian crises such as mass migration or refugee flows, resulting from conflicts or natural disasters.

The scary thing is these are happening now, in more significant ways than we have seen in years. Obviously, these geopolitical risks affect more than retail businesses. They can have significant consequences for trade, investment, economic growth, and the stability and security of countries and regions. Organizations and individuals operating in international markets must know and manage these risks to protect their interests and maintain resilience in an increasingly interconnected world.

How Geopolitical Risks Can Affect Your Business

Geopolitical risks can significantly impact retail and supply chains. Here are some areas of concern based on current events:

• Trade barriers and tariffs. Geopolitical tensions between countries can lead to trade barriers such as tariffs, quotas, or embargoes. These barriers can increase the cost of imported goods, disrupt international trade, and reduce the availability of specific products in the retail market.
• Currency fluctuations. Geopolitical events can trigger changes in currency exchange rates, affecting the cost of importing and exporting goods. Retailers that rely heavily on international trade may experience increased costs or decreased profits due to currency fluctuations.
• Supply chain disruptions. Geopolitical conflicts or natural disasters can disrupt the global supply chain. This may result in delays, increased costs, or shortages of critical raw materials, components, or finished products. Retailers may need help maintaining inventory levels and meeting customer demands, which could impact their reputation and bottom line.
• Changes in regulations. Geopolitical events can spark changes in regulations or new laws affecting retail and supply chain operations. For example, stricter environmental regulations or labor laws may impact sourcing of raw materials or manufacturing, requiring retailers to adapt their supply chain strategies.
• Political instability. Geopolitical tensions can cause political unrest in certain regions, affecting local economies and disrupting retail and supply chain operations. This may increase risks for businesses operating in those regions, with the potential for asset damage, increased security costs, or difficulty in repatriating profits.
• Shifts in consumer attitudes. Geopolitical events can influence consumer sentiment, leading to changes in purchasing behavior. For example, consumers may boycott products from certain countries due to political tensions or environmental concerns, impacting retailers relying on those products.

Rethinking Risk Strategy

Most businesses have changed how they handle risk following the COVID-19 pandemic. So, now is a good time to dust off business continuity plans and risk registers. Here are four ways retailers can mitigate the effects of geopolitical risks on their businesses and supply chains:

• Monitor global events closely. Retailers must stay informed about geopolitical events and their potential impact on the supply chain. By closely monitoring such events, retailers can proactively adjust their sourcing strategies or seek alternative suppliers to mitigate potential disruptions.
• Understand demographics and provide support. Geopolitical conflicts can have far-reaching social impacts, particularly for retailers in regions directly affected by conflict. Retailers should pay attention to the demographics of their customer base and ensure they have support mechanisms in place. For instance, when customers may have family members affected by conflict, offering empathetic customer service and providing resources or assistance can help build customer loyalty and trust.
• Develop contingency plans and diversify sourcing and distribution networks. Retailers should develop robust plans to address potential geopolitical risks. One smart strategy is to diversify sourcing and distribution networks to reduce dependency on regions or countries prone to geopolitical volatility. For example, if a retailer relies heavily on a single manufacturing hub in a geopolitically unstable region, it may be wise to explore alternative production locations or engage in dual sourcing to ensure a steady supply of goods.
• Maintain strong relationships. Building strong relationships with suppliers and partners is a crucial factor in enabling retailers to navigate geopolitical risks effectively. Open communication channels and regular supplier updates can provide valuable insights into the geopolitical landscape. For instance, a retailer may maintain close contact with suppliers in countries experiencing political unrest to understand potential disruptions in production or shipment schedules. Strong relationships can foster collaboration, enabling retailers and their partners to address and mitigate geopolitical risks collectively.

Geopolitical risk has become an inherent part of the modern retail industry. The interplay among political, economic, social, and environmental factors on a global scale can significantly impact retail businesses and their profitability. By staying agile and adaptive, retailers can better navigate the challenges posed by geopolitical risks and maintain a resilient supply chain. By adopting proactive measures, retailers can enhance their resilience, adapt to changing circumstances, and continue to deliver products and services. They’ll be able to protect their operations and seize opportunities despite geopolitical uncertainties.