The retail industry is experiencing a period of great transformation. Nimble disrupters are entering the marketplace, online sales are growing rapidly, and new digital technologies are empowering consumers, giving them unprecedented transparency, choice and convenience. As companies compete in this new retail landscape, enhancing and improving consumer engagement, in-store and online experience, sourcing, delivery and product expectations are top of mind for America's retailers.
To better understand how retailers are navigating the current financial environment, RILA and EY are excited to share the results of the 2018 Retail Accounting Policy Survey.
Our goal for the survey was to understand how retailers are applying specific accounting principles in their financial reporting. Finance executives from across the retail industry answered more than 100 questions, which focused on the most commonly applied accounting practices related to inventory, accounts payable, sales incentives and more. More than 40 retailers from a wide variety of categories, including mass merchants, department stores, grocers and specialty retailers participated in the survey. The respondents also varied from middle-market companies to retailers with more than $20 billion in revenue and included both RILA members and nonmembers.
We wanted to delve deeper into the changes causing retail finance leaders to update or modify their financial reporting and learn more about the ways finance leaders are incorporating new technologies (e.g., AI, robotics, etc.) into their organizations.
The findings proved interesting. Since EY last conducted this survey in 2007, retailers have adopted a new revenue recognition standard. In response to the explosion of online sales, some retailers have changed the time at which e-commerce revenue is recognized from customer delivery to shipping point. Additionally, a small number of retailers are allocating online sales to stores.
Additional survey takeaways include:
- Since 2007 the number of retailers with physical stores and distribution centers outside the US has doubled
- The cost of shrinkage is evenly shared by companies (38%) and Vendors (38%), in 2007 the majority of retailers (55%) indicated shrinkage was shared by both the vendor and the company
- 93% of retailers offer coupons and other sales incentives to customers
- Only 15% of retailers are employing Robotic Process Automation (RPA)
The survey results also indicate that some retailer accounting practices remain unchanged. For example, the most widely used method for valuing inventories are continues to be cost averages and despite the growth of e-commerce and international operations, most respondents continue to report one segment.
Surprisingly, in a period of rapid advancements in technology, it was interesting to see how few retailers are using radio-frequency identification (RFID) in the physical inventory management process or RPA in the finance function. Perhaps this will be an area of development to come.
The information in this comprehensive survey provides an illuminating look at the current state of the retail sector accounting practices and financial reporting. We hope the collected insights will give the industry a sense of how retail companies' financial models and accounting practices compare with those of their peers' and assist brands as they continue to move toward the future.
Mindy Dragisich is Partner at Ernst & Young LLP and Kathleen McGuigan is Executive Vice President and Deputy General Counsel for RILA