Supplier Risk Seen Improving in Retail Industry
Financial performance improvements in key supplier sectors driving stability, CVM reports based on latest analysis of supplier financial data
Chicago — September 21, 2009 — Supplier risk in the retail industry is easing after steady worsening over the last two years, although specific supplier subsectors still are experiencing financial difficulties that may present risk for their retail customers, according to a new analysis from enterprise supplier management solutions provider CVM Solutions.
"While retail supplier health has not returned to pre-recession levels, the upswing in financial stability of key suppliers during the first two quarters of 2009 is a positive sign for the retail community," said Jon Bovit, vice president of marketing and strategy for CVM Solutions.
However, Bovit noted that CVM's analysis also showed that such sectors as business services, industrial products and especially electronics still present some level of risk for retailers. "Of the eight supplier subsectors we analyzed, electronics appeared to be still suffering from the stagnating economy, likely due to over capacity and sharp price reductions on big-ticket items," Bovit said.
Earlier this year CVM issued a report on risk levels among automotive suppliers. The company produced the report on retail suppliers based on requests from customers in the retail space, according to Bovit.
To determine retailers' supplier risk, CVM utilized a sample data set from its Master Supplier Database. The data, covering the two years from June 2007 through June 2009, included many of the top retailers in North America. CVM then selected key publicly traded suppliers to these retail customers and calculated an "Altman Z-Score" for each customer and supplier to objectively measure risk.
The Altman Z-Score is a financial analysis model that examines five company financial ratios and is intended to be highly predictive of a company's bankruptcy risk. An Altman Z-Score of less than 2.6 is considered "high risk."
CVM segmented the suppliers into eight sub-sectors — apparel, building products, business services, electronics, food/retail drug, home furnishings/appliance, industrial products and non-food retail — to evaluate risk by category.
The resulting analysis showed that the retailers' stability had started improving back in the beginning of this year and that direct suppliers to the retail industry seems to be trailing the retailer recovery by at least a quarter. The resulting analysis showed that the suppliers average Altman Z-Score bottomed out in the last two quarters and has remained at 3.46.
Most sub-sectors had scores of 3.1 or higher, with the exception of electronics, which dropped to 1.78 at the end of the second quarter of 2009; industrial products, with a score of 2.44; and business services with a 2.74.
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| Altman Z-scores for sub-sectors within retail industry. Scores of less than 2.6 are considered high risk and are highlighted above. Source: CVM Solutions. |
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