When Levees Break: How Retailers Are Preparing for a Riskier Natural World

More specifically, retailers have some 1,900 facilities exposed to hurricanes and typhoons, another 6,770 exposed to rises in sea level and more than 17,000 exposed to floods, according to data provided to Retail Dive by Four Twenty Seven, a climate risk data firm recently acquired by Moody’s.

Walmart — perhaps unsurprisingly given that it’s the world’s largest retailer by revenue — faces the most risk, with 14% of its global facilities exposed to hurricanes and 16% to floods, according to Four Twenty Seven.

While the largest retailers may have more stores and facilities exposed to climatological furies, scale also insulates the biggest players.

“Today, it’s hard to mitigate when you’re a small company and you are locally focused,” Jon Slangerup, chairman and CEO at American Global Logistics, told Retail Dive. “And that’s where the very sad disasters happen, where a [retailer] with a number of storefront operations gets wiped out in a fire or gets impacted by floods — there’s not much mitigation that can happen there. Because they’re simply very local or regional in their structure.”

He added, “But the larger they are, the more diversity they can introduce into their system.”

Yet larger retailers are still exposed. As Cowen analysts led by Oliver Chen noted in a 2018 report, off-mall retailers are hit hardest in hurricanes specifically because lost sales are typically not made up. At the same time, broad-line retailers can benefit, as can home centers such as Home Depot and Lowe’s, which are major sources for clean-up and rebuilding materials. However, the analysts said that “severe, land-falling hurricanes can pose longer-term disruption risk to their store bases and supply chains.”

Retailing in disasters

Stores often end up as front lines for both major weather events and the rebuilding process. Retailers, depending on what they sell, have to balance customer and employee safety against the store’s importance in filling customer needs for food, daily necessities and clean-up supplies.

When natural disasters strike, retailers zero in on keeping products flowing to stores, making sure payroll is functioning so employees get paid, and ensuring point-of-sale systems are up and running (barring power outages), or maintaining cash payment systems when the POS is down, Walch said.

Coordination and training are also critical. Walch notes larger retailers typically have emergency operation centers that act as a command center, monitoring weather using specialized analytics and information systems that track geographies, assets and events on the ground. Walmart, for example, has a multi-pronged emergency operations team that is online 24 hours a day, and handles 22.5 million alarm signals and 365,000 calls a year.

Retailers also train their store managers to make decisions in disaster situations. Walch says in his practice he recommends retailers simplify the process and make messaging as pragmatic as possible. “It’s not about creating documents or doing administrative things,” he said. “What’s more important is to do some exercises or go through scenarios that actually help those people make better decisions. Oftentimes we will talk about muscle memory that you want to create, do some exercises that help people know how to respond when they are affected by an event.”

Retailers additionally have to focus on how they can quickly re-open and re-staff stores when there is no major damage to them. “Not only do you want to get your employees back to work, but your community relies on on your store in some way,” said Kim Hirsch, a senior advisory consultant with Fusion Risk Management.

“So if you supply food and ice and things like that, especially, it takes a lot of burden off of the federal response if they have local stores that can recover and begin bringing supplies back to the community very rapidly,” she added.

Keeping goods flowing

For large store chains, even a massive event like a hurricane likely will not be an existential risk, experts said. Threats to distribution centers and supply chains, however, generally are of a higher concern.

“Distribution centers oftentimes are in remote locations that are tough to get to and in places that are more exposed to disasters,” Deloitte’s Walch said.

“Many [retailers] just have one or two distribution centers,” Hirsch said. “So it’s a huge loss to take one of them down.” For those retailers, that could prove a massive risk to their business. “If you have one distribution center, you’re definitely out of business if you have one destroyed,” she added. “You can’t just stand one up within a week or two.”

But even larger retailers, with an expansive network of facilities, can’t necessarily absorb the loss of a logistics facility shutting down in a weather event. “You can’t just say, ‘Oh, I guess we’ll supply them from another one,” Hirsch said. “It’s a huge undertaking to re-maneuver your entire network to support that.” Moreover, she adds, “merchandise is seasonal.”

“If you lose your Christmas shipments that are coming in throughout the fall, that is going to be a problem for even the biggest retailer,” Hirsch said.

Mitigating the risks to distribution centers means having plans in place to potentially rent out alternative facilities and replenish products.

Retailers can also build out additional capacity or add additional warehouses to their network that operate as a fallback when primary warehouses go down, according to Shehrina Kamal, director of risk intelligence for risk management software firm DHL Resilience360.

Retooling for disruption

Some of the larger retailers are even shifting how they distribute to mitigate risk. Those with a diversified distribution network are “not reliant on any one particular port or gateway or delivery system,” Slangerup said. “In fact, they have highly diversified, smaller, more agile distribution systems, based on smaller distribution centers.” He adds that retailers specifically are often turning “traditional brick-and-mortar stores into virtual warehouses.”

Those trends, he emphasizes, are also occurring in response to market pressures, as customers come to demand more quickly fulfilled e-commerce orders and pick-up options. But many of the same necessary changes can also make businesses more resilient in climate events.

Relationships with suppliers are also key when disaster strikes, both to replenish any destroyed stock but also to provide customers with products as they prepare or work to clean up.

One of Slangerup’s clients last year had a fire rip through a warehouse. To replenish destroyed stock, the company had to accelerate shipments of goods from Asia. “It affected their business, but it didn’t cripple them. It didn’t put them out of business,” he said. “They were able to respond very quickly,” which Slangerup attributes partly to a dynamic purchasing system and rapid replenishment cycle.

Preparation is opportunistic as well as defensive. “Maybe you’re pre-ordering stuff that comes from suppliers in a specific area that is likely to be affected,” Mirko Woitzik, an international risk intelligence manager for DHL Resilience360, said in an interview. Because when the event hits, “then it’s kind of too late already, because obviously everyone would like to get the orders, but they can’t move out, so it has to happen before a storm.”

Having backup suppliers certified and shipping on a regular basis can help ensure a fluid relationship should the time come to ramp up in a disaster. That could mean shipping 20% of a product from that supplier on a regular basis — in normal times — Woitzik said. Once the relationship is in place, retailers can more easily ramp up in times of need. On the other hand, “going out into the spot market and buying stuff that you haven’t really certified yet — that’s not recommended and is very, very difficult in a lot of industries.”

This sort of detailed planning for contingencies has long been unglamorous work in retail, but it’s getting harder to ignore and riskier to neglect.

“The number of 100-year weather events is getting shockingly more prevalent,” Walch said. “Hurricane Sandy in New York, the wildfires in California — these are 100-year events. And unfortunately, we’re having them every four or five years now. And it’s forcing executives to think about it.”

“Now here’s the challenge,” he adds, pointing to a retail market that has plenty of challenges and disruptions already beyond climate events. “Those same executives are trying to figure out how to grow. They’re trying to figure out in some respects how to survive.”