Every industry has a certain level of risk, but the success of an industry depends on how its operators manage their risk and adapt for the future. In turbulent times, like during the recession and slow recovery that has characterized the past five years, the companies that survive are the movers and shakers, restructuring their operations and refocusing their energies to secure a future in their respective industries.
Of the 10 industries that market research firm IBISWorld has identified as the riskiest, most are in flux and still adjusting to the changing market conditions that resulted from the recession. Although opportunities for growth do exist for each of the industries, the factors contributing to their high risk are expected to keep most in decline over the next five years. By looking closely at the developments that are expected to take place over the period, lenders will be able to target companies that are adapting to the changing market and position themselves to benefit now and in the future. The risk scores referenced are on a scale of one to nine, where one represents the lowest risk and nine represents the highest.
Recordable Media Manufacturing
Risk Score 7.24
Recordable media is becoming obsolete in the face of digital media formats and online streaming. Instead of purchasing CDs or DVDs, consumers are downloading or streaming movies, TV shows, music and software. Businesses are consolidating company IT services onto the internet, making cloud computing the likely future of business IT solutions. These new online services will reduce companies’ need to purchase physical software, thereby undercutting industry revenue. During the next five years, the popularity of substitutes will continue to rise. As a result, Recordable Media Manufacturing industry revenue is expected fall at an average annual rate of 3.9% to $3.2 billion in the five years to 2018.
Providing some light at the end of the tunnel is the film industry. Movie studios earn a significant profit on disc sales and, in turn, are working to popularize new formats. In particular, 3-D films require large data files that cannot be easily streamed through the internet. In conjunction, companies like Sony have gaming consoles with 3-D capabilities in the works. Consequently, industry operators will profit from improving disc sales, especially as demand for 3-D films increases over the next five years.
Risk score 7.17
Strong external competition has been forcing this industry into a decline over the past decade. The biggest threat is from appliance manufacturers and large retailers that offer warranties for repair services, which undercuts demand for industry services. Consumer preferences for reliable brand names, such as the Home Depot and Best Buy, tend to drive business away from independently owned specialty repair shops. In addition, technological advances are improving the lifespan of appliances, reducing the need for repairs. And as incomes rise in line with the improving economy, consumers will begin purchasing new appliances, which will further diminish repair demand. New technologies, such as built-in diagnostic tools, will allow consumers to fix minor problems on their own and go longer before requiring major repairs. Consequently, Appliance Repair industry revenue is expected to fall an annualized 1.5% to $3.4 billion in the five years to 2018.
Some growth opportunities do exist for the industry, though. Prices for appliances are forecast to outpace disposable income growth, so some consumers will refrain from new appliance purchases and instead rely on repair services while income growth remains sluggish. As retail sales of new appliances inevitably grow over the next five years, the industry will benefit from an increasing stock of appliances that will need repairs in the future.
Leather Tanning & Finishing
Risk score: 6.65
The primary factors affecting risk for US tanners are revenue volatility and high import activity. Low disposable incomes during the recession pushed consumers to reduce their spending, which flowed on as lower demand for leather goods. Demand from downstream industries, including automobile and household furniture manufacturers, fell as well, leading industry revenue to plummet 11.3% and 31.3% in 2008 and 2009, respectively.
Because automakers and household furniture manufacturers are key industry customers, the return to spending on these discretionary items has been benefiting the industry, starting with a 61.9% jump in 2010. Rising disposable incomes over the period will encourage consumers to return to purchasing new cars and household furniture, which will boost demand for leather goods from these industries.
Nonetheless, competition from imports is high and increasing: By 2018, imports are expected to make up 83.3% of domestic demand. Tanners overseas have cheaper operating and labor expenses, which allows them to provide cheaper leather and tanning services. Over the next five years, US firms will increasingly relocate to lower-cost countries to be closer to downstream manufacturers, many of which have moved abroad as well. Consequently, revenue for the Leather Tanning and Finishing industry is anticipated to fall an annualized 1.9% to $1.7 billion in the five years to 2018.
Risk score 6.54
Revenue volatility over the past five years has made this industry risky. Because the Fuel Dealers industry sells heating oil, propane and other fuels directly to end users, revenue depends on fuel prices, which have closely followed the wildly fluctuating prices of crude oil and natural gas. When world crude oil and natural gas prices plummeted 36.3% and 39.9%, respectively, during the recession in 2009, industry revenue followed suit and fell 14.5% for the year.
During the next five years, firms will face increasing competition from natural gas companies as investment into natural gas pipeline infrastructure rises. As this infrastructure becomes more widely available, customers are expected to switch from the industry’s propane and heating oil products to natural gas. To combat this threat, operators will expand their geographic footprint to access new customers and retain existing ones. Luckily, as the economic recovery picks up during the next five years, consistently rising fuel prices will be a boon to operators. Consequently, revenue is projected to increase an annualized 2.2% to $51.3 billion in the five years to 2018.
Risk score: 6.33
Despite being a mature industry that provides services with wide market acceptance, high regulation and increasing external competition make the Commercial Banking industry a risky one. New regulation following the recession has increased industry oversight and raised operators’ compliance costs. Recent legislation limits the fees banks can charge consumers and forces banks to hold higher capital reserves in case of defaults. Higher capital reserves then leaves banks with less money for lending, making credit more difficult for consumers to access. At the same time, reduced bank fees also impede banks’ ability to grow profit.
Competition from nontraditional financiers is also rising. Large external competitors like Walmart are marketing prepaid debit cards and microloans to consumers, allowing an underserved market to participate in banking activities outside of the traditional banking realm. In addition, nonbank organizations such as commercial and manufacturing companies often offer financial services to their customers to facilitate their purchases.
During the next five years, the landscape for commercial banks is forecast to drastically improve, with revenue rising an annualized 7.4% to $725.0 billion. Larger banks will use their wider array of service offerings to attract retail depositors, thereby helping boost industry revenue. In addition, banks will increasingly use new technology to attract Gen Y clients (i.e. consumers aged 30 and younger). This age group relies heavily on mobile technology to pay bills and make deposits. So companies with well-developed mobile platforms will likely retain more young adults, thereby ensuring future deposit growth and lending capabilities.
Major Household Appliance Manufacturing
Risk score 6.25
The major drivers affecting the Major Household Appliance Manufacturing industry’s risk are high input costs, such as those of steel and plastic, and rising imports. In the five years to 2018, world steel prices are projected to increase an annualized 1.8%, while the domestic price of plastic materials and resin is anticipated to rise an annualized 1.3%. Manufacturers have been increasing product prices in an attempt to keep pace with higher costs, but with consumer demand and incomes still recovering from the recession, sales have been weak. Rising input prices have been encouraging operators to offshore manufacturing to countries with lower labor costs, which has caused import competition to rise. In the next five years, imports are forecast to rise an average 1.1% annually, eventually making up 47.5% of domestic demand by 2018.
In the next five years, a rebounding housing market will spur industry growth, with revenue rising an annualized 2.8% to $17.7 billion by 2018. New energy-efficient products, such as smart appliances that activate when electricity is most abundant and least expensive, will help propel the industry’s growth. These products are not yet on the market, but are expected to make their appearance during the period. As disposable incomes and the price of electricity continue to rise, consumers will demand these energy-efficient products, boosting industry revenue.
Business Certification & IT Schools
Risk score 6.16
This industry faces rising competition from junior colleges, trade schools and universities. Demand for industry schools has declined because more students are choosing degree programs to boost their chances in an increasingly competitive job market. Additionally, declining demand has caused operators to lower prices for courses, which has eaten into industry profit margins. To remain relevant and reduce costs, operators are offering online courses that allow students to attend classes remotely. Although these strategies will help profit improve moderately during the next five years, Business Certification and IT Schools industry revenue is expected to continue declining at an average annual rate of 5.6% to $2.1 billion as competition from other educational institutions rises.
Schools that offer online classes attract more students by appealing to a broader demographic. In particular, growth opportunities exist for operators that provide training and online course for the medical professions. During the next five years, business certification and IT schools will expand their range of classes to include higher-growth industries.
Gasoline & Petroleum Wholesaling
Risk Score 6.05
The Gasoline and Petroleum Wholesaling industry’s revenue and risk level depend heavily on global crude oil prices: The recession-induced price declines contributed significantly to volatility and risk, with revenue falling 34.6% in 2009 as oil prices plummeted. Although the volatile crude oil prices resulting from the recession are unlikely to recur, there is always the potential for natural disasters or political events that could impact prices. Protests and regime changes in the Middle East, which includes some of the most prolific oil-producing nations, may cause more spikes in oil prices. In addition, a legislative push for fuel efficiency, including higher miles per gallon required for cars and light trucks, will weaken domestic demand and slow the growth in the volume of petroleum products wholesalers sell.
Despite the risks involved, wholesalers have a vital role in the petroleum product supply chain. Slim profit margins and the already-established relationships many customers have with wholesalers make it not worthwhile for oil companies to set up their own wholesaling operations. In addition, some downstream industries lack the infrastructure to purchase petroleum products directly from manufacturers. Combined with recovering product prices, wholesalers’ key role will help revenue grow at an annualized rate of 2.5% to $439.5 billion in the five years to 2018.
Apparel Knitting Mills
Risk score: 5.99
Very little knitting activity takes place in the United States, with most operators outsourcing labor-intensive production to countries with lower labor costs, which is the main contributor to the industry’s high risk. Instead, domestic firms focus on designing and branding to earn profit. Because the majority of production takes place overseas, import competition is constantly rising. Consequently, Apparel Knitting Mills industry revenue is forecast to continue falling over the next five years at an annualized rate of 3.1% to $412.0 million in 2018.
Nevertheless, there is room for growth for domestic operators. US mills that successfully switch to higher value-added activities will benefit from increasing revenue and profit. In particular, successful firms will carve out a niche in the market and fulfill rising demand for differentiated and high-quality knits as demand for apparel rebounds over the next five years. In addition, companies that can incorporate designing and marketing activities will be able to grab a larger piece of the pie.
Risk score 5.95
Over the past decade, newspapers have been facing high and rising competition from other forms of media, particularly digital outlets. Publishers depend on business advertising expenditure for their funding, so because consumers prefer the real-time access to information that online news and social media provide, advertisers have less incentive to spend money on print campaigns. Also, online platforms are generally less expensive and allow advertisers to reach a wider audience and create targeted ads to reach a specific market.
Despite declining overall readership, newspapers tend to attract a more affluent demographic, making advertisers reluctant to desert the industry altogether. To slow the exodus of advertising dollars, publishers will increasingly implement paywall systems to raise revenue, as well as online and mobile platforms to increase accessibility and potentially boost readership. The New York Times Company recently rolled out a platform to incorporate newspapers with mobile devices like tablets. The company has also implemented a successful paywall that allows readers to access a certain number of free articles each month before requiring payment for more content. These online platforms will also allow advertisers to use newspapers as means to target a specific audience. Similar to the past five years, Newspaper Publishing industry revenue will continue to fall through 2018, albeit at a slower annualized rate of 3.7%, to $27.7 billion.
For a printable PDF of 10 Riskiest Industries, click here.