Fin 431, Exam #1
February 17, 2010
Foot Locker Incorporated: Risk Prevention Methods
Foot Locker Incorporated (ticker symbol: FL) is a U.S. based company that operates worldwide. Their services include the sale of various athletic equipment, sports apparel and products. According to their company background, as of the beginning of 2009 Foot Locker operates roughly 3,600 retail stores in 21 countries worldwide (“About Us"). Although Foot Locker provides their goods through both local retail stores and an online based “direct-to- customers” program, my risk management tactics will primarily focus on local retailers and warehouses and their risks. The five risks I have chosen are employee theft within the local branches and through bank accounts, customer theft within the store, physical injuries to customers and employees on Foot Locker property, property damage to Foot Locker property due to obscene weather conditions and the risk of fluctuating prices of necessary inputs that are used in the production of various Foot Locker goods including footwear.
One of the most essential inputs in the production of footwear is rubber. As a risk manager, I must take into account the possibility of the cost of rubber increasing. According to the commodities index ran by indexmundi.com, the price of rubber has increased every month for the past 6 months. In January 2010, the price of rubber increased to $139.73 from $92.86 merely 6 months ago in August of 2009 (“Rubber Monthly Prices”). This nearly 34% increase in the commodity price of rubber could have devastating effects on Foot Lockers cost of production. This increase will potentially increase the cost of producing foot and athletic wear, which in turn will increase retail prices. The need for consumers to purchase high end Foot Locker products will then decrease as retail prices increase. Rubber remains the main input in producing footwear; however the leather used in everyday footwear is prevalent enough to be looked at.
Due to the fluctuating productivity and efficiency during the current economic downturn, buyers tend to be less predictable. “Earlier, the buyers anticipated sales trend and placed orders well ahead of time. But now they wait to ensure retail off-take before placing orders. Improving speed of operations even as one keeps cost down is important (“Business Line”).” This efficiency has brought down leather prices. “Leather prices are also dropping and this contributed to leather costs coming down to 50-60 per cent from 70 per cent (“Business Line”).” Although this decrease in leather costs could potentially help the cost of footwear production, the main input in footwear production is rubber.
As the price of the main input of my product increases, I must be ready to counteract this risk. In doing so, I am also performing another risk by hedging the cost of my inputs. I must be willing to set a pre-determined price of rubber to be purchased from my wholesaler for a set amount time. Although I take the risk of the price falling below my set price, since the prices have increased at a constant rate for the past 6 months my current risk is dramatically lower. By setting the price 6 months ahead of time I, as a risk manager, potentially prevent the 34% loss that could have occurred over the past 6 months. Along with the speculative risk of price fluctuation, there are many pure risks that come when providing goods to consumers.
Employee theft is one of the most common risks an employer or company takes on when doing business. “Every year billions of dollars are lost by businesses nationwide to employee fraud and theft and the number of incidents are rising.” (Schaefer 1). Employees could steal cash, merchandise, and illegally redirect customer account information to a private account. “A former Foot Locker employee was sentenced to five years probation and ordered to pay nearly $26,000 in restitution for taking the company’s money to cover...
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