Top 10 Riskiest Industries

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1 October October 2012 By Kevin Boyland & Anna Son Despite economic improvement on the horizon, these ten industries are just too risky to see much growth. Rising costs, high competition and declining demand are keeping recovery out of reach In a risk analysis of US industries, IBISWorld found declining life cycles, high competition, declining consumer demand and technology changes to be the contributing perils for many of the top 10 riskiest industries. Despite the US economy s steady, albeit tepid, recovery, there are several industries that are not expected to improve along with it. IBISWorld forecasts the following industries to be the top 10 riskiest during Over the 10 years to 2017, each industry s overall contribution to the economy, measured by industry value added, is forecast to trail annualized GDP growth of 1.8%. Stagnant technological innovation, market saturation and fierce competition from substitutes and low-cost imports are common factors that continue to cause the majority of these industries to decline in relevance. To calculate overall risk scores, IBISWorld assesses the risks pertaining to industry structure (structural risk), expected future performance (growth risk) and economic forces (sensitivity risk). Risk scores are based on a scale of one to nine, where one represents the lowest risk and nine represents the highest. The three types of risks are scored separately, then weighted and combined to derive the overall risk score. Cigarette and Tobacco Manufacturing Risk score: 7.10 This industry manufactures cigarettes, cigars, smoking and chewing tobacco and reconstituted tobacco. Tobacco manufacturers acquire raw materials from upstream tobacco growers, stemmers and redriers and from paper and fiber manufacturers. Consequently, establishments are highly concentrated in the tobacco-growing Southeast region of the United States; major player Altria, the parent company of Phillip Morris is based in Virginia, and industry heavyweights Reynolds American and Lorillard are both headquartered in North Carolina. Although the stress of layoffs, foreclosures and a tumbling stock market drove many people to seek stress relief with cigarettes during the recession, demand is burning out. Consumers are expected to buy fewer tobacco products in the next five years as the economic recovery reduces stress levels and product prices continue to increase due to rising excise taxes and tobacco prices. Indeed, the world price of tobacco is forecast to increase at an annualized rate of 1.5% over the five years to 2017, increasing costs and slowing profit growth for manufacturers that are unable to pass rising input costs on to info@ibisworld.com

2 October consumers amid declining demand. Additionally, antismoking campaigns are expected to further sully the image of tobacco companies and dampen demand. Soda Production Risk score: 6.69 The Soda Production industry s operations entail blending various ingredients with carbonated water and then packaging and distributing these beverages for resale. Firms that are primarily involved in still-water production, water purifying and ice manufacturing are not included in this industry. Over the five years to 2017, industry revenue is expected to contract an average 1.3% per year to $15.2 billion, as a result of falling per capita consumption of carbonated soft drinks and intensified external competition from alternative drinks. As consumers become more health-conscious and move away from high-calorie, sugary drinks to healthier substitutes, manufacturers of energy drinks and ready-to-drink tea will continue intensifying competition against industry participants. Relatively lower plastic and high-fructose corn syrup prices, however, are expected to mitigate input price volatility and boost industry profitability over the next five years. Formal Wear and Costume Rental Risk score: 6.45 Companies in this industry rent out clothing such as formal wear, accessories, costumes and other clothing (excluding laundered uniforms and work apparel). Continuing recent trends, demand will increasingly shift from rentals toward purchases as import penetration into the manufacturing sector, particularly from Chinese imports, continues providing low-priced formal wear and costume options for consumers. The aging babyboomer generation will contribute to the shrinking rental demand since men in the 45-and-older demographic with higher disposable incomes have higher preferences to purchase formal wear instead of renting it. In addition, women s formal rentals are forecast to plummet as alternative outlets like online retailers gain popularity and expand their formal dress options. As such, industry revenue will shrink an average 1.1% per year to $953.8 million in the five years to Despite a forecast fall in the domestic marriage rate during the next Top10RiskiestIndustries Industry OverallRisk Score 2012Revenue ($ billion) Annualized RevenueGrowth (%) AnnualizedIVA Growth (%) Cigarette & Tobacco Manufacturing Soda Production Formal Wear & Costume Rental Fishing Furniture Repair & Reupholstery Business Certification & IT Schools Gift Shops & Card Stores Homeowners' Associations Shoe & Footwear Manufacturing Business Service Centers SOURCE: IBISWORLD

3 October five years, tuxedo rentals will continue driving industry demand. In fact, formal wear for men, the largest market for this industry, remains unchanged, with most men still opting to rent tuxedos instead of purchasing them because the purchase price of these items is significantly higher than their rental rate. Fishing Risk score: 6.35 This industry includes firms that primarily catch finfish, shellfish and miscellaneous marine products for commercial sale (excluding aquaculture and firms that generate a bulk of their revenue from fish processing). Given the prominence of imports and exports, the US Fishing industry would lose nearly all its revenue. Trade movements and the price of seafood will play a crucial role in the industry s revenue growth, while profit margins will rely on oil prices and catch levels. With global demand for seafood forecast to increase due to population and income growth, continued weakness in the US dollar relative to foreign currencies will continue to benefit export sales. Slow growth in employment and disposable income levels may affect the number of purchases of fish and seafood, however, which are often featured as part of the high-margin white tablecloth dining market. Furthermore, industry revenue, which is forecast to grow at an annualized rate of 1.1% to $6.0 billion during the next five years, will be stymied by preventative measures against overfishing in US waters and unpredictable weather conditions, which can result in the destruction of fishing vessels, the closure of coastal processing plants and the disruption of animal movements. Furniture Repair and Reupholstery Risk score: 6.27 Firms in this industry are involved in repairing, reupholstering, refinishing and restoring furniture, offering on-site and in-store furniture services. (This industry excludes automotive vehicle upholstery repair services and the restoration of museum pieces.) As with many other players in the repair sector, industry demand is generally countercyclical. When the economy flourishes and disposable income levels rise, households and businesses are more likely to purchase new furniture rather than repair existing items. In the next five years, growth in per capita disposable income and consumer confidence is forecast to bolster new furniture sales, a trend that will be underpinned by a growing influx of lower-cost imported furniture. Falling prices for new furniture pieces have been a serious challenge for industry participants as manufacturers in high furniture importing countries, such as China, Mexico and Vietnam, pass lower production expenses and cost savings down to consumers in the form of lower prices. In addition, the rising cost of raw materials, such as cotton, leather and steel, which are all expected to increase in price over the next five years, will hamper industry profitability. As firms struggle to compete against lowpriced furniture, the size of the industry is expected to contract an average 2.8% per year to 20,829 businesses over the five years to Business Certification and IT Schools Risk score: 6.21 Establishments in this industry offer courses in office procedures and secretarial skills, as well as courses that teach software packages, computerized business systems, computer electronics technology and local-area-network management. In recent years, the industry has suffered from rising competition from junior colleges, trade schools and universities as more students opt for two- and four-year degree programs to improve their chances of employment in the competitive job

4 October market. Moreover, many courses that the industry s IT segment provides have become second nature for a generation that was raised with computers. As more computer-literate employees enter the workforce, the industry has experienced a decline in demand for nonspecialized software courses. Looking for ways to remain relevant in a knowledge-based economy, large operators have started consolidating and offering online courses that allow students to attend classes remotely. Over the five years to 2017, the number of firms operating in the industry is forecast to decline at an annualized rate of 4.4% to 11,790. Gift Shops and Card Stores Risk score: 6.19 Firms in this industry offer a range of gifts, gift wrap, novelty merchandise, souvenirs, greeting cards, party supplies and holiday decorations. (Retailers that operate primarily as used-merchandise stores, electronic shopping and mailorder houses or discount retail stores are not included in this industry.) Industry revenue contracted during and following the recession, when low per capita disposable income and consumer sentiment resulted in decreased spending on discretionary items offered at gift shops and card stores. Although the growth in consumer sentiment and tourist activity will stimulate demand for gifts and souvenirs, retailers will continue to face rising competition from discount retailers and online retailers that offer lower prices for comparable products. Substitutes like virtual greeting cards and social networking websites will foster growth for digitized gift cards and likely drive sales away from the industry, contributing to this industry s high risk score in the coming year. Due to the discretionary nature of products sold by gift shops and card stores, changes in consumer sentiment and disposable income have a direct correlation with spending behavior. As such, industry revenue is forecast to decline an average 1.9% per year to $14.1 billion in the five years to Homeowners Associations Risk score: 6.17 A homeowners association is a legal entity created by a real estate developer for the purpose of developing, managing, selling or administering a community of homes. Over the past five years, homeownership rates and housing starts, which are the industry s most significant drivers, have been pressured. Heightened unemployment during the recession followed by a tepid recovery have meant that fewer homeowners have the disposable income necessary to pay assessment fees to community associations, hurting industry revenue. Additionally, while the national unemployment rate has declined in recent years, it remains stubbornly high during 2012, negatively affecting homeowners. Unlike many other risky industries, the Homeowners Associations industry is in the mature stage of its life cycle, characterized by a high degree of public acceptance for industry organizations and a stable number of participants. Although 2012 will be a risky year for the industry, a slowly decreasing unemployment rate is forecast to lead to increased homeownership rates and per capita disposable income levels over the next five years, returning the industry to growth. Shoe and Footwear Manufacturing Risk score: 6.14 Firms in this industry manufacture rubber and plastic footwear, protective footwear, house slippers and slipper socks. Industry products also include men s or women s shoes with rubber or plastic soles and leather or vinyl uppers. The industry depends heavily on

5 October About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call consumer spending, which was negatively affected by the recession. At the same time, price competition from low-cost imports has made it difficult for firms to sustain profit margins, sending the industry into a state of decline. Many companies have moved away from manufacturing footwear in the United States and are instead focusing on designing, wholesaling and marketing branded shoes. The entire industry has been restructured to reflect the changing environment of footwear manufacturing, with large operators becoming vertically integrated to obtain economies of scale and cost savings, while smaller operators have exited the industry. Over the five years to 2017, the number of industry participants is forecast to decrease 1.9% per year on average to 698. Import competition will continue to be a persistent threat, with imports anticipated to satisfy more than 96.0% of domestic demand by Business Service Centers Risk score: 6.07 Business service centers provide mailbox rental and other postal and mailing services, along with one or more other office support services, such as fax services, word processing services, on-site PC rental and office products. This industry also includes copy centers or copy shops. Two of the industry s key drivers of growth business demand and corporate profit slowed during the recession as small businesses shuttered their doors. While these drivers are recovering, external competition from electronic substitutes, such as , will continue to erode demand for industry services. As more businesses move toward paperless operations, rely on cloud computing and conduct a larger percentage of services online, the industry will continue to decline in relevance, slowing revenue growth and pressuring profit margins. Contact: Savannah Haspel VP, Public Relations IBISWorld Phone: savannahh@ibisworld.com

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