The 10 Riskiest Industries of 2014-2015

By USDR

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The weakened economy has challenged the recovery of many industries over the past few years. While several operators are slowly starting to recover, certain industries are not convalescing as swiftly and have experienced increased risk. Industry risk measures the relative likelihood that an investor or creditor would receive a negative return on an investment in a particular industry over 12 to 18 months. The risk rating for each industry is calculated based on an analysis of an industry’s structural risk, growth risk and sensitivity risk. IBIS World’s risk scores are based on a scale of one to nine, with a score of one representing the lowest risk and nine representing the highest.

IBISWorld’s 10 riskiest industries are listed below. With the exception of the Corn Farming industry (which is undergoing short-term difficulties), all of these industries are in a state of long-term decline. Some may be able to re-invent themselves, despite very difficult internal and external operating conditions. While every industry is subject to a certain level of risk, these 10 industries will encounter the most difficult operating environments.

Both of these apparel manufacturing industries have been in a state of steady, long-term decline over the past few decades, as domestic clothing manufacturers have been unable to compete with much more efficient producers in Asia. Low wages and an abundant workforce in this region has enabled these labor-intensive industries to thrive. Since clothing is lightweight, and therefore easy to transport, foreign manufacturers have been able to economically export mass quantities of clothing into the country, driving the majority of domestic operations out of business. Given these long-term negative trends, both of these manufacturing industries are forecast to decline in 2014 and 2015. However, the Women’s and Girls’ Apparel Manufacturing industry’s risk rating is relatively higher due to the fact that the industry has not declined quite as strongly over the past decade.

The Corn Farming industry differs from the other industries on this list because it is not in a state of long-term decline. In fact, the industry has a crucial function in the US economy. Corn serves as a major source of animal feed; it is used to produce the country’s most widely used sweeteners and is the most important stock in biofuel production. Despite the industry’s impressive performance in recent years, it has a high risk rating for 2014-2015 due to the threat of decreasing government support for ethanol production. In November 2013, following eight years of rising government subsidization of corn ethanol production, President Obama announced a proposal to decrease the annual corn ethanol production quota. While the EPA is still deliberating next year’s ethanol quota, if such quotas are implemented, demand for corn would drop dramatically over the following year, leading to a drastic decline in industry revenue. As a result of this threat, the Corn Farming industry has a high risk rating.

The Computer Manufacturing industry was severely affected by the recession, as rising unemployment and negative shocks to consumer wealth and confidence discouraged domestic consumers from purchasing durable goods, including computers. Computer parts are highly standardized across the globe, and consequently, their manufacture and assembly requires the use of relatively low-skilled labor. As a result, domestic computer-manufacturing operations have been steadily moving abroad to lower-cost countries, such as China and Mexico, due to declining sales. This trend has continued in subsequent years, albeit at a slower pace, as steadily decreasing computer prices have made high-cost domestic production increasingly uncompetitive. Increasing demand for computers from data processing and hosting services, and demand from niche markets (e.g. designers and avid video game players) for individually designed computers represent potential sources of revenue growth for creative industry operators. However, given the Computer Manufacturing industry’s lack of competitiveness relative to foreign manufacturers, this industry’s 2014-2015 risk rating is high.

Technological changes have dramatically altered media consumption habits, causing the DVD, Game and Video Rental industry to decline at a staggering rate. As a $12.9 billion industry in 2004, the industry provided a convenient and inexpensive way of watching TV shows and movies. However, the industry’s appeal to consumers rapidly deteriorated as a result of convenient and inexpensive substitute services, namely on-demand and web-streaming movie and TV show rentals, as well as mail- and kiosk- distributed video game and movie rentals. As these alternative forms of media became more available, industry revenue eroded to less than 30.0% of its peak 2004 levels. Additionally, the industry’s former largest company, Blockbuster, closed the last of its company-owned stores in November 2013.As internet availability continues to expand, the DVD, Game and Video Rental industry is expected to continue to decline, as well as maintain a high risk rating.

The Vacuum, Fan and Small Household Appliance Manufacturing industry comprises companies that manufacture small electric appliances and housewares, such as blenders, coffee makers and blow-dryers. As with the Computer Manufacturing industry, the Vacuum, Fan and Small Household Appliance Manufacturing industry has been unable to compete with more cost-effective foreign competitors with substantially lower labor costs. As a result, production has steadily been moving abroad, with imports forecast to satisfy 82.5% of domestic demand for industry products in 2014.

While the industry is forecast to continue declining in 2014 and 2015, some industry operators will likely be able to take advantage of growth in consumer spending and a decline in the price of plastics (a key input in industry production),marginally improving revenue and profit margins. Additionally, competition from abroad is expected to relatively lighten as wages grow in China, where over 80.0% of industry imports are sourced. Despite these positive trends, industry operations are expected to continue moving abroad, leaving this industry with a high risk rating.

These two industries have been in decline for decades as rising health consciousness and increasing regulation have stifled growth. Rising health consciousness has led many Americans to decrease or eliminate their consumption of cigarettes and other tobacco products. Additionally, expanding industry regulation has further hampered revenue and profit margins in recent years. High and increasing federal and state taxes on cigarettes and other tobacco products are also forcing industry operators to increase their prices, causing them to lose some customers.

In upcoming years, cigarette consumption is expected to continue decreasing, while regulation of the tobacco industries is forecast to continue to grow, causing industry revenue to fall. Industry operators are expected to benefit from increased sales of electronic cigarettes, which are growing in popularity as a less-harmful alternative to smoking. However, this trend is not forecast to offset the overall decline in demand for industry products. Moreover, industry operators are expected to increasingly shift their operations abroad to meet rapidly growing demand for tobacco products in developing economies. While both industries have high risk ratings, the Cigarette and Tobacco Products Wholesaling industry’s rating is higher due to wholesale bypass; the Cigarette and Tobacco Manufacturing industry has been increasingly selling their products directly to retailers (bypassing wholesalers) in an attempt to salvage thinning profit margins.

The Recordable Media Manufacturing industry comprises companies that manufacture and mass-replicates optical and magnetic media, including compact discs (CDs), digital versatile discs (DVDs) and Blu-ray discs. Similar to the DVD, Game and Video Rental industry, the Recordable Media Manufacturing industry is a victim of changing media consumption patterns. Since the early 2000’s, consumers have been increasingly opting to purchase (or illegally download) the music and video media content they use online. They then store this content either on large flash drives or online via centralized data storage servers known as cloud computing. Other consumers make substantial use of streaming services to fulfill their music and video consumption needs. Given that this form of media consumption requires neither blank nor prerecorded CDs and DVDs, industry demand has also been on a steady decline. In upcoming years, growing demand for 3D movies is forecast to stem the decline in industry revenue to some extent, much as Blu-ray discs have done over the past five years. However, this is not forecast to counteract the long-term negative trends affecting the industry, which maintains a high risk rating in 2014-2015.

The Appliance Repair industry has the highest risk rating of all IBISWorld industries in 2014-2015. Operators in this industry repair and maintain home and garden equipment or household-type appliances, such as lawn mowers, washing machines, clothes dryers and refrigerators. In the past, household appliances tended to be important, expensive purchases, with most appliances meant to last for a long period of time. As a result, consumers would invest substantially in the proper care of such appliances, including hiring the services of the Appliance Repair industry. In recent years, however, household appliances have generally become inexpensive and lower quality. Given the ready availability of relatively inexpensive household appliances, households have been increasingly throwing out old appliances and replacing them with new ones. As a result of this trend, demand for this industry’s services has been on a steady decline over the past few decades. Moreover, the industry has been increasingly threatened by the growing prevalence of manufacturer warranties, which replace malfunctioning appliances, as well as the proliferation of do-it-yourself repair videos online. Due to the high-anticipated growth in per capita disposable income in 2014-2015, consumers are expected to make a relatively large number of new durable goods purchases, including household appliances. Since new appliances rarely need substantial repair or maintenance, industry demand is expected to be especially low.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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