IBISWorld Identifies Top 10 Riskiest US Industries

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Although the future looks brighter for the overall economy, these top 10 risky industries will be left behind in the dark.

IBISWorld Market Research

IBISWorld Market Research

Risk scores are based on a scale of one representing the lowest risk and nine representing the highest risk. These 10 industries are considered HIGH risk because they all have scores well beyond a six rating.

As the United States inches toward recovery, there are several industries that aren’t expected to improve along with the rest of the economy. In a risk analysis of US industries, industry research firm 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.

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 representing the lowest risk and nine representing the highest risk. The three types of risk are scored separately, then weighted and combined to derive the overall risk score. The 10 industries identified are considered HIGH risk because they all have scores well beyond a six rating.

Recordable Media Manufacturing
This industry manufactures and mass replicates optical and magnetic media, including audio and video tapes, diskettes and optical discs, CDs, DVDs and Blu-ray discs. The biggest source of difficulty is the declining life cycle stage, which indicates weakening demand. The Recordable Media Manufacturing industry has suffered a sharp drop-off in production volumes over the five years to 2011. Revenue has fallen as the switch to online content has dented – and will continue to do so – demand for physical media. Industry decline has instigated industry consolidation, with the number of firms in the industry forecast to drop at an annualized rate of 3.0% to 572 over the 10 years 2016. Furthermore, the difficulty is exacerbated by the number of broadband connections and external competition. Competition from cable TV, particularly video-on-demand services, reduces demand for DVD rentals and purchases, which in turn reduces demand for recordable media.

Wired Telecommunications Carriers
Industry participants provide direct communication services (such as local, long-distance and international phone service using wired telecommunications networks) and own, operate and maintain this infrastructure, which includes landlines, microwaves and satellite linkups. In recent years, the continuous emergence of new technologies, like naked DSL and voice over internet protocol (VoIP) technologies, and rapidly falling cell phone prices are making this industry particularly risky. However a positive for operators within the industry are the high barriers to entry, which protect against higher competition in the long run by reducing the ability of new operators to enter the marketplace, and low revenue volatility.

Soda Production
Firms in the Carbonated Soft Drink (CSD) Production industry blend various ingredients with carbonated water and also package and distribute these beverages for resale, excluding still beverage production, water purifying and ice manufacturing. Industry revenue is expected to grow only anemically due to declining per capita consumption of carbonated soft drinks. Alternative beverage categories have stepped up their marketing campaigns and gained market share as a result, hampering some of the traditional demand for CSDs. Top competitor categories include energy drinks and ready-to-drink teas and coffees. Furthermore, soft drink syrup concentrate is a significant raw material required by soft drink and energy drink makers to produce consumer beverages, so its unit costs directly affect industry value added and profit.

Laundromats
Establishments in this industry primarily operate facilities with coin-operated laundry and dry-cleaning equipment for customer use on the premises. Businesses competing fiercely for market share are forced to incur expenses to differentiate their offerings, keep prices low to entice demand or both. The industry primarily targets renters because they typically use coin-operated washers and dryers at local laundromats or those that landlords provide in the rental complex. Therefore, when rental vacancy rates increase, the industry is negatively affected. Additionally, the industry faces external competition from the sale of residential washers and dryers purchased primarily for the home as well as from colleges and universities that provide students with coin- or card-operated washers and dryers.

DVD, Game & Video Rental
This industry includes subscriptions for mail-distributed and in-store media rentals, but it excludes on-demand and web streaming rentals. A slew of alternative media is causing consumers to reduce and even cease renting physical copies of videos and games. Instead, Americans are choosing streaming media, video on demand and online downloads. Additionally, this industry is affected by changes in consumer spending, which can be influenced by changes in the rate of employment growth, interest rates and tax rates. When spending rises, consumers will be more likely to rent DVDs and games. Furthermore, broadband is necessary for consumers to stream and download video content online, the primary substitute for physical media rentals. People without a steady Internet connection are unlikely to subscribe to streaming services, such as Netflix. So greater penetration of internet connections will likely hurt the industry.

Homeowners’ Associations
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. The two factors with the most significant impacts on the industry are homeownership rates and housing starts. Amid heightened unemployment during the recession and slow recovery period, fewer homeowners had the disposable income necessary to pay assessment fees to community associations. This trend has negatively affected industry revenue during the period. Although the recession officially ended in June 2009, unemployment continued to rise during 2010 and has remained stubbornly high during 2011, a trend that has adversely affected many homeowners.

Petroleum Refining
Firms in this industry refine crude oil into petroleum products, which involves one or more of the following activities: fractionation, straight distillation of crude oil and cracking. Crude oil is the industry’s key input; therefore, it is the major cost item. When prices increase, petroleum refiners are adversely affected. Government regulations regarding the type of petroleum products (which also include blended petroleum or blended ethanol) that can be sold at different times and in different regions have a direct influence on industry performance. Furthermore, Chinese GDP growth indicates an increase in oil demand, which places upward pressure on world crude oil prices and will contribute to this industry’s risk in the coming year.

Bridge & Tunnel Construction
This industry is comprised of firms that are primarily engaged in the construction of bridges, viaducts, elevated highways and tunnels, including new work, reconstruction and repairs (the industry does not include road and highway construction activity). Industry establishments include general contractors, design builders, engineer-constructors and joint-venture contractors. The two factors with the most significant impacts on the industry are government funding for highways and value of private non-residential construction. Furthermore, projects and contractors typically bid for funding and contracts based on the estimated costs. As the price of inputs like concrete rise, bridge and tunnel construction demand diminishes. The cyclical growth and dispersal of residential construction activity generally contributes funds in the form of development and impact fees for the installation of local transport infrastructure, such as roads, bridges and tunnels. These factors will contribute to risk in the coming year.

Gift Shops & Card Stores
Operators in this industry retail a range of gifts, gift wrap, novelty merchandise, souvenirs, greeting cards, party supplies, seasonal and holiday decorations. The industry excludes retailers that operate primarily as used merchandise stores, electronic shopping and mail-order houses or discount retail stores. Gifts and cards supplied by this industry compete with comparable products offered by discount and online retailers. Such external competitors generally offer lower prices, a wider selection of goods and the added convenience of one-stop shopping, thus eroding sales from industry operators. Furthermore, the rising prevalence of e-cards and social networking websites has been reducing the demand for traditional greeting cards and postcards. As such, a rise in the number of broadband connections will likely lead to more online activity, further driving down demand for traditional cards. Low consumer sentiment and per capita disposable income will also contribute to this industry’s high risk score in the coming year.

Community Food Services
This industry comprises establishments that collect, prepare and deliver food for the needy. The two factors with the most significant impacts on the industry are per capita disposable income and the poverty rate. As the economy recovers, a rise in per capita disposable income will decrease the demand for community food services since individuals and households will be better able to purchase food for themselves. In 2012, industry revenue is expected to drop 7.1% to $5.1 billion, eliminating most of the gains experienced during the recession. This low- to negative-growth trend will occur as the unemployment rate falls from 9.1% currently to 6.0% by 2016. This trend will aid incomes and lower demand for community food services. Also, as the poverty rate decreases, so will demand for community food services, which will contribute to this industry’s risk in the coming year. In terms of government funding, which is the main driver of revenue, IBISWorld expects that the public focus will revert to balancing state and federal budgets, causing funding to fall to more affordable levels in 2012 through 2014.

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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 http://www.ibisworld.com or call 1-800-330-3772.

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