Combating Risks in the Retail Industry

by | May 22, 2019

Background Study

Retail Industry with a global market of USD 22.64 Trillion in 2017 is expected to reach USD 27.7 trillion by 2020 and is undergoing a massive change in its marketing structure. This envisages changes resulting in

  • Product Management strategies
  • Pricing Strategies
  • Distribution strategies
  • Promotion strategies

These changes are brought about mainly due to changes in technology, human behavior towards shopping, new entrants in the retail sector, new products, new marketing strategies, global economic changes, political strategies, climatic changes etc. These changes also bring about changes in the various dimensions of risk which are presently in vogue for the retail industry. An adaptive approach to risk assessments, synergic management, and development of new controls, processes, and organizational structure is required to meet the challenges put forward to the retail industry by these changes.

Global Retail Statistics

In 2017 Retail sector achieved a global sale of USD 22.64 Trillion of which USD 2.3 Trillion was through E Commerce. Out of the E-Commerce channel USD 1.35 Trillion was contributed through M Commerce.

Global Retail market is expected to reach USD 27.7 Trillion by the year 2021 with a CAGR of 4.9%. E Commerce share in Retail sale is expected to grow to USD 4.5 Trillion by the year 2021.

Dangers facing the Industry

Risk appetite of retail industry has been deemed at a higher level than most of the other industries, due to the complexities arising from marketing technicalities, and management structuring on a cost effective manner. The necessary due diligence on risk management strategies from the very onset of a project needs to be revamped in the industry.

Lack of capability for establishing appropriate risk management strategies, building the necessary infrastructure for the same, and lack of management responsiveness to the risk escalations have drawn the industry into deeper turmoil than the appetite prevalent.

If you place a broad perspective on risk assessments, the dangers may be identified as

  • Change Management risks
  • Absence and Compliance to processes and policies,
  • Shop lifting – Customer thefts and Kleptomania
  • Vendor thefts
  • Mistakes
  • Employee Theft
  • Organized Retail Crime
  • Fraud schemes
    • Billing,
    • Cash larceny,
    • Teeming & lading,
    • Check and payment tampering,
    • Corruption,
    • Expenses re-imbursements,
    • Financial statement frauds,
    • Non-cash,
    • Payroll,
    • Register disbursements,
    • Skimming, etc.
  • Wastages
  • Documentation errors,
  • Natural disaster losses,
  • In-transit losses,
  • Product liabilities arising from claims,
  • Product contamination and recalls,
  • Credit card chargebacks,
  • Regulatory fines,
  • Currency exchange losses,
  • Spoilages,
  • Fraudulent returns in Online transactions
  • Breakages, and
  • Voucher / loyalty card abuse

The impact of the above dangers leads to heavy damages in the industry and results in

  • Stock / Asset loss – Store shrink
  • Margin Loss
  • Cash loss

Research data on Retail losses

Sensormatic Global Shrink Index from Tyco Retail Solutions and Planet Retail RNG

The mix of dangers / risks differ from industry area and sector. The global impact of store shrink alone has been assessed at USD 100 Billion which is 1.82% of global sales by the Sensormatic Global Shrink Index from Tyco Retail Solutions and Planet Retail RNG. This index has been the most dependable measurement point to assess the impact of store shrink since the exercise considered the following:

  • 1,100 Retail decision makers,
  • 229,000 stores, in
  • 14 countries and
  • 13 retail segments

The above sample covered segments having 1.56 Trillion USD which contributed to 7% of the global retail sale.

Retail Losses Leader

The online fraud value is estimated at 1.58% of the global Ecommerce transactions, which is USD 36 Billion. This is bound to increase due to lack of proper authentication procedures, new marketing schemes like in-store pickup of online orders, etc.

Association of Certified Frauds Examiners

Institute of Certified Fraud Examiners, the premier agency involved in global fraud research and audit process, has released its Report to the Nations, 2018. This report informs on the following aspects relating to risk of fraud and existing level of fraud in the Retail Industry, based on detailed investigations and analysis of over 104 Retail organizations globally and in specific regions across the globe. This report lays out the specific frauds and details presently prevalent in the retail sector. Specific areas of excerpts from the report is given here under.

Fraud Schemes % of occurrence (in 104 cases)
i Billing 20%
ii Cash larceny 10%
iii Teeming & lading 19%
iv Check and payment tampering 9%
v Corruption 28%
vi Expenses re-imbursements 8%
vii Financial statement frauds 12%
viii Non-cash 34%
ix Payroll 5%
x Register disbursements 13%
xi Skimming, etc 13%

All fraud schemes were seen prevalent with medium and high occurrence conditions. The median loss for these sector was USD 50,000 for each occurrence. Further, the scope for cost escalations are prevalent in areas like inventory holding cost, promotion, overtime, vehicle operations cost, etc. The above facts, certifies the grave need to commit a risk review, in organizations similar to your esteemed organization.

Vital Role for Risk Consultants

Risk Consultants play a vital role in establishing the infrastructure for the Retail Industry. They have made remarkable achievements in cost cutting, detecting of revenue identification failures, fraud detection, prevention, and providing for corrective measures in such areas. The approach required to meet with the infrastructural applications has been duly explored by a few of them to provide value adding services to the organizations in this industry. The prudent use of such Risk consultants could go a long way in supporting the organizations war to combat the risk prevalent in their industry.

Risk Consulting for Retail Industry

Being aware of the various fraud schemes, shop shrink factors, control requirements to close risks, policy and procedural requirements to be complied in the industry for the specific sector of your client, is required to be borne by a professional risk consultant. This requires exposure and research into various dangers in each of the domains under each sector of each area of the retail industry. The risk consultant’s awareness in the areas of control requirements for each potential threats is necessary to add value in their association with the client.

A true professional Risk Consultant shall always build up the Risk register for the client prior to planning out the audit strategy. Scoping of the audit structure or domains is very much a critical aspect in the Internal Audit functions development in your client’s organization.

Our Strategy for Risk Containment

Synergic strategies for prevention, detection, and correction for expenditure overload, revenue loss, Low productivity and fraudulent practices needs to be implanted into the core structure of the organization. The following structured methodology may be considered for meeting the required norms for establishing the same.

Determined to add value to retail clients, Affility has developed multi layered strategies to combat the threats in this sector. The focus of the threat combat strategy is to ensure;

  • Development of a risk register – Risk Audit Scope
  • Develop a Hotline for whistle blowers to open communications – This could be connected to the Loss Prevention or Internal Audit Head – Top Management Activity
  • Establish a strong Pre-Audit process to review all procurement and payment practices prior to commitment – Top Management Activity
  • Ensure that a Zero Tolerance policy is adopted to set the norm for fraud prevention – Top Management Activity
  • Establish a routine internal audit review on all domains of activity to cover the factors declared in the Risk Register.
  • Lay down a good ERP duly integrated to Material Resource Planning, Accounting and Reporting and Human Resources. Further, the report formats for delivery of information to the relevant operational divisions should also be ensured in the system – Top Management Activity
  • Establishing a strong Risk Consulting Team – Outsourced teams with Retail background could be used to establish a roadmap towards developing an internal team – Risk Audit Scope
  • Generate a team that works with the loss prevention team to ensure preventive systems are put in place.
  • Review the GAPS in the procedures and policies due to which fraud threats prevail in the organization
  • Provide policies and procedures to block out frauds, store shrink, control gaps, etc.

Ensure that the check list of threats be generated and covered in the review process to ensure effective coverage of risks as a fraud and shop shrink prevention strategy. Multiple schemes of shopper’s theft with or without collusion from other sources have been identified by our risk consultants and preventive procedures identified to stop such practices in retail outlets. We also focus on adaptive strategies to keep the shop lifters who continue to generate novel fraud schemes and making it more resilient and un-identifiable, to succeed.

Outsourcing Model with Affility

Outsourcing of Internal Audit function through Affility can be done by an organization under 2 different structures.

  • Outsource the full function
  • Outsource specific functions of Internal Audit process while internally managing the governance process to the extent desirable.

There are various models under which a Risk consulting could be outsourced while client has an Internal Audit Head to ensure the governance aspect of the function.