Fluctuating market conditions, the cost-of-living crisis, and payment fraud are just some of the threats faced by retail organisations in recent times. The significant rise in crimes such as theft within the retail sector, as highlighted by the British Retail Consortium (BRC) Crime Survey, is certainly a cause for concern. Given the negative knock-on effects of such risks, it’s essential to manage and prevent them effectively.
Retailers can manage risks by implementing a robust risk management strategy that identifies risks early and proactively uses key strategies such as avoidance, reduction, sharing, retention, and transfer. Preventing issues before they arise is vital, and measures like secure systems, strong contingency plans, clear policies and protocols, well-trained staff, ongoing risk assessments, and insurance can help mitigate risks successfully.
Here are some risks in retail and tips for mitigating them:
Theft
In the UK, local shops report millions of thefts every year. The Association of Convenience Stores (ACS) Crime Report warns that these crimes are increasing, with records of over 600 thefts occurring each hour.
For retailers, theft goes beyond organised retail crime (ORC), where thieves break in to steal cash or goods for resale. It also includes shoplifting, refund fraud (returning non-store products), and price tag tampering.
Customer theft alone costs £1.8 billion, according to the BRC’s Crime Survey. Retailers also face internal theft, where employees can steal goods, offer unauthorised discounts, or abuse store policies. Even vendors and delivery personnel can engage in theft by taking products before they reach the store or invoicing for more than delivered.
Tips to prevent theft in retail:
1. Install surveillance systems
Use security cameras and alarms for break-ins. Actively monitor footage to catch offenders in real time or review regularly to identify repeat offenders.
2. Use robust Point-of-Sale systems
Employ systems that are hard to manipulate, provide real-time sales and inventory tracking, and help detect discrepancies or refund fraud.
3. Implement Electronic Article Surveillance (EAS) tags
Use EAS tags for high-value items like electronics and clothing. These trigger alarms if someone attempts to leave without paying.
4. Deploy security personnel
A uniformed security guard at entrances can deter theft and can help handle violent offenders. For frequent incidents, consider undercover personnel to spot and catch shoplifters in action.
5. Screen candidates thoroughly
Conduct background checks during hiring to avoid employing individuals with a history of misconduct.
6. Foster a healthy work environment
Address employee grievances, offer solutions like on-demand pay to ease financial stress, and make efforts to improve employee engagement and loyalty to reduce internal theft.
7. Train employees
Train employees to spot suspicious behaviour, manage difficult customers, and prevent theft while maintaining a positive customer experience.
8. Optimise store layout
Ensure maximum visibility by creating clear sightlines for staff to monitor all areas. Lock high-value items, like electronics and high-end products, to reduce theft.
9. Collaborate with authorities
Seek assistance from police, law enforcement, or retail associations to address serious thefts, violence, or organised crime and cooperate in tracking offenders.
Payment fraud
Payment fraud, causing billions in annual losses, is a major risk for the UK retail sector. It involves financial crimes where stolen or fake payment information is used for unauthorised transactions, targeting retailers, customers, or both.
Common types of payment fraud include:
- Credit card fraud: Stolen or fake card details used for unauthorised purchases.
- Card not present (CNP) fraud: Fraudsters use stolen or compromised card details without possessing the physical card. This type is prevalent in e-commerce, accounting for 81% of UK card frauds.
- Chargeback fraud: A customer falsely disputes a legitimate purchase as unauthorised, forcing the retailer to return funds and lose goods. About 34% of merchants globally face this fraud.
- Account takeover: Hackers access customer accounts and make unauthorised purchases using saved payment details.
Payment fraud can also occur through fake online stores and payment gateways that resemble legitimate sites, tricking customers, or through the use of counterfeit cheques.
As online shopping continues to thrive, ensuring protection against payment fraud is a critical responsibility for retailers.
Tips to prevent payment fraud in retail:
1. Secure payment gateways
Ensure secure payment gateways and channels like digital wallets (e.g., Apple Pay, Google Pay), choosing providers with fraud detection tools such as encryption, tokenisation, and advanced authentication, while ensuring compliance with necessary guidelines.
2. Enhance online transaction security
Implement measures like Address Verification System (AVS) to verify billing addresses and 3D Secure authentication to confirm the cardholder’s identity during transactions, making it harder for fraudsters to succeed.
3. Monitor suspicious activities
Track unusual behaviour such as multiple accounts with the same details, high-value transactions from unverified accounts, or repeated failed payment attempts. Use fraud detection systems to analyse and flag such activities in real time.
4. Handle chargebacks proactively
Investigate chargebacks to identify their causes. Respond promptly with evidence supporting transaction legitimacy to improve the chances of winning disputes.
5. Establish a fraud response plan
Create a fraud response plan outlining steps such as identifying fraud, blocking compromised payment methods, notifying affected customers, and reporting incidents to authorities.
Data breaches and cybersecurity threats
With sensitive customer data such as names, addresses, and payment details at stake, data protection and cybersecurity remain a top concern for retailers. IBM’s Cost of a Data Breach Report estimates the global average cost of a breach at $4.88 million in 2024. Data breaches and cyber-attacks not only cause financial losses but also expose customers to identity theft and cybercrimes, eroding their trust in your business. Such incidents can severely damage a business’s reputation and lead to legal challenges that are harder to recover from than financial losses.
Attackers use methods like phishing, ransomware, malware, SQL injection attacks, and Distributed Denial-of-Service (DDoS) attacks to steal data, disrupt essential systems like POS, and halt operations. A DDoS attack, for example, floods a website with traffic, overwhelming servers and preventing legitimate customers from accessing it.
Tips to protect against data breaches and cybersecurity threats:
1. Keep systems updated
Regularly update all systems, including POS, website, and backend databases, with the latest software versions, plugins, and security patches to close vulnerabilities and protect against cyberattacks.
2. Enhance website security
Secure data exchanged between customers and your website by implementing SSL (Secure Sockets Layer) encryption.
3. Conduct regular audits
Have cybersecurity specialists perform regular system audits, security assessments, and penetration testing to identify and address potential vulnerabilities.
4. Adopt multi-factor authentication
Use Two-Factor Authentication (2FA) or Multi-Factor Authentication (MFA) for both employees and customers to add an extra layer of security.
5. Enforce strong password policies
Set strong password requirements and encourage regular password changes for employees and customers to reduce account takeover risks.
6. Encrypt sensitive data
Encrypt data both in transit (while sent over the internet) and at rest (when stored) to ensure it remains unreadable to unauthorised parties.
7. Raise employee awareness
Train employees on cybersecurity best practices, including identifying phishing emails and spotting fraudulent activities, especially those involved in transactions.
8. Use role-based access controls
Restrict access to sensitive data based on job roles to minimise the risk of insider threats and limit breach impact.
9. Plan for potential threats
Develop a disaster recovery plan, regularly back up critical data, and store backups securely with encryption.
10. Ensure compliance
Comply with data privacy regulations like UK GDPR, ensuring customer consent for data collection, transparency, and the right to access, update, or delete their personal data.
Inventory damage
Inventory can get damaged due to a variety of reasons, including mishandling, storage, or transportation issues. Accidents like fires, natural calamities, or adverse weather, such as flooding in warehouses or stores, can also cause significant losses. Even indirect consequences like power outages causing perishables to spoil can lead to significant losses.
While large damages are obvious, small ones, like scratches or stains, should not be overlooked. These can accumulate over time, forcing products to be sold at a loss or even discarded. When factoring in processing, restocking, or disposal costs, the total loss grows. If damaged goods are sold, they can harm customer trust, which is far more valuable than the item itself. Therefore, efforts should be made to minimise inventory damage and its associated losses.
Tips to prevent inventory damages in retail:
1. Provide proper employee training
Provide clear guidelines and training to employees on proper inventory handling, especially for fragile or delicate items.
2. Invest in safe storage conditions
Invest in secure storage solutions and ensure a climate-controlled environment for inventory, especially perishable goods, with precise control over temperature and humidity to meet specific storage requirements.
3. Conduct regular inspections
Perform regular inventory checks to ensure store conditions are optimal and identify any damages early, allowing timely corrective action. A clear process for reporting damages can facilitate this.
4. Implement quality control measures
Implement stringent quality control measures to thoroughly inspect goods upon receipt from suppliers and prevent damaged products from entering inventory.
5. Secure insurance coverage
Protect your business from losses due to uncontrollable factors like natural disasters and accidents by securing appropriate insurance.
Inventory management issues
Inefficient inventory management can result in stockouts, leading to lost sales, or overstocking, where unsold items take up storage space and increase maintenance costs. Errors between recorded and actual stock data, or limited visibility into inventory levels can cause replenishment, sales, and forecasting errors.
Rooted in operational inefficiencies, these challenges hurt stock availability, order fulfilment, efficiency, profitability, and customer satisfaction. Resolving these issues is essential for improving processes and boosting productivity.
Tips to prevent inventory mismanagement issues in retail:
1. Conduct regular inventory audits
Perform routine audits to identify and resolve discrepancies between recorded and actual stock levels.
2. Use data to improve forecasting
Use historical data to understand customer preferences and seasonal trends, improving demand forecasting to avoid stockouts and overstocking.
3. Adopt strategic inventory methods
Evaluate and implement strategies like Just-In-Time (JIT) if they suit your business needs.
4. Utilise inventory management software
Utilise technology such as inventory management software to track stock in real time and quickly identify discrepancies.
Financial management software, such as Financials, includes integrated inventory management functionality, providing a unified view of stock. With data linked directly to core accounting features, it delivers accurate insights for better forecasting and inventory control.
Safety hazards
Retail, being an industry involving customers’ physical presence, carries significant safety risks. Hazards include slip-and-fall accidents, falling merchandise, fire and electrical dangers, poor infrastructure, and even overcrowding during events like sales. These risks threaten both customers and employees.
Such incidents can result in serious injuries, leading to compensation claims and legal fees. Fines, penalties, or legal actions from regulatory bodies may follow. Additionally, this can cause negative publicity and damage to brand reputation.
Tips to prevent safety hazards in retail:
1. Ensure robust infrastructure
Invest in strong, sturdy infrastructure and ensure regular maintenance for safety.
2. Improve store layout and design
Add signage, warnings, and floor markings to alert customers and employees to potential hazards. Keep aisles well-lit and clutter-free, ensuring enough space for movement. Strategically place products and equipment, such as storing heavy items on lower shelves and securing sharp tools or restricted items away from children’s reach.
3. Conduct regular safety inspections
Implement routine checks to identify hazards like slippery floors or faulty equipment. Assign dedicated staff to carry out inspections, including documentation and photo evidence if needed. Ensure all electrical and mechanical tools are regularly maintained and promptly address issues to create a safe environment.
4. Train employees on safety compliance
Provide thorough training on accident prevention, emergency response, crowd management, first aid, and the proper use of safety tools. Schedule regular refresher sessions to keep employees informed and prepared.
5. Develop an emergency response plan
Create a clear plan outlining actions for emergencies such as fires, medical incidents, or robberies. Form a dedicated team responsible for executing the plan and ensure all employees are familiar with it.
6. Comply with safety regulations
Adhere to safety guidelines set by regulatory bodies. Equip stores with fire prevention systems, including extinguishers, smoke detectors, and sprinklers.
7. Prepare for crowd control
During high-traffic periods, use barriers, signage, and staff to direct customer flow. Limit the number of customers in specific areas if necessary to prevent overcrowding.
Supply chain disruptions
A robust supply chain is vital for retail, as any disruption can lead to product shortages, lost sales, and reduced customer satisfaction, ultimately affecting costs, operations, and overall profitability. Disruptions may arise from uncontrollable factors like natural disasters, geopolitical issues, or macroeconomic changes, as seen during the global pandemic. They can also stem from supplier delays, transportation issues due to weather, strikes, or customs, unexpected demand shifts, or production challenges like machinery breakdowns, labour shortages, or raw material scarcity.
While many of these factors are beyond a retailer’s control, there are still ways to minimise their impact and prepare for such events.
Tips to prevent supply chain disruption in retail:
1. Diversify suppliers
Reduce dependency on a single supplier by diversifying, ensuring product availability through multiple sources in case one supplier faces delays.
2. Support local sourcing
Include locally manufactured items in your inventory to minimise the impact of global supply chain disruptions and reduce risks like customs delays or shipping issues.
3. Maintain safety stock
Keep buffer inventory for high-demand or critical products to cushion against supply fluctuations or delays.
4. Build strong supplier relationships
Build a strong supplier base by thoroughly evaluating suppliers for reliability and maintaining transparent, responsive relationships. Strong relationships enable early warnings of potential delays and foster collaborative problem-solving.
5. Monitor your supply chain
Use real-time tracking to increase visibility into lead times and shipping statuses. Conduct regular audits of suppliers and logistics partners to ensure they meet performance standards and can handle disruptions.
6. Develop a risk management strategy
Identify vulnerabilities in the supply chain and create contingency plans to address potential disruptions, including supplier switching and order adjustments.
Supplier management software provides full visibility and control over your supplier relationships, allowing for collaboration, performance reviews, and identification of supplier risks, enabling effective mitigation.
Economic downturns and slowdowns
During economic slowdowns and downturns, the cost of goods and services rises while consumer spending declines, directly affecting sales and profits. To offset rising costs, retailers may raise prices, which can further deter sales, creating a challenging situation. Consequently, economic downturns pose a significant risk to retail businesses.
Tips to mitigate the effects of economic downturns and slowdowns in retail:
1. Diversify product offerings
Diversify product offerings to generate revenue from essentials when demand for luxury or non-essential items drops.
2. Pivot to value-driven marketing
As consumers become more price-sensitive during economic slowdowns, increase sales by providing promotions, discounts, and loyalty programmes that cater to their needs.
3. Grow your ecommerce presence
Establishing or expanding your ecommerce store can help reduce the costs of maintaining physical stores and increase overall sales.
4. Reduce non-essential costs
Focus on cutting non-essential overheads by streamlining operations, exploring options like renegotiating supplier contracts, optimising staffing, reducing energy consumption, and identifying other cost-saving measures.
Cash flow issues
When funds are insufficient to cover essential expenses like suppliers, wages, rent, and overheads, a business can come to a halt, making cash flow issues a significant threat to its survival. Delays in customer payments, especially with extended credit for large or B2B sales, poor inventory decisions, and unforeseen costs such as repairs or legal fees, can strain cash reserves. Additionally, relying on credit or loans with high-interest rates can drain cash flow if revenue doesn’t meet repayment needs. Poor financial planning and management can further worsen cash flow problems.
Tips to prevent cash flow issues:
1. Improve cash flow management
Enhance efficiency of accounts payable and receivable processes to ensure a steady cash flow.
2. Optimise inventory to free up cash
Manage stock levels to minimise cash tied up in unsold inventory and improve liquidity.
3. Build strong supplier relationships
Build strong relationships with suppliers and vendors to secure credit lines and negotiate favourable payment terms, such as longer payment periods, low interest rates, or early payment discounts.
4, Implement cash flow forecasting
Predict cash inflows and outflows to anticipate shortfalls and adjust operations before issues arise.
5. Continuously monitor cash flow
Keep track of daily cash flow movements to ensure they align with forecasts and identify potential issues early.
6. Build financial resilience
Maintain strong cash reserves and emergency funds, setting aside savings during profitable periods for slower seasons or unexpected expenses.
Reputational risks
Reputational risks are those that can damage a business’s reputation, erode customer trust, and harm brand value. Instances such as poor customer experiences, lack of transparency, and safety hazards can lead to negative publicity. Additionally, unethical business practices, environmental impact and controversial marketing can further damage a brand’s reputation. For retailers, where customer perception directly influences sales, managing reputational risks is crucial.
Tips to mitigate reputational risks:
1. Maintain high product and service quality
Ensure strict quality control measures and regular inspections to uphold product and service standards.
2. Provide excellent customer service
Offer accessible channels for complaints, resolve issues quickly, and train employees to handle customer concerns effectively.
3. Implement responsible business practices
Practice environmental responsibility by reducing waste, using sustainable materials, and supporting fair labour practices. Be transparent about sustainability efforts, avoiding false claims.
4. Cultivate a positive social media presence
Build a positive social media presence by engaging with customers and monitoring feedback, addressing negative comments promptly and professionally.
5. Develop a crisis management plan
Develop a crisis management and public relations strategy to ensure a swift and appropriate response to any negative publicity or backlash.
Compliance
In retail, compliance is crucial across several areas, including product quality and safety, labour laws, environmental standards, trading laws, consumer protection, data protection, payment regulations, and tax compliance. Failure to adhere to relevant laws, regulations, standards, and industry best practices can lead to legal, financial, and reputational consequences, potentially resulting in the closure of the business. As such, non-compliance is a significant risk for retailers.
Tips to mitigate compliance risks:
1. Stay updated
Regularly review changes in laws and regulations to ensure ongoing compliance. Consider hiring legal experts or compliance officers to manage this.
2. Implement a compliance programme
Establish clear policies, procedures, and internal controls to monitor and enforce compliance across all business areas.
3. Work with compliant suppliers
Partner with manufacturers and suppliers who meet legal, ethical, and regulatory standards. Include compliance mandates in contracts and review adherence regularly.
4. Ensure software compliance
Ensure that the software and tools you use comply with regulations, featuring strong cybersecurity and data protection. Opt for software that tracks regulatory changes, implements them promptly, and provides clear documentation for audits.
5. Conduct regular audits
Regularly audit all business areas, including operations, finance, working conditions, product quality, and the supply chain. Utilise both internal and third-party auditors to identify potential compliance gaps.
Why is risk management important in retail?
The importance of risk management in retail is evident from the many benefits it brings to the business. These include:
- Minimises financial losses: By identifying potential risks across various business areas, it enables proactive measures to avoid or minimise financial losses.
- Enhanced efficiency: Regular reviews of processes help identify and address inefficiencies in areas such as inventory management, staffing, and spending, streamlining operations and boosting productivity.
- Ensures business continuity :By preparing for emergencies, risk management reduces downtime and ensures smooth operations.
- Safeguards brand image: It protects the brand’s reputation from reputational risks and their consequences, preserving customer trust and brand value.
- Ensures compliance: A strong risk management strategy ensures adherence to legal and regulatory requirements, avoiding penalties and operational disruptions.
- Competitive advantage: Being prepared for unexpected events, economic conditions, and market shifts makes the business more agile, adaptable, and better positioned to gain a competitive edge.
What tool to use to manage risk in retail?
Given the wide range of business areas in retail that require constant risk assessment and management, a centralised solution is essential. OneAdvanced’s risk management tool provides exactly that, consolidating all risk data into a single, user-friendly platform, eliminating the need for disparate systems.
This tool allows you to organise and manage risks across one or multiple risk registers, ensuring comprehensive coverage. You can create groups and risk categories that align with your unique risk framework. It also enables you to assign ownership, track the status, timelines, and progress of reviews, controls, and actions, improving accountability.
You can generate clear, actionable reports using a traffic light system to highlight the status of controls and actions, giving you full control over your organisation’s risk management.
FAQs
What is retail risk management?
Retail risk management refers to the process of identifying different risks across various areas of the retail business, assessing their impact, and taking necessary measures to prevent or mitigate them. In retail, risk management spans various areas, including product quality, financial health, operational efficiency, workforce safety, environmental impact, data security, compliance with trade regulations, and managing the online presence. Effective risk management helps ensure business continuity, protect brand reputation, minimise financial losses, and maintain profitability.
How can small retailers manage risks with limited budgets?
Small retailers may not have the budget for extensive preventive measures, but they can prioritise essential actions within their means. Regular internal reviews, employee training, selecting reliable suppliers, improving inventory management, and having contingency plans can all be done with minimal cost. Investing in emergency funds, physical and cyber security, and insurance should be prioritised over time as the budget allows, building gradually for better risk mitigation.
