Multichannel Retail: More than clicks and bricks
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    Multichannel Retail: More than clicks and bricks Multichannel Retail: More than clicks and bricks Document Transcript

    • Multichannel retail:More than clicks and bricks
    • Contents 1 Executive summary 3 Introduction: New opportunities abound for retailers 4 Retail websites deepen relationships with customers 9 Smartphones change the retail experience11 Social media is becoming integral to the consumer experience13 Internet coupons gain popularity15 Multichannel retailing gives rise to more third-party vendor relationships17 Closing thoughts: Be dynamic, maintain focus18 Grant Thornton offices
    • Multichannel retail: More than clicks and bricksExecutive summaryMultichannel retail — the merging of traditional brick-and- Smartphones change the retail experience.mortar retailing with online and mobile retail channels — Seventy-eight million people in the United States are currentlyinvolves far more than allowing customers to purchase items using smartphones. A large number of people use these devicesthrough a website. Multichannel retailing presents ample, to search for stores, compare prices and research product details.seemingly boundless opportunities for brand engagement and Some retailers are producing mobile applications — or “apps”interaction with customers across new platforms. Yet inevitably, — to create more opportunities for sales, customer interactionthese new technologies, platforms and sales channels come with and an enhanced in-store experience. Yet smartphones have alsonew risks and challenges for companies to manage. shifted power toward the consumer in unprecedented ways. For example, while shopping, smartphone users may search onlineRetail websites deepen relationships with customers. for better prices or selections elsewhere.With the growth of e-commerce, many retailers are usingtheir websites to enhance their relationships with customers Implication: Retailers will want to maximize the potentialthrough offerings like live chats with service representatives and opportunities of mobile applications, but they must carefullyeducational Web content that helps customers better choose consider both competitive and security risks. Many mobileor use the products they buy. However, the popularity of apps are not compliant with payment card industry (PCI) datae-commerce has also brought about many new risks for retailers, standards — information security standards established by theincluding increased competition and quicker customer price major debit and credit card companies — and therefore may notcomparisons. be safe for use in sales transactions.Implication: Retailers must integrate their storefront and website Social media is becoming integral to the consumeroperations, both conceptually and operationally; attend to data experience.security risks in order to keep customer information safe and Social media has also become a popular consumer engagementavoid costly security breaches; and stay on top of changing state tool. A growing number of retailers use it as an opportunity toand local tax legislation in the areas of nexus, apportionment increase customer awareness and loyalty and provide additionaland global retailing. outlets for customer service, advertising and feedback. But negative attention via social media can spin out of control quickly if left unchecked. Implication: It is imperative for retailers to monitor social media and viral videos in order to respond promptly and informatively to customer questions and to manage problems swiftly. 1
    • Internet coupons gain popularity. Multichannel retailing gives rise to more third-party vendorGrouponTM, LivingSocial and many other Internet coupon sites relationships.have grown immensely in popularity over the past few years. As their companies have expanded, many retailers haveFor retailers, partnering with these companies to create special outsourced business functions such as website hosting, shippingoffers can help them reach new customers and provide an and credit card processing. However, retailers must ensure thatefficient means of marketing and advertising. However, retailers their third-party service providers take precautions for backingmay make only 25 cents on the dollar — and sometimes even up data and keeping customer information safe. Additionally,less — on these special offers, and there is no guarantee that retailers selling digital products through third-party vendorscustomers will return after taking advantage of one-time deals. can run into new tax situations.Implication: Retailers must look at the reputational and Implication: Retailers should ask for an independent auditor’sfinancial factors involved in partnering with Internet coupon report on third-party controls, such as Service Organizationsites to determine whether such a partnership would be a good ControlSM (SOC) 1, SOC 2 and SOC 3 reports.1 Retailersbusiness decision. must also be familiar with their state tax regulations and make sure that contracts with vendors clearly stipulate tax responsibility. They will want to make sure their tax personnel and external advisers are up to date on changing state tax laws that affect e-commerce. Service Organization Control Reports, SOC 1, SOC 2 and SOC 3 are registered trademarks of the AICPA. See http://www.aicpa.org/InterestAreas/FRC/AssuranceAdvisoryServices/Pages/1 SORHome.aspx.2
    • Multichannel retail: More than clicks and bricksIntroduction: New opportunitiesabound for retailersRetail strategy and operations have changed permanently. Grant Thornton LLP’s Retail practice professionals are well-Retailers today are doing business across various new sales and versed in the issues facing retail companies. We help retailersservice platforms, including websites, smartphones, social media, identify and implement solutions that address a range ofInternet couponing and third-party vendor relationships, among economic, tax and regulatory challenges, and we assist leadingothers. Certainly these multiple channels provide new ways to retailers as they develop a variety of short and long-termhelp retailers grow their businesses. But as retailers embrace strategies for success.these new channels — and the opportunities those channels offer We embrace the opportunity to strengthen our partnerships— they must have the necessary controls and resources in place with retailers as they move toward successful multichannelto ensure their safe and effective use. growth. Multichannel retail: More than clicks and bricks examinesthe many opportunities for retailers to market to and interactwith customers across new Web technology platforms Mark Wullersuch as social media and mobile applications. Based on our National Retail Practice Leaderexperience with multichannel retailers, we present an overviewof the opportunities and challenges new retail channels andtechnologies pose, as well as some of the best practices that Giles Suttonleading retailers are employing to surmount obstacles. National Retail Tax Practice Leader 3
    • Multichannel retail: More than clicks and bricksRetail websites deepen relationshipswith customersAccording to a recent report by comScore, 84 percent of all Internet retailing has made shopping more convenient forInternet users in the United States visited a retail site in the consumers and presents them with far more choices than theysecond quarter of 2011.2 In the same quarter, e-commerce had in the pre-Internet age. Retailers, meanwhile, have gainedspending grew by 14 percent, compared with 7 percent the ability to sell more products to more people across thegrowth for total retail spending, signaling a consumer shift to United States and around the world.multichannel retail outlets. The report also found that consumers The popularity of e-commerce has also afforded retailersare now spending approximately one in every 10 discretionary more freedom in how they operate their brick-and-mortardollar online. stores. According to Deepika Sandhu, Business Advisory Furthermore, comScore reports that shopping via online Services (BAS) senior manager, the showroom model, in whichchannels has recovered from the 2008 recession more quickly salespeople show customers samples in the store and order theirthan shopping via brick-and-mortar stores, posting seven purchases online, is becoming popular with a wider range ofquarters of gains. And while small businesses in the United States retailers. Because inventory is kept in one central distributioncontinue to struggle overall, small retailers have chalked up three center rather than in stores, this model ties up less resources,straight quarters of gains in e-commerce sales. allowing retailers to create a more engaging brand experience, notes Sandhu.More choices for customers, better The showroom model can contribute to a retailer’s loss prevention strategy, too: In August 2011, when thieves robbedstorefront strategies Sonny’s Jewelry in Denver, approximately half of the stolen goods turned out to be worthless sample pieces.3 Owner Michael Nedler observed that the showroom model has become more popular for jewelry stores over the last two to three years. Given the skyrocketing costs of gold and diamonds, Nedler said, it’s getting prohibitively expensive to stock a full line of wedding rings or other jewelry if it’s just going to sit in the case.4 New ways to interact with customers2 Fulgoni, Gian, and Lipsman, Andrew. “State of the U.S. Online Retail Economy in Q2 2011,” Aug. 10, 2011. Available at www.comscore.com/Press_Events/Presentations_Whitepapers/2011/ State_of_the_U.S._Online_Retail_Economy_in_Q2_2011.3 Bolton, Anastasiya. “Robbers Disguised as Clowns Stole Fake Jewelry,” 9news.com, Aug. 25, 2011. See www.9news.com/news/article/215583/188/Robbers-disguised-as-clowns-stole-fake- jewelry-.4 Ibid.4
    • Retail websites serve many purposes beyond allowing customers • More sophisticated market research — Websites and socialto purchase products. In fact, retail websites — along with media applications have provided retailers with many newretailers’ mobile applications and social media outlets — opportunities to monitor customer behavior and identifyrepresent the primary means of engaging with a retail brand for ways to better serve customers. Many retailers segmenta growing number of customers. their customer data to understand the relationship between According to BAS IT Audit Managing Director Matt consumer behavior and online purchases. Most retailers useThompson: “Retailers are well aware that from a customer analytics to understand why customers abandon a selectionservice perspective, websites and social media applications serve at checkout. To understand how to help customers online,as a means for engaging and interacting before and after a sale. many retailers also employ traditional strategies such asRetailers know it is a business risk not to get their multichannel in-person focus groups.strategies right.” Thompson goes on to list some of the most promising Further, a large number of retailers are putting a great deal ofopportunities for enhancing the customer experience through effort into integrating their brick-and-mortar storefronts withwebsites and other multichannel outlets: their online businesses. Take Barnes & Noble, for example.• New avenues for customer service — Multichannel retailing While its bookstores play a crucial role in introducing customers has brought about many customer care options that go to new merchandise and selling the company’s NookTM e-reader, beyond an 800 number. Retailers are offering live chat The Wall Street Journal reports that the chain’s growth and capability via their websites and answering customer queries future profits will be linked to its ability to compete with online through corporate Facebook pages and Twitter accounts. rivals such as Apple®5 and Amazon.com.6 As retail consultant• Expanded Web content — Retailers are using rich, dynamic Lorraine Shanley told WSJ, “It’s a balancing act, because Web content to ensure that customers visit their websites bookstores are needed to generate excitement even though frequently. Offerings might include a blog that adds new the final transaction may be digital.”7 posts a few times a week, exclusive discounts and deals for customers who opt in, or educational content. For example, retailers such as Lowe’s® and Home Depot® have Increased competition, faster consumer traditionally held free in-store classes and are now making price comparisons and less consistency similar how-to content available online and providing other presale resources to help customers. Other companies text customers discount codes to be redeemed online.5 Apple, iPad, iPod, iPhone, and Mac are trademarks of Apple Inc. Multichannel retail: More than clicks and bricks is an independent white paper and has not been authorized, sponsored or otherwise approved by Apple Inc.6 Trachtenberg, Jeffrey A. “Barnes & Noble Focuses on E-Books,” The Wall Street Journal, July 20, 2011. Available at online.wsj.com/article/SB10001424052702303795304576453882840821 172.html?mod=dist_smartbrief.7 Ibid. 5
    • While retailers benefit from the ability to reach more “Creating clear policies for their multichannel operations andcustomers via e-commerce, they also face an increased number educating all employees about these policies will go a long wayof competitors in the multichannel sphere. And the Internet has toward providing customers with a consistent experience,”allowed consumers to conduct price comparisons in a far more BAS IT Audit Managing Director Matt Thompson observes.effective manner than visiting multiple storefronts or making To take further advantage of the opportunities offered byseveral phone calls. Partly because of the fallout from the 2008 multichannel technology, retailers should make sure that therecession, seeking out the lowest price has become crucial to culture and metrics of their company encourage online activity.the customer shopping experience, trumping factors such as For some retailers, adopting this mindset has not come easily.brand loyalty. As Thompson notes, “In the early days of Walmart.com, Of course, retailers must do more than offer competitive Wal-Mart store managers were effectively penalized by onlineprices, robust product selection and respectful customer service sales that cannibalized in-store sales, so they resisted efforts toto be relevant in the multichannel space, and many long- promote Walmart.com.”standing brick-and-mortar businesses have found it daunting Many retailers still lag behind when it comes toto incorporate effective online and mobile elements into their acknowledging the key role that multichannel platforms playoverall business design. To ensure that their brand survives in promoting their businesses. Retailers should not only haveexpansion into these areas, retailers must focus on consistency. a vigorous multichannel presence, but also encourage all staffAs Danny Miller, national solutions leader for cybersecurity members to champion these efforts.and privacy at Grant Thornton, asserts, “Whether they arebeing accessed on a BlackBerry®, iPhone®, desktop or tablet, Security risksa company’s website and applications need to feel, look and Multichannel retailers may be receiving sensitive customerwork in a manner that is intuitive and that is consistent with data online and wirelessly, which can make them a target forall of the other channels.” hackers. Hackers can easily pick up unencrypted wireless traffic Brand consistency goes beyond technology. Retailers with readily available off-the-shelf equipment. Even whenmust ensure that their storefronts are working in cooperation information is encrypted, wireless devices and communicationswith their other channels, Miller says. All operations should may not be completely secure. When customer informationbe complementary, sharing the same message and delivering is intercepted, this can have serious implications for retailers:a unified customer experience. For example, many customers According to a 2011 study conducted by the Ponemonexpect a business to provide the option of returning an item Institute, “data breach incidents cost U.S. companies $204 perpurchased online to their nearest store. If a retailer hasn’t compromised customer record in 2009.”8 Considering thatconsidered the flow from one channel into another, then this figure would be multiplied by thousands in the event ofcomplications can arise. a security breach, retailers can get a sense of the true cost of a In multichannel retailing, business functions blend and breach. As BAS IT Senior Manager Brian Browne points out,overlap. For these functions to operate seamlessly, the proper “The numbers don’t even include costs related to staff responsefinancial and employee policies and processes must be in place. and brand image repair.”In-store and mobile point-of-sale (POS) systems, or checkouts, One of the easiest ways to protect customers is by notshould be integrated so that store employees are able to assist storing their credit card data. Browne says it is not difficultcustomers who have ordered merchandise online with in-store to acquire chargeback information through other sources, andpickups and returns. Furthermore, a designated employee should storing credit card information is usually a bigger security riskbe responsible for ensuring that items ordered online or through than it is worth.mobile applications are readily accessible by the customer. Multichannel integration considerations • Do we have a policy that allows customers to return items purchased online to stores? • Have we updated accounting and inventory systems and processes to handle multichannel retailing transactions? • Are in-store, online and mobile POS systems integrated? • Do we have controls in place to manage functions that overlap between online and in-store components? • Do we have a policy in place for responding to in-store customers’ requests to pay a cheaper price when they find the item discounted online or at another retailer? • Are we training employees in multichannel customer service?6
    • However, many retailers still opt to store cardholder data. Just as retailers employ software to keep hackers out of theirIn this case, Browne advises them to practice segregation systems, they can also use it to assist in fraud detection. Manywith respect to the systems that handle sensitive information. programs, such as Accertify, protect against velocity hacks“If your sales systems are detached from all other systems, — the practice of ordering merchandise via multiple stolenthat is a good step toward making the data less vulnerable credit cards to test whether they will work — by monitoringto an attack,” he observes. suspicious orders originating from the same Internet Protocol Furthermore, retailers should assess their information (IP) address. Sullivan also suggests that retailers use systems suchsecurity regularly. There is a variety of software — data as MarkMonitor, which manages IP addresses and scans theleakage prevention (DLP) tools, for example — that can be Internet for phishing websites and other inappropriate use ofused to monitor for hacking and check the integrity of a a retailer’s brand.company’s systems. Retailers should also ensure that all staff members are trained BAS Cybersecurity Senior Manager David Glod notes: to detect indicators of possible fraudulent activity. For instance,“It’s important for retailers to take proactive steps against a salesperson might receive a telephone call from a customerhacking. Controls aren’t perfect — for example, scans using complaining that an item ordered online never arrived. If theDLP tools often require manual verification — but they are salesperson can find no record of the customer’s order, thehelpful. If your systems are hard to break into, then hackers salesperson should be aware of the possibility that the customer tend to go elsewhere.” may have visited a phony website — and the alternate possibility Once retailers put the proper controls in place, it is crucial that the customer may in fact be a scammer . . Retailers shouldto create a culture of compliance within their organization. have a process in place for investigating these claims and“It’s important to train employees to conduct security checks pursuing fraudsters proactively.regularly and follow up on them consistently,” says Glod.“This will foster a culture where employees understand that New tax challengessecurity controls are a critical part of day-to-day operations.” Among the most complex issues being raised by e-commerce are those related to taxes. Today’s tax landscape is evolvingFraud risks quickly as new retail practices emerge and cash-strapped stateHackers trying to access customer information are not governments seek additional sources of tax revenue.the only fraud-related issue retailers face. Another popular According to Retail Tax Practice Leader Giles Sutton,scheme, according to Mark Sullivan, national practice leader “Tax issues are affecting most retailers: All major chain storesfor investigations, Forensic and Valuation Services, is ordering have an Internet retail presence, and with mobile technology,merchandise online or through mobile devices using stolen that presence is only increasing. When a customer orders ancredit card numbers. “When the order is scheduled to arrive, item online and picks it up at the store, that item can be taxed.the perpetrators will loiter near legitimate physical addresses However, if the customer purchases the item online and has itand intercept the delivery,” he notes. shipped, the tax situation gets murkier and depends on who is Another threat is a fraudster creating a phony website that collecting the tax and where that tax is being collected.”looks identical to a retailer’s actual website. These fraudulentsites are largely used for the purpose of phishing, or attemptingto gather sensitive visitor data such as Social Security numbers or Security and fraud considerations • Are we managing credit card data risks appropriately (e.g., storingcredit card information. “More recently, fraudsters have begun cardholder data prudently) or not at all?setting up legitimate-looking blogs linking to special retail offers. • Do we utilize fraud detection tools that identify high-risk transactions,The link then takes visitors to the phony retail site. While this monitor and prevent fraudulent orders, and identify deceptive use of our brand?type of fraud usually has no immediate monetary repercussions • Have we trained employees properly so that they recognize the redfor retailers, it can certainly harm brand integrity,” warns flags of fraud?Sullivan. Ponemon Institute, LLC. “Ponemon Study Shows the Cost of a Data Breach Continues to Increase” (press release). See www.ponemon.org/news-2/23.8 7
    • Following are some of the most prevalent tax issues Because tax laws are evolving so rapidly, the most important stepaffecting multichannel retailers: retailers can take is to be proactive and keep abreast of current rules and regulations. “What is a regulation now may change inNexus issues — At one time, state taxes were relatively six months,” says Sutton. “Retailers need to have their eyes widestraightforward: If a retailer had a physical presence, or nexus, open. If they aren’t aware of alterations in the tax landscape,in a state that imposed a sales tax, then the retailer collected a confusion will occur and negative consequences may follow.sales tax. However, with the rise of online retail giants such Furthermore, it is essential to share tax-related information withas Amazon, state governments have begun figuring out how all parties in the company that need to know about it. This isto charge sales taxes when companies do not have a physical part of managing information up the organizational chain.”presence in the state. A number of states have either passed or proposed affiliatenexus legislation — and its corollary, the “Amazon rule” — that Remote seller nexus − "Amazon rule" and affiliate nexussays a retailer must collect sales taxes if it works with businessaffiliates in that state. States with affiliate nexus legislation onthe books or being considered include California, South Dakota,Colorado, Oklahoma, Texas, Illinois, Arkansas, New York,Vermont, Connecticut and North Carolina. Federal lawmakershave started paying attention to nexus issues as well; some areintroducing legislation that would impose greater consistencyacross state tax laws. The rapidly changing nexus rules have caused confusionamong retailers. Notes Sutton, “The nexus rules contain so manygray areas that are open to interpretation, and retailers can expectthese issues to continue to evolve for the foreseeable future.”Apportionment — Retailers have long been required toapportion their taxes in the states where they do business, Amazon rule Affiliate nexus Amazon rule and affiliate nexususing sales, property and payroll factors. However, online and Not addressed No sales tax Contingent Amazon rulemobile sales have given rise to uncertainty about the best way toapportion taxes. Notes: (1) Calif. Amazon rule and affiliate nexus become operative on Sept. 15, 2012 or Jan. 1, 2013, depending on enactment of federal legislation and implementation by state; (2) Washington, D.C. has “remote-vendor” collection requirement for Internet sales that isGlobal retailing — Multichannel retailing has paved the way contingent on local SSTP-type reforms being enacted; (3) Penn. is based on administrative authority, legislation has been proposed; (4) Vt. Amazon rule becomes effective when at leastfor retailers to do business seamlessly in multiple countries. 15 states have adopted similar rule.An emerging area of concern is how to handle internationalorders from a tax perspective. For example, retailers with limitedinternational operations may find it most straightforward to letinternational customers order through one U.S.-based website. Tax considerationsAs their international business expands, they will likely consider • Have we considered whether changes in the tax law in a given state apply to our company?hosting different parts of the business — and different websites • Do we have the system capabilities to comply with the new laws?— in multiple countries. Before proceeding, retailers need to • What will be the financial impact of a given law change to our company?understand the tax implications of operating in each countryso that they can make informed business decisions.ONLINE GROWTHOpportunities Challenges and risks• Increasing online consumer activity and purchases • Increasing competition• Expanding reach • Pricing pressures• Changing to a showroom model • Integrating online and in-store processes and systems, particularly those• Enhancing customer service concerning loyalty programs and returns• Providing educational online content • Adapting performance metrics to support online activities• Gathering market intelligence • Data security and fraud risks • Tax uncertainties and exposures (e.g., nexus, apportionment and international)8
    • Multichannel retail: More than clicks and bricksSmartphones change the retailexperienceAccording to information recently released by comScore, Consumer empowerment78 million people in the United States are currently using While smartphones have helped retailers find new ways tosmartphones — phones with mobile access and Web engage customers, they have also shifted power toward thebrowsing capabilities.9 A large number of smartphone users consumer in unprecedented ways. According to comScore,have incorporated these phones into their shopping habits: 66 percent of customers with smartphones report using theirIn the second quarter of 2011, 50 percent used their phones devices while in a brick-and-mortar store to search for betterto find nearby stores, while 40 percent used them to compare prices elsewhere. Thirty-eight percent have abandoned an in-prices before shopping, and 34 percent used them to research store purchase after looking up information on their phones;product details. over half of them did so because they located the item in Retailers have taken notice, and many have designed mobile another store or online for a better price.applications for the iPhone, the AndroidTM operating system These practices mark fundamental changes to consumers’and various tablet devices in hopes of enhancing traditional overall shopping behavior and indicate a need for retailers toretail offerings. A recent adopter is Michaels, a large specialty re-examine their existing policies. For example, some retailerscrafts retailer that in 2011 introduced a mobile-optimized site have adopted more aggressive price-matching guidelines. As theapplication and mobile coupons aimed at boosting in-store use of smartphones continues to rise, it is crucial that retailerstraffic and improving customers’ in-store experiences.10 take a proactive approach: They should not only figure out the Anthony Price, Michaels’ senior director of digital marketing best way to integrate mobile apps into their businesses, but alsoand public relations, told Mobile Commerce Daily, “Our key develop effective strategies for staying competitive in the facestrategy was to give customers the opportunity to engage with of this new technology.Michaels whenever and wherever they choose.”11 Mobile applications are not only offering consumersmore ways to interact with their favorite brands, but are alsobecoming integral to many shoppers’ expectations. “Retailers, no matter the size and scope of their operations,must consider that customer demand for applications thatenhance their overall shopping experience will only continueto thrive. Retailers that ignore this trend risk missing out ona valuable and growing customer base,” says BAS PartnerDanny Miller.9 Fulgoni, Gian, and Lipsman, Andrew. “State of the U.S. Online Retail Economy in Q2 2011,” Aug. 10, 2011. Available at www.comscore.com/Press_Events/Presentations_Whitepapers/2011/ State_of_the_U.S._Online_Retail_Economy_in_Q2_2011.10 Johnson, Lauren. “Michaels Pushes Mobile Initiatives to Drive In-Store Traffic,” Mobile Commerce Daily, July 25, 2011. See www.mobilecommercedaily.com/2011/07/25/michaels-pushes- mobile-initiatives-to-drive-in-store-traffic.11 Ibid. 9
    • Safety concerns about mobile applications This doesn’t mean that retailers should ignore mobile apps; theyMost retailers are very familiar with the need for PCI should simply approach them with caution for the time being.compliance — that is, adherence to the data security standards Adds Miller: “Mobile app technology is still in its early stages,enforced by the payment card industry in order to keep and security standards are not yet consistent across platforms.cardholder information safe. All retailers that accept, transmit They need to be.”or store credit card data must be PCI-compliant and are subject In the meantime, because apps are becoming an increasinglyto penalties if they are not.12 popular outlet for marketing and customer interaction, retailers While the PCI standards have been in place for some time, should stay abreast of changes in mobile app technology. It’s alsothe use of mobile applications to process cardholder data important to be aware of the risks apps present and weigh thoseintroduces new concerns. Miller notes that the PCI Security risks accordingly.Standards Council is still studying how to make mobileapplications safe. Currently, the council does not endorse usingmost mobile applications to collect customer data. Mobile app considerations Although some newer mobile applications such as Square • Have we begun developing mobile apps that enhance our customers’ retail experience?have been deemed PCI-compliant, many more have not. BAS • Do we have a competitive price-matching policy?Cybersecurity Senior Manager David Glod observes: “As • Are we exclusively using PCI-compliant applications and processes to collect, transmit and store cardholder data and other customerretailers develop and offer new apps, consumers and regulators information?are focusing more sharply on credit card data security. It wouldbe a big risk for retailers to use apps that are not PCI-compliantto collect customer information.”SMARTPHONESOpportunities Challenges and risks• New means of reaching and engaging consumers • In-store price matching• Way to market to customers while they are shopping • Purchase abandonment • Data security See www.pcisecuritystandards.org/security_standards/index.php.1210
    • Multichannel retail: More than clicks and bricksSocial media is becoming integralto the consumer experienceAccording to comScore, 200 million people in the United States Not that ads are the only way for retailers to reach customersvisited a social networking site in the second quarter of 2011. through social media. For example, the fan pages on FacebookSo it only makes sense that retailers are turning to social media provide a viable outlet for retailers to inform customers ofto increase consumer loyalty and provide additional outlets for company news and promote special offers. However, the verycustomer service. nature of social media means that brand engagement often For instance, in 2011, the teen-targeting retailer Aéropostale extends beyond a company’s efforts. Research by comScoreintroduced a fully integrated Facebook store where customers has found that Facebook users spend most of their time oncan purchase items and inform their Facebook friends of these their home page or news feed — not on retail fan pages.transactions.13 In other words, most Facebook users will be more likely to “We have over 5 million Facebook fans that are engaged discover a new brand if their friends are posting about it.and active with our brand on a daily basis,” Aéropostale SeniorVice President of Marketing and E-Commerce Scott Birnbaum Social media riskstold Mobile Commerce Daily. “Creating this shop was a natural The credible word-of-mouth advertising that social mediastep in completing the experience of liking and sharing with outlets like Facebook provide can be very beneficial to retailers,friends to then being able to buy right in this environment.”14 who gain insight into consumer preferences as sales grow. In Social media is also gaining popularity among advertisers: fact, even when the feedback isn’t positive, finding out whatIn 2011, Facebook saw the number of paid brand advertising people are thinking and saying about a product or service cancampaigns on its site increase by 104 percent between the first be invaluable to a retailer. But when the social media buzz isand second quarter, according to TBG Digital.15 As noted by extremely negative, word can travel fast.comScore, 34 percent of all Internet ads are currently placed “It’s wonderful for retailers when people post on theiron social media websites. Facebook pages about a great interaction with a brand. But it can also be harmful when people use social media as an outlet for venting about their negative experiences,” cautions BAS IT Audit Managing Director Matt Thompson. “Facebook can definitely be a double-edged sword for retailers.”13 Kats, Rimma. “Aeropostale Rolls Out Android App, Relaunches Mobile-Optimized Site for Fashionable Shoppers,” Mobile Commerce Daily, Aug. 1, 2011. See www.mobilecommercedaily.com/ 2011/08/01/aeropostale-rolls-out-android-app-relaunches-mobile-optimized-site-for-fashionable-shoppers14 Ibid.15 TBG Digital. “Advertising Goes Truly Social” (press release), July 19, 2011. See www.tbgdigital.com/archive/advertising-goes-truly-social/. 11
    • Retailers should keep in mind that negative posts about a Social media considerationscompany can include everything from one-off individual • Do we motivate customers to interact with us via social media outlets?comments to viral media such as video clips. Given how rapidly For example, do we update our content frequently, share coupons and host exclusive online events?adverse publicity can spread through social media outlets, • Do we have adequate and scalable resources to respond to customerretailers should monitor them carefully and respond swiftly interactions via social media?should problems occur. • Have we implemented training and policies about employees’ social media activities? “Ensuring that processes and resources are in place for • Do we monitor social media regularly and respond to negative criticismresponding to customers via social media is essential,” says swiftly and effectively?Steven Stauffer, Audit partner. He adds: “Social media can beused to create a positive customer experience, but only if theinteraction is managed appropriately. If a customer posts aquestion about product features or availability on Facebook,Yelp or Twitter, he or she needs to receive a prompt andinformative reply.”SOCIAL MEDIAOpportunities Challenges and risks• New channel to reach customers • Negative publicity can go viral• Allows consumers to promote brands to friends and family • Requires fast and effective response to consumer comments and questions• Way to interact with customers before, during and after their purchases12
    • Multichannel retail: More than clicks and bricks Internet coupons gain popularity Launched in 2008, Groupon has become an important player Potential downsides to daily deals in the multichannel landscape. Its competitors are popular, Despite the popularity of daily deal websites, they come with too. Groupon, LivingSocial and Scoutmob, among other such a number of risks to retailers. sites, negotiate substantial discounts with businesses in markets As small business owner Jay Goltz explained in The New worldwide and send these special offers to their subscribers via York Times, “The [subscribers] who buy the coupon get 50 to daily emails. Once a certain number of subscribers sign up for 70 percent off on a product or service, and Groupon splits the the deal, the coupon goes live. proceeds with the retailer — usually leaving the retailer with By 2011, Groupon had acquired 115 million subscribers,16 about 20 to 25 cents [for every] dollar of retail value.”17 and its many competitors have been growing rapidly as well. Goltz believes that partnering with coupon sites is likely a bad According to comScore, 46 million U.S. consumers visited idea for retailers who think large discounts could damage their a coupon site in the second quarter of 2011. These sites are brand. It’s also probable that business will surge after their especially popular with young consumers. coupon goes live, and retailers must ensure that they are ready Partnering with these brands can be an effective method for the additional customers. Consumers brought in by a deep of supplementing existing promotional efforts. “The discount will not return if they receive poor service or have a Groupon concept has merged the functions of advertising and negative experience. merchandising. The power of merging these functions will Of course, many of the customers who are brought in by resonate with retailers for a long time,” says Retail Tax Practice the discount price may not return regardless. Goltz wrote, Leader Giles Sutton. “Is it possible 90 percent won’t return? Sure.”18 Applicability of gift card rules Another issue that may become problematic for retailers relates to the treatment of Internet coupons as gift cards under state law. Coupon sites including Groupon and LivingSocial have been sued under various state and federal gift card statutes. In Groupon’s IPO filing, the company disclosed that it faces more than 15 class action suits concerning this issue; a number of its merchant partners are co-defendants in the litigation.16 McNaughton, Marissa. “Groupon Doubles Subscribers in 2011, But Only 20% Have Made Purchases,” The Realtime Report, Aug. 12, 2011. See therealtimereport.com/2011/08/12/groupon- doubles-subscribers-in-2011-but-only-20-have-made-purchases/.17 Goltz, Jay. “Doing the Math on a Groupon Deal,” The New York Times, Nov. 23, 2010. Available at boss.blogs.nytimes.com/2010/11/23/doing-the-math-on-a-groupon-deal/.18 Ibid. 13
    • In the United States and Canada, merchants currently benefit if Daily deal partnership considerationsInternet coupons are not redeemed before their expiration date. • Do our products and services lend themselves well to a promotional deal?But if states begin regulating daily deals, merchants may have to • Will the exposure and new customer traffic be worth the initial loss we will take because of the deep discount?redeem the coupons long after their expiration date, in keeping • Are we able to deal with a swift and potentially large increase inwith the gift card rules. In some states, gift cards can’t expire customers for the duration of the offer?within five years; in other states, they never expire. Before deciding to partner with a coupon site, retailers needto be fully aware of the potential downsides. Retailers shouldalso talk with daily deal sites that operate in their geographicand/or product area in order to find the most favorablepartnership terms.INTERNET COUPONSOpportunities Challenges and risks• Powerful means of promoting brands and reaching new customers • Financial cost of a promotion can be steep • Can be difficult to handle large-scale uptake of a promotion • Little long-term customer retention • Daily deals may become subject to gift card regulations14
    • Multichannel retail: More than clicks and bricksMultichannel retailing gives rise tomore third-party vendor relationshipsAs multichannel retailing has allowed businesses to expand into A good way for retailers to learn about a prospectivenew areas, many retailers have decided to outsource business vendor’s security practices is to take a lesson from a draftfunctions such as website hosting, shipping and credit card contract. For example, retailers can not only decline to storeprocessing. Relationships with third-party vendors provide a credit card information, but also contractually require theirviable means for many retailers to cost-effectively grow their third-party vendors to follow that same precaution in orderbusinesses and better manage their resources. to keep customer data safe. BAS Cybersecurity Senior Manager David Glod notes: Lawrence Griff, Audit partner, observes: “It is important“Creating relationships with third-party vendors can be a great for retailers to request an independent auditor’s report onbusiness solution for small retailers from a cost-efficiency and third-party financial and security controls. SOC 1, SOC 2expertise perspective. However, retailers must be certain that and SOC 3 reports are replacing the SAS 70 report that manytheir service providers take the precautions needed to keep retailers are familiar with.”customer information safe.” Following are the main functions of the three individual SOC reports:Third-party vendor security risks • SOC 1 reports address the service organization’s financialGlod points to an example of a third-party security violation reporting controls. These reports are intended as auditor-with far-reaching implications: the Epsilon breach of April to-auditor communications.2011. In this incident, hackers accessed the databases at • SOC 2 reports deal with the service organization’s controlsEpsilon, a company that managed email services for banks related to security, availability (of data and computingsuch as JPMorgan Chase and large retailers such as Best Buy services), processing integrity, confidentiality and privacy.and Walgreens. The hackers were able to intercept customer A SOC 2 report is intended for the user organization’snames and email addresses that had been stored by more than management and other stakeholders (e.g., business partners50 brands. While Epsilon stressed that no sensitive data such and customers).as credit card information was retrieved, the company warned • SOC 3 reports focus on the same controls as SOC 2 butconsumers that their information might be used to generate do not include a detailed description of tests of controlstargeted phishing attacks. The breach was widely publicized, or related test results. These reports are released ashurting not only Epsilon but also the brands of ccompanies short-form, publicly available documents.19that hired it. Grant Thornton LLP. Puzzled about SOC reports? Clarifying the decision-making process. Available at www.gt.com/staticfiles/GTCom/Advisory/IT/BAS%20-%20puzzle%20article%20-%20FINAL.pdf.19 15
    • Glod notes that SOC 2 and SOC 3 reports need not be Taxes and third-party relationshipscomprehensive. Retailers can ask for a report that relates Thanks to multichannel retailing, more companies are sellingspecifically to confidentiality or security, for example. Many digital products through third-party vendors. For example,retailers choose to obtain both SOC 2 and SOC 3 reports a software company might have its products available forin order to share them with stakeholders (SOC 2), post download through a third-party website. In this case, it can bethem to their website (SOC 3) or use them in other public unclear how to source the income for tax purposes. Accordingcommunications (SOC 3). The reports can not only help to Sutton, this determination hinges largely on the retailer’sretailers select their third-party vendors wisely, but also go contract with its third-party vendor.a long way toward assuring customers and other interested Sutton advises retailers to understand the tax laws of theparties that the retailer is taking sufficient precautions to state or states in which they operate. “Depending on whereshield their information. retailers are doing business, taxes could be collected based on Other best practices for retailers employing third-party the ownership of the digital item, the sale of the digital item,vendors include keeping backups of critical data and having or the ownership of tangible personal property,” he says. Abusiness interruption contingency plans in place. Glod cites retailer’s contracts with third parties should reflect its adherencethe case of a Virginia-based data center that was raided for to state laws and regulations.hosting child pornography websites, unbeknownst to the manylegitimate businesses whose data was also stored there. Thesebusinesses experienced website interruptions and in many Third-party vendor considerations • Have we asked for a SOC 1, SOC 2 and/or SOC 3 report from ourinstances lost irretrievable data. While most retailers will not third-party vendors, as appropriate?unwittingly find themselves in the middle of a federal raid, they • Have we taken all necessary precautions to ensure that third-party vendors are keeping customer information safe?must take precautions concerning third-party service outages. • Do we have on-site backup of all data given to our third-party vendors? Finally, retailers should share only the information their • Have we ensured that we are exchanging only relevant information withvendors need. BAS IT Senior Manager Brian Browne warns: our third-party vendors? • Are we familiar with state tax laws and regulations concerning the sale“Retailers should never give their third-party associates a big of digital and other intangible products?file dump. Likewise, they shouldn’t accept reams of information • Do our contracts with third-party vendors clearly stipulate tax responsibility?they don’t need. Doing so increases unnecessary liability.”THIRD-PARTY VENDORSOpportunities Challenges and risks• Ability to tap into third-party expertise while focusing on core capabilities • Data security• Speed to market • Service reliability• Scalability • Cost and reputational impact of third-party errors or failures• Potential cost savings • Tax uncertainties with respect to digital and other intangible goods16
    • Multichannel retail: More than clicks and bricksClosing thoughts:Be dynamic, maintain focusMaking use of multiple channels creates significantopportunities for retailers to grow revenues and better targetand interact with customers. At the same time, companyleadership must understand and manage a host of challengesand risks, many of which pertain to operations, data security,fraud prevention and taxes. Retailers that survive and prospermust be dynamic enough to adapt to evolving multichanneldemands and focused enough to deal with the attendant issues. While the multichannel landscape is always changing, thepath ahead is clear. Retail channels will continue to widen,offering customers more autonomy over their shoppingpractices. In an uncertain economy, one of the safest betsfor enhancing revenues may be providing consumers witha comprehensive and effective multichannel experience. 17
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