Inherent Risk in the Retail Industry: What You Should Know

The retail industry is undergoing a significant transformation driven by emerging technologies, omnichannel shopping, and the influence of digital and social media. These changes require organizations to operate more efficiently and better accommodate customers, but they also introduce new inherent risks.

Every business faces inherent risks, and retail—whether e-commerce or brick-and-mortar—is no exception. As online shopping grows, so do e-commerce crimes, making retailers increasingly vulnerable. To meet consumer demand and remain competitive, organizations must also find better ways to manage these risks.

Cybercrimes

Retailers are frequent targets for cybercriminals. Examples include:

• ​Phishing scams that trick customers or employees into revealing personal information, such as credit card data.
• ​Distributed denial of service (DDoS) attacks that can take down company servers, preventing purchases.
• ​Hacking of point-of-sale (POS) systems in physical stores.
• ​Ransomware and malware infections.

To manage these risks, companies should consider replacing outdated POS equipment and having cybersecurity specialists audit their systems and software.

Reputation Risk Factors

Retailers interact directly with consumers, and the rise of social media means companies no longer control their own messaging. A single negative post or video can damage a brand’s reputation and revenue.

To mitigate reputation risks:

• ​Conduct regular customer satisfaction surveys to identify needs and expectations.
• ​Implement a customer relationship management (CRM) system to handle complaints and questions.
• ​Establish a social media policy to respond quickly to negative comments.

Not Complying with Laws and Industry Regulations

Failure to comply with government regulations or maintain valid agreements and licenses can result in financial losses, penalties, or reputational damage. To avoid these risks:

• ​Adopt procedures to identify and comply with regulatory changes.
• ​Implement processes to monitor agreements and licenses.
• ​Set timelines to renew agreements and licenses before expiration.

Supply Chain Risks

Supply chain risk management has become a major challenge. Customers expect products to be available whenever and wherever they want. To stay competitive, retailers must transform their supply chains.

Key actions include:

• ​Implementing digitally enabled supply networks for cross-channel shopping and multiple delivery options.
• ​Ensuring real-time communication with customers and accurate inventory information.

Establishing a Digital Risk Framework

Digital assets and connectivity are inherently at risk, as they can be entry points for hackers. The impact of a single cybersecurity incident can be significant due to the integration of digital systems in daily operations.

Effective risk management makes companies more competitive. Senior management should use risk management to guide investment and sustainability decisions. Digital risk management involves multiple layers of defense:

1. 1.First line of defense: Business units, working with IT, incorporate risk-informed decision-making into daily operations, determine acceptable risk levels, and escalate issues as needed.
2. 2.Second line of defense: The risk management function establishes governance, oversight, and risk management tools and processes.
3. 3.Third line of defense: Internal auditors verify the effectiveness of risk management processes and recommend improvements.

A digital risk management framework helps auditors evaluate controls and ensures risks are addressed. Organizations often have multiple digital assets across various channels, some under direct control (e.g., websites, apps) and others outside their control (e.g., public perception online).

Implementing a digital risk management framework allows companies to:

• ​Expose potential risks.
• ​Establish controls and repeatable processes.
• ​Streamline responses to risks.
• ​Evaluate the company’s ability to sense and respond to digital risk.

This ongoing approach crosses organizational silos and involves all stakeholders. The process includes:

• ​Framing and benchmarking the current risk management strategy, including processes, policies, controls, and metrics for digital assets.
• ​Establishing digital governance, risk mitigation, and response plans.
• ​Launching integrated risk management programs across business units, audit, and IT.
• ​Testing risk processes and internal controls, including scenario testing and performance management.

With a comprehensive risk framework, company leaders can better manage risk, nullify threats before they occur, and balance risk-taking with innovation and growth. As digital becomes central to the shopping experience, it is crucial for retailers to meet customer demands while managing the inherent risks that arise.