1. Multichannel retail:
More than clicks and bricks

2. Contents
1 Executive summary
3 Introduction: New opportunities
abound for retailers
4 Retail websites deepen
relationships with customers
9 Smartphones change the
retail experience
11 Social media is becoming integral
to the consumer experience
13 Internet coupons gain popularity
15 Multichannel retailing gives rise
to more third-party vendor
relationships
17 Closing thoughts: Be dynamic,
maintain focus
18 Grant Thornton offices

3. Multichannel retail: More than clicks and bricks
Executive summary
Multichannel 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 currently
involves far more than allowing customers to purchase items using smartphones. A large number of people use these devices
through 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 interaction
these new technologies, platforms and sales channels come with and an enhanced in-store experience. Yet smartphones have also
new risks and challenges for companies to manage. shifted power toward the consumer in unprecedented ways. For
example, while shopping, smartphone users may search online
Retail websites deepen relationships with customers. for better prices or selections elsewhere.
With the growth of e-commerce, many retailers are using
their websites to enhance their relationships with customers Implication: Retailers will want to maximize the potential
through offerings like live chats with service representatives and opportunities of mobile applications, but they must carefully
educational Web content that helps customers better choose consider both competitive and security risks. Many mobile
or use the products they buy. However, the popularity of apps are not compliant with payment card industry (PCI) data
e-commerce has also brought about many new risks for retailers, standards — information security standards established by the
including increased competition and quicker customer price major debit and credit card companies — and therefore may not
comparisons. be safe for use in sales transactions.
Implication: Retailers must integrate their storefront and website Social media is becoming integral to the consumer
operations, 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 engagement
avoid costly security breaches; and stay on top of changing state tool. A growing number of retailers use it as an opportunity to
and local tax legislation in the areas of nexus, apportionment increase customer awareness and loyalty and provide additional
and 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

4. Internet coupons gain popularity. Multichannel retailing gives rise to more third-party vendor
GrouponTM, 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 have
For retailers, partnering with these companies to create special outsourced business functions such as website hosting, shipping
offers can help them reach new customers and provide an and credit card processing. However, retailers must ensure that
efficient means of marketing and advertising. However, retailers their third-party service providers take precautions for backing
may 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 vendors
customers 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’s
financial factors involved in partnering with Internet coupon report on third-party controls, such as Service Organization
sites to determine whether such a partnership would be a good ControlSM (SOC) 1, SOC 2 and SOC 3 reports.1 Retailers
business 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

5. Multichannel retail: More than clicks and bricks
Introduction: New opportunities
abound for retailers
Retail 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 retailers
service platforms, including websites, smartphones, social media, identify and implement solutions that address a range of
Internet couponing and third-party vendor relationships, among economic, tax and regulatory challenges, and we assist leading
others. Certainly these multiple channels provide new ways to retailers as they develop a variety of short and long-term
help 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 multichannel
to ensure their safe and effective use. growth.
Multichannel retail: More than clicks and bricks examines
the many opportunities for retailers to market to and interact
with customers across new Web technology platforms Mark Wuller
such as social media and mobile applications. Based on our National Retail Practice Leader
experience with multichannel retailers, we present an overview
of the opportunities and challenges new retail channels and
technologies pose, as well as some of the best practices that Giles Sutton
leading retailers are employing to surmount obstacles. National Retail Tax Practice Leader
3

6. Multichannel retail: More than clicks and bricks
Retail websites deepen relationships
with customers
According to a recent report by comScore, 84 percent of all Internet retailing has made shopping more convenient for
Internet users in the United States visited a retail site in the consumers and presents them with far more choices than they
second quarter of 2011.2 In the same quarter, e-commerce had in the pre-Internet age. Retailers, meanwhile, have gained
spending grew by 14 percent, compared with 7 percent the ability to sell more products to more people across the
growth 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 retailers
are now spending approximately one in every 10 discretionary more freedom in how they operate their brick-and-mortar
dollar online. stores. According to Deepika Sandhu, Business Advisory
Furthermore, comScore reports that shopping via online Services (BAS) senior manager, the showroom model, in which
channels has recovered from the 2008 recession more quickly salespeople show customers samples in the store and order their
than shopping via brick-and-mortar stores, posting seven purchases online, is becoming popular with a wider range of
quarters of gains. And while small businesses in the United States retailers. Because inventory is kept in one central distribution
continue 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 robbed
storefront 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 customers
2
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

7. Retail websites serve many purposes beyond allowing customers • More sophisticated market research — Websites and social
to purchase products. In fact, retail websites — along with media applications have provided retailers with many new
retailers’ mobile applications and social media outlets — opportunities to monitor customer behavior and identify
represent the primary means of engaging with a retail brand for ways to better serve customers. Many retailers segment
a 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 use
Thompson: “Retailers are well aware that from a customer analytics to understand why customers abandon a selection
service 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 as
Retailers 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 of
opportunities for enhancing the customer experience through effort into integrating their brick-and-mortar storefronts with
websites 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

8. While retailers benefit from the ability to reach more “Creating clear policies for their multichannel operations and
customers via e-commerce, they also face an increased number educating all employees about these policies will go a long way
of 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 by
several phone calls. Partly because of the fallout from the 2008 multichannel technology, retailers should make sure that the
recession, 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 online
prices, robust product selection and respectful customer service sales that cannibalized in-store sales, so they resisted efforts to
to 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 to
to incorporate effective online and mobile elements into their acknowledging the key role that multichannel platforms play
overall business design. To ensure that their brand survives in promoting their businesses. Retailers should not only have
expansion into these areas, retailers must focus on consistency. a vigorous multichannel presence, but also encourage all staff
As Danny Miller, national solutions leader for cybersecurity members to champion these efforts.
and privacy at Grant Thornton, asserts, “Whether they are
being accessed on a BlackBerry®, iPhone®, desktop or tablet, Security risks
a company’s website and applications need to feel, look and Multichannel retailers may be receiving sensitive customer
work in a manner that is intuitive and that is consistent with data online and wirelessly, which can make them a target for
all 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 when
must ensure that their storefronts are working in cooperation information is encrypted, wireless devices and communications
with their other channels, Miller says. All operations should may not be completely secure. When customer information
be 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 Ponemon
expect a business to provide the option of returning an item Institute, “data breach incidents cost U.S. companies $204 per
purchased online to their nearest store. If a retailer hasn’t compromised customer record in 2009.”8 Considering that
considered the flow from one channel into another, then this figure would be multiplied by thousands in the event of
complications 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 response
financial 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 not
should be integrated so that store employees are able to assist storing their credit card data. Browne says it is not difficult
customers who have ordered merchandise online with in-store to acquire chargeback information through other sources, and
pickups and returns. Furthermore, a designated employee should storing credit card information is usually a bigger security risk
be 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?
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9. However, many retailers still opt to store cardholder data. Just as retailers employ software to keep hackers out of their
In this case, Browne advises them to practice segregation systems, they can also use it to assist in fraud detection. Many
with 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 stolen
that is a good step toward making the data less vulnerable credit cards to test whether they will work — by monitoring
to 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 such
security regularly. There is a variety of software — data as MarkMonitor, which manages IP addresses and scans the
leakage prevention (DLP) tools, for example — that can be Internet for phishing websites and other inappropriate use of
used 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 customer
hacking. Controls aren’t perfect — for example, scans using complaining that an item ordered online never arrived. If the
DLP tools often require manual verification — but they are salesperson can find no record of the customer’s order, the
helpful. 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 should
to 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 challenges
security 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 evolving
Fraud risks quickly as new retail practices emerge and cash-strapped state
Hackers 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 stores
for 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 an
credit 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 it
and 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 fraudulent
sites are largely used for the purpose of phishing, or attempting
to gather sensitive visitor data such as Social Security numbers or Security and fraud considerations
• Are we managing credit card data risks appropriately (e.g., storing
credit 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 red
for 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

10. Following are some of the most prevalent tax issues Because tax laws are evolving so rapidly, the most important step
affecting multichannel retailers: retailers can take is to be proactive and keep abreast of current
rules and regulations. “What is a regulation now may change in
Nexus issues — At one time, state taxes were relatively six months,” says Sutton. “Retailers need to have their eyes wide
straightforward: 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 with
as Amazon, state governments have begun figuring out how all parties in the company that need to know about it. This is
to 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 affiliate
nexus legislation — and its corollary, the “Amazon rule” — that
Remote seller nexus − "Amazon rule" and affiliate nexus
says a retailer must collect sales taxes if it works with business
affiliates in that state. States with affiliate nexus legislation on
the books or being considered include California, South Dakota,
Colorado, Oklahoma, Texas, Illinois, Arkansas, New York,
Vermont, Connecticut and North Carolina. Federal lawmakers
have started paying attention to nexus issues as well; some are
introducing legislation that would impose greater consistency
across state tax laws.
The rapidly changing nexus rules have caused confusion
among retailers. Notes Sutton, “The nexus rules contain so many
gray areas that are open to interpretation, and retailers can expect
these issues to continue to evolve for the foreseeable future.”
Apportionment — Retailers have long been required to
apportion their taxes in the states where they do business, Amazon rule Affiliate nexus Amazon rule and affiliate nexus
using sales, property and payroll factors. However, online and Not addressed No sales tax Contingent Amazon rule
mobile sales have given rise to uncertainty about the best way to
apportion 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 is
Global 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 least
for retailers to do business seamlessly in multiple countries. 15 states have adopted similar rule.
An emerging area of concern is how to handle international
orders from a tax perspective. For example, retailers with limited
international operations may find it most straightforward to let
international customers order through one U.S.-based website. Tax considerations
As 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 country
so that they can make informed business decisions.
ONLINE GROWTH
Opportunities 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)
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11. Multichannel retail: More than clicks and bricks
Smartphones change the retail
experience
According to information recently released by comScore, Consumer empowerment
78 million people in the United States are currently using While smartphones have helped retailers find new ways to
smartphones — phones with mobile access and Web engage customers, they have also shifted power toward the
browsing 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 their
In the second quarter of 2011, 50 percent used their phones devices while in a brick-and-mortar store to search for better
to 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 to
retail offerings. A recent adopter is Michaels, a large specialty re-examine their existing policies. For example, some retailers
crafts retailer that in 2011 introduced a mobile-optimized site have adopted more aggressive price-matching guidelines. As the
application and mobile coupons aimed at boosting in-store use of smartphones continues to rise, it is crucial that retailers
traffic 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 also
and public relations, told Mobile Commerce Daily, “Our key develop effective strategies for staying competitive in the face
strategy 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 consumers
more ways to interact with their favorite brands, but are also
becoming integral to many shoppers’ expectations.
“Retailers, no matter the size and scope of their operations,
must consider that customer demand for applications that
enhance their overall shopping experience will only continue
to thrive. Retailers that ignore this trend risk missing out on
a valuable and growing customer base,” says BAS Partner
Danny 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

12. Safety concerns about mobile applications This doesn’t mean that retailers should ignore mobile apps; they
Most 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 increasingly
to 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 also
the use of mobile applications to process cardholder data important to be aware of the risks apps present and weigh those
introduces new concerns. Miller notes that the PCI Security risks accordingly.
Standards Council is still studying how to make mobile
applications safe. Currently, the council does not endorse using
most 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 customer
retailers develop and offer new apps, consumers and regulators information?
are focusing more sharply on credit card data security. It would
be a big risk for retailers to use apps that are not PCI-compliant
to collect customer information.”
SMARTPHONES
Opportunities 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.
12
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13. Multichannel retail: More than clicks and bricks
Social media is becoming integral
to the consumer experience
According to comScore, 200 million people in the United States Not that ads are the only way for retailers to reach customers
visited a social networking site in the second quarter of 2011. through social media. For example, the fan pages on Facebook
So it only makes sense that retailers are turning to social media provide a viable outlet for retailers to inform customers of
to increase consumer loyalty and provide additional outlets for company news and promote special offers. However, the very
customer 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 comScore
introduced a fully integrated Facebook store where customers has found that Facebook users spend most of their time on
can 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 Senior
Vice President of Marketing and E-Commerce Scott Birnbaum Social media risks
told Mobile Commerce Daily. “Creating this shop was a natural The credible word-of-mouth advertising that social media
step 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 what
In 2011, Facebook saw the number of paid brand advertising people are thinking and saying about a product or service can
campaigns on its site increase by 104 percent between the first be invaluable to a retailer. But when the social media buzz is
and 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 their
on 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-shoppers
14
Ibid.
15
TBG Digital. “Advertising Goes Truly Social” (press release), July 19, 2011. See www.tbgdigital.com/archive/advertising-goes-truly-social/.
11

14. Retailers should keep in mind that negative posts about a
Social media considerations
company 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 customer
retailers 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 criticism
responding to customers via social media is essential,” says swiftly and effectively?
Steven Stauffer, Audit partner. He adds: “Social media can be
used to create a positive customer experience, but only if the
interaction is managed appropriately. If a customer posts a
question about product features or availability on Facebook,
Yelp or Twitter, he or she needs to receive a prompt and
informative reply.”
SOCIAL MEDIA
Opportunities 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 purchases
12

15. 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

16. In the United States and Canada, merchants currently benefit if
Daily deal partnership considerations
Internet 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 in
with 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 need
to be fully aware of the potential downsides. Retailers should
also talk with daily deal sites that operate in their geographic
and/or product area in order to find the most favorable
partnership terms.
INTERNET COUPONS
Opportunities 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 regulations
14

17. Multichannel retail: More than clicks and bricks
Multichannel retailing gives rise to
more third-party vendor relationships
As multichannel retailing has allowed businesses to expand into A good way for retailers to learn about a prospective
new areas, many retailers have decided to outsource business vendor’s security practices is to take a lesson from a draft
functions such as website hosting, shipping and credit card contract. For example, retailers can not only decline to store
processing. Relationships with third-party vendors provide a credit card information, but also contractually require their
viable means for many retailers to cost-effectively grow their third-party vendors to follow that same precaution in order
businesses 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 on
business solution for small retailers from a cost-efficiency and third-party financial and security controls. SOC 1, SOC 2
expertise perspective. However, retailers must be certain that and SOC 3 reports are replacing the SAS 70 report that many
their 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 financial
Glod 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 controls
Epsilon, a company that managed email services for banks related to security, availability (of data and computing
such 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’s
names and email addresses that had been stored by more than management and other stakeholders (e.g., business partners
50 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 but
consumers that their information might be used to generate do not include a detailed description of tests of controls
targeted phishing attacks. The breach was widely publicized, or related test results. These reports are released as
hurting not only Epsilon but also the brands of ccompanies short-form, publicly available documents.19
that 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

18. Glod notes that SOC 2 and SOC 3 reports need not be Taxes and third-party relationships
comprehensive. Retailers can ask for a report that relates Thanks to multichannel retailing, more companies are selling
specifically 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 for
in order to share them with stakeholders (SOC 2), post download through a third-party website. In this case, it can be
them to their website (SOC 3) or use them in other public unclear how to source the income for tax purposes. According
communications (SOC 3). The reports can not only help to Sutton, this determination hinges largely on the retailer’s
retailers 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 the
parties that the retailer is taking sufficient precautions to state or states in which they operate. “Depending on where
shield 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. A
business interruption contingency plans in place. Glod cites retailer’s contracts with third parties should reflect its adherence
the case of a Virginia-based data center that was raided for to state laws and regulations.
hosting child pornography websites, unbeknownst to the many
legitimate businesses whose data was also stored there. These
businesses 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 our
instances 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 with
vendors 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 VENDORS
Opportunities 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 goods
16

19. Multichannel retail: More than clicks and bricks
Closing thoughts:
Be dynamic, maintain focus
Making use of multiple channels creates significant
opportunities for retailers to grow revenues and better target
and interact with customers. At the same time, company
leadership must understand and manage a host of challenges
and risks, many of which pertain to operations, data security,
fraud prevention and taxes. Retailers that survive and prosper
must be dynamic enough to adapt to evolving multichannel
demands and focused enough to deal with the attendant issues.
While the multichannel landscape is always changing, the
path ahead is clear. Retail channels will continue to widen,
offering customers more autonomy over their shopping
practices. In an uncertain economy, one of the safest bets
for enhancing revenues may be providing consumers with
a comprehensive and effective multichannel experience.
17

20. Multichannel retail: More than clicks and bricks
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