Retail Risk Management: Threats and Strategies to Mitigate Them

Retailers have always faced challenges in risk management. 

During the financial crisis of the late 2000s, US retailers suffered a nearly 9% jump in crimes like shoplifting and supply chain fraud. 

More recently, the COVID-19 pandemic presented new challenges, like card-not-present (CNP) fraud and return fraud, due to the rapid shift to online shopping. Today, a report shows that retailers lost an average of $3 million each to fraudulent activity in 2023. 

In these challenging times, robust retail risk management strategies can help mitigate losses. Those who invest in the right solutions can better adapt to address new and emerging threats and build long-term business stability.

What is a risk in retail?

A risk in retail is any potential threat or challenge that could harm a store’s operations, finances, or reputation. These risks range from everyday issues like shoplifting to larger problems such as economic downturns or major shifts in consumer behavior.

There are risks everywhere in the retail industry. Safety risks and theft happen in-store. Inventory management, supply chain logistics, and financial operations are all risks behind the scenes. Cybersecurity and digital customer experiences are two of the biggest risks in online retail.

Top 7 threats to retailers

The survival and success of retail businesses depend on understanding and managing risks. Effective risk management protects profits, keeps customers happy, keeps employees safe, and keeps operations running smoothly.

These are the top seven threats to retailers:

1. Theft
2. Data breaches
3. Inventory damage
4. Safety hazards
5. Payment fraud
6. Supply chain
7. Economic downturns

1. Theft 

Every stolen item is lost revenue. In 2023, retailers absorbed roughly $142 billion from inventory shrink, a 25% increase from the prior year, according to a Wall Street Journal report.

Retail thrift isn’t just shoplifting (although that’s a big part of it). It also includes:

• External theft (shoplifting)
• Internal theft (employee theft)
• Organized retail crime (ORC)

Besides lost merchandise, theft can lead to higher prices for consumers as retailers try to recoup losses. It can also mean fewer store hours or even store closings in high-theft areas, affecting job availability. 

For example, 7-Eleven, Target, Starbucks, and Nordstrom are a few examples of retailers that closed across California between 2022 and 2024 due to crime.

Retailers can prevent theft by using security cameras, training staff to spot suspicious behavior, and keeping valuable items locked up. They should also regularly count inventory and work with local police to catch repeat offenders.

2. Data breaches

Data breaches have become a top concern for retailers, and for good reason. They can ruin a company’s finances and reputation. According to an IBM report, in 2024, the average cost of a data breach hit a record high of $4.88 million, an increase of 10% from the year prior. 

A retailer collects sensitive customer information, such as credit card numbers, addresses, and purchases. When this information is breached, it can be sold on the Dark Web or used for identity theft, leaving customers angry and vulnerable.

The fallout from a breach extends beyond immediate financial losses. Customer trust, a retailer’s most valuable asset, takes a massive hit. 

To mitigate these risks, retailers must prioritize PCI (Payment Card Industry) compliance, which sets standards for secure handling of credit card information. 

Regularly update and patch all software systems, and train employees to recognize and report suspicious activities like phishing emails. Use strong, unique passwords for all accounts and enable two-factor authentication wherever possible. 

Retailers are also adopting a “zero trust” security model, in which every user and device is treated as a potential threat and must be verified before accessing sensitive information.

3. Inventory damage 

Inventory damage usually starts small—a snagged sweater here, a scratched piece of jewelry there. But the cost of damaged goods adds up over time when you consider:

• The time and money spend processing damaged inventory 
• Restocking or disposing of unsellable items
• Loss of customer trust

Every damaged item is money down the drain. You can’t sell it at full price, and sometimes you can’t sell it at all.

To fight this threat, retailers need to improve handling procedures, use protective packaging, and train staff on inventory management. Some forward-thinking retailers are even using AI and Internet of Things (IoT) sensors to track inventory in real time.

4. Safety hazards

Safety hazards pose a major threat in the retail sector, with customer injuries being a particularly significant risk. 

According to the National Floor Safety Institute, slip and fall accidents alone account for more than one million hospital emergency room visits annually, making up 12% of total falls. For retailers, these incidents can lead to costly lawsuits, damage to reputation, and loss of customer trust.

Common customer safety hazards in retail environments include:

• Wet or slippery floors
• Poorly maintained walkways
• Falling merchandise
• Inadequate lighting
• Faulty equipment or fixtures

The financial impact of these hazards is substantial. The Brown & Crouppen Law Firm states that a slip and fall injury costs between $10,000 and $50,000, while more severe injuries can result in settlements exceeding $100,000. Beyond the direct costs, retailers also face indirect expenses like increased insurance premiums and potential loss of business.

Retailers can protect their customers and their bottom line by implementing comprehensive safety protocols, conducting regular inspections, and training their employees on hazards.

5. Payment fraud

Payment fraud is a type of financial crime where scammers use stolen or fake payment information to make unauthorized purchases. For retailers, it’s like having someone constantly trying to steal from your cash register without you noticing.

Common types of payment fraud include:

• Credit card fraud: Using stolen card details or creating fake cards.
• Chargeback fraud: Making legitimate purchases and then falsely claiming a refund.
• Account takeover: Hackers gaining access to customer accounts to make purchases.
• Friendly fraud: Customers disputing legitimate charges they actually made.

Global retailers lost more than $429 billion to payments fraud in 2023, a joint study between Adyen and the Centre for Economic Business and Research found. On average, luxury fashion retailers lost $3.97 million and health and beauty brands $3.94 million.

For US companies, $1 of fraud loss costs $4.41 when you factor in all the costs like:

• Replacing stolen goods
• Chargeback fees
• Fraud investigation costs
• Investment in fraud prevention tools

For big retailers, fraud is a constant drain on profits. For smaller businesses, it can be catastrophic. A single large fraud incident can wipe out a small retailer’s profit margin for months.

But retailers are fighting back by investing in fraud prevention, like:

• AI-powered fraud detection systems
• Biometric authentication (like fingerprint or facial recognition)
• 3D Secure protocols for online transactions
• Staff training to spot suspicious transactions

Modern retailers must stay vigilant as fraud techniques evolve, and continue investing in protection. It’s a never-ending battle, but one that’s essential.

6. Supply chain

Supply chain issues have become a top concern for retailers in recent years. When products can’t make it from manufacturers to store shelves, it spells trouble.

The COVID-19 pandemic really highlighted how fragile supply chains can be. US retailers faced delays in receiving their inventory. In February 2022, about 34% of container vessels arrived at their destination without any delay.

But it’s not just pandemics that can cause problems. Natural disasters, political unrest, and even a single stuck cargo ship (remember the Ever Given in the Suez Canal?) can cause major holdups.

To stay competitive, retailers need to get creative. Some are diversifying their supplier base or bringing production closer to home. Others are investing in better inventory management systems to predict and prevent shortages.

7. Economic downturns 

Economic downturns affect almost all retail sectors. They are hard to anticipate (and prepare for), and the effects can last months or even years. When the economy slows, consumers tighten their belts, and retailers feel the pinch. 

This shift in consumer behavior can lead to:

• Decreased foot traffic in brick and mortar stores
• Lower sales volumes
• Reduced profit margins

The numbers don’t lie. In the 2008 financial crisis, US retail sales dropped by 3.6% from 2008 to 2009. During the COVID-19 pandemic, retail sales plummeted by 16.4% in April 2020 alone.

Smart retailers prepare for economic downturns by diversifying their product lines and building cash reserves. They also focus on enhancing their ecommerce capabilities and improving operations management to better weather financial storms.

9 retail risk management tips

Here are the top risk mitigation strategies to guide your business:

1. Implement fraud prevention measures
2. Ensure secure payments
3. Manage inventory effectively
4. Prioritize data security
5. Stay compliant with local regulations
6. Safeguard customer data
7. Prevent operational risk
8. Handle disputes efficiently
9. Conduct regular risk assessments

Implement fraud prevention measures

Use Shopify’s built-in fraud analysis tool to identify and review suspicious orders before processing. The system provides comprehensive indicators and recommendations to help you make informed decisions about potentially fraudulent orders.

It provides detailed information about each order, like: 

• AVS (Address Verification System) check results
• Card Verification Value (CVV) and Card Verification Code (CVC) verification
• IP address details
• Multiple credit card usage attempts

Shopify’s machine learning algorithms, trained on historical transactions across all Shopify stores, categorize orders as low, medium, or high risk. Medium and high-risk orders are flagged on the Orders page and in order notification emails.

Regularly review your fraud settings and adjust them as needed to balance security with customer experience. While Shopify provides these tools, the final decision to fulfill or cancel an order remains with you, the merchant.

Ensure secure payments

Make sure your payments are secure and PCI-compliant with Shopify Payments. With 3D Secure checkouts, you’ll get bank-level encryption and fraud protection right out of the box. Also, it simplifies your payment processing, reducing the need for third-party integrations that could add security risks.

Manage inventory effectively

Use Shopify’s inventory management features to track stock levels across all your sales channels in real time. 

Set up low stock alerts and use the platform’s analytics to forecast demand more accurately. For multi-location businesses, take advantage of Shopify’s inventory transfer and adjustment features to maintain optimal stock levels across all your stores and warehouses.

Prioritize data security

Leverage Shopify’s secure hosting and automatic platform updates to maintain a strong security posture. Implement additional security measures such as two-factor authentication for admin accounts and staff training on phishing prevention. Regularly review your app integrations and remove any that are no longer necessary to minimize potential vulnerabilities.

Stay compliant with local regulations

Stay compliant with local taxes with Shopify’s automated tax calculation feature. You’ll be able to figure out and collect the correct amount of sales tax based on your store's location, your customers' location, and the products you’re selling. Make sure your store settings are up to date to guarantee taxes work out correctly.

Safeguard customer data

Take advantage of Shopify’s built-in data protection features, including SSL encryption for all pages of your store. 

Use Shopify’s customer accounts feature to securely store customer information and order history. Regularly review and update your privacy policy to ensure it accurately reflects your data handling practices and complies with relevant regulations like the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA).

Prevent operational risk 

With Shopify POS, you can manage online and in-store sales simultaneously to reduce errors. This unified system lets you see your customers, inventory, and orders all at once. 

Monitor key performance indicators and identify potential operational issues before they occur. You can also use Shopify Flow’s workflows to create rules, allow lists, and block lists that control which orders your store accepts.

Handle disputes efficiently

Using Shopify Payments, you can speed up chargeback disputes because it automatically submits evidence for you. Shopify also shares transaction details and shipping information with the cardholder’s bank by the due date. If you have more info, you can include it in your chargeback response.

Conduct regular risk assessments 

Perform periodic, comprehensive risk assessments of your Shopify store and overall business operations. Analyze the trends across your business with detailed fraud reports on your acceptance rate, high-risk orders, and fraudulent chargebacks.

Protect your retail business with Shopify

Retail risk management is vital for business success. Shopify’s built-in tools help you tackle common threats like fraud, inventory issues, and data breaches. From fraud-busting algorithms to real-time stock tracking, Shopify empowers merchants to stay one step ahead.