October 26, 2006
BrainTrust Query: Do the use of high tech criminal methods somehow lessen a retailer’s responsibility for trafficking in stolen merchandise?
By Bill Bittner, President, BWH Consulting
A Wall Street Journal article from earlier this week begins by describing William Swanberg, apparently well known on the internet as a very reliable source of deeply discounted Lego sets. It appears that Mr Swanberg has been using fake barcodes to fool the POS Systems at a variety of retailers to stock up on the $100 Lego sets for $19. He would then resell them on a popular toy collectors’ web site.
The article goes on to quote a University of Florida study that reveals that retail crime rose to about $37 billion in 2005 from $31 billion in 2003. But what I really found interesting was that the gross margin on stolen goods has doubled or tripled. This is attributed specifically to the expanded retail market provided by the internet. In addition to “fencing” goods, the internet has been a gold mine for selling counterfeit or stolen gift cards. Retailers responding to an NRF survey last year estimated that 70 percent of the gift cards sold over eBay were frauds. Ebay has since introduced stricter policies on gift card sales.
Other scams are discussed in the article and it also talks about employee theft, but the thing that keeps coming back to me is how the internet has made it so much easier and profitable to get rid of the stolen merchandise.
Discussion Questions: Is there something in the nature of internet commerce and other retail technologies that somehow lessens the retailer’s obligation
to verify legitimate sources of product? How can technology be used to combat the rise in online retail crime?
The article quotes some law enforcement officials as saying that there are sites that take orders for merchandise and then go out and steal it to satisfy
the requests. One of the online retailers interviewed said they have no idea where their sellers get their merchandise and can’t be expected to know. I think a retailer has an
obligation to monitor his suppliers to ensure that merchandise is not likely to be stolen. No established retailer would start a business relationship with someone who pulled
up to their warehouse with a trailer of Legos. Even pawn shops, the traditional outlet for questionable merchandise, are required to record the seller and item identity.
Serialization of products with RFID or RSS will go a long way to address this issue by giving each unit a unique identity. By using the “license number”
assigned to each unit, retailers will be able to detect duplicate sales or switched tags. In the meantime, cashiers must be trained to detect barcode fraud and online retailers
should be required to monitor who is selling on their sites.
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At least thirty times a week my junk mail folder receives an invitation to purchase “replica” watches. These are direct sales pitches, with no retailer involved. The Lego story that led this discussion involved no retailer in the final sales. Fraudulent sales on eBay generally involve no retailer. I speculate that the bulk of online retail crime involves counterfeiting and stolen goods from individuals and very small retailers; not from large, recognized retailers who could install the technologies to prevent it.
This discussion seems ambiguous to me. Is the question really, “How can small online retailers ensure that products purchased from suppliers are not counterfeit or stolen?” Or, are there instances of large online retailers unknowingly selling counterfeit or stolen products? None of the latter have been offered as examples, and as to the former, small online retailers are not prepared to employ whiz-bang technological means to vet their merchandise.
The issue of item tracking is raised again. This should be seen in the broad context of not just item, but people tracking. The reality is that we are moving to a society in which there will be total transparency/accountability. The question isn’t whether this will happen, with all its “big brother” implications, but how it will be managed.
The first response to this is usually to think, “Oh my god, everyone will know everything about ME!” Well, yes, they maybe, might, could. But if the trade-off is knowing everything about the bad guys–who they are, where they are and what they are up to–maybe you will accept that how this knowledge is managed is more important than maintaining anonymity for thieves, murderers, rapists and other miscreants.
The reality is that those tradeoffs are already being made. It is too late to stop the train, and even its destination seems pretty clear. But its speed, its staffing and management, and the accoutrements in the dining car are still open for negotiation.
I agree in principal with Karen Ribler. Online retailers, like other retailers, should know who their suppliers are. That doesn’t mean detailed background checks or supply-chain checks to make sure a given supplier is an authorized distributor. But it does mean verifying the tax ID and business address of their suppliers.
The onus of surveiling the online channels is on manufacturers– to identify both fake and stolen merchandise. With the rise of price-checking sites, there’s a market for a service aimed at manufacturers where they can monitor online sales activities – and investigate suspicious transactions. Online sale of retail gift cards is an area that retailers themselves can and should monitor using the same type of service.
Another issue is that it is harder for consumers to know who they are dealing with on the Internet than on the street. Walk into your local mall or down the street and it is pretty easy to determine who the legitimate retailers are and stay away from the small percentage that aren’t. Online it is much more difficult to tell when doing a Google search for, say “software,” which are the legitimate retailers and which are selling counterfeit goods or pulling some sort of scam. It would be nice if we had authorities or a business association that could get the scam artists off the web and/or develop a “seal of approval” for online retailers with best practices. The blessing and the curse of the Internet is it doesn’t take much beyond computer savvy to set up an e-commerce site that looks bigger and more honest than it is.
It doesn’t lessen the retailer’s responsibility to take action and I don’t know of a retailer who wouldn’t want to do something in the face of such incredible shrink.
However, retailers cannot do it alone. Thieves are very resourceful and will always find a way. The only way to combat this kind of organized crime is through partnerships with local law enforcement and the FBI which is in the process of setting up an organized retail crime task force.
It’s gong to be very difficult to stop this kind of trafficking online. But I think retailers could do a much better job of cracking down at the store level by beefing up loss prevention initiatives–again in partnership with law enforcement. Many major cities–and even smaller ones these days–actually have officers assigned full time to retail crime units. Get to know who they are, invite them into your stores for a risk assessment and take action.
Verifying the authenticity of goods is not the retailer’s responsibility. However, retailers should ensure that they are following sound, ethical and honest business practices when purchasing and selling products. Most retailers and their suppliers do business in an open and honest way. There are some who do not. This does not put the onus on retailers to spend the resources and time to ensure that the products they sell are bona fide. Authenticity is often difficult to determine, by even the best “experts.” Forcing retailers to become verifiers of the goods they sell is not reasonable, feasible nor practical. Retailers have enough issues just trying to exist in today’s global market without being burdened with another expense that does nothing to add to their bottom line.
As I was reading the moderator’s comments my thoughts went to using RFID tags, which is how the opening comments ended. The tags might serve as a deterrent initially, i.e. before a criminal figures out how to manipulate the data they carry. I don’t believe it is realistic to expect the cashier to catch incorrect bar code pricing…just like I don’t believe it will be realistic to expect this individual to catch incorrect pricing when read off an RFID tag…unless it is an obvious price error or training has been provided regarding potentially “hot” items.
Len’s idea to invite local authorities to conduct a retail risk assessment is a good idea. Getting this communication going is good for everyone but the criminals.
I do believe retailers have a responsibility to know where their product is coming from and to say otherwise is to acknowledge a tolerance for less than legitimate means of procurement. It’s not the technology, it’s the fast buck.
Being accountable isn’t only an obligation, it’s their competitive advantage in a big, fast world where trust counts most.
eBay can’t be reasonably expected to check its sellers’ sourcing. RFID is unlikely to stop counterfeiting, since RFID tags can be counterfeited. The best check against online sales of stolen and counterfeit merchandise: legit manufacturers can sample suspicious online offers and prosecute the guilty. The sellers can’t easily hide, since they actually ship the product, so their physical addresses can be accessed. Prosecuting even a small fraction of the guilty would have a significant deterrent effect. Ask the IRS. Of course, some bad guys will get away with it, but perfection is rarely an achievable goal.
And when will the legit manufacturers start seriously embarrassing the Chinese government? If the leaders of China wanted to do it, they’d wipe out counterfeiting in 24 hours.
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At least thirty times a week my junk mail folder receives an invitation to purchase “replica” watches. These are direct sales pitches, with no retailer involved. The Lego story that led this discussion involved no retailer in the final sales. Fraudulent sales on eBay generally involve no retailer. I speculate that the bulk of online retail crime involves counterfeiting and stolen goods from individuals and very small retailers; not from large, recognized retailers who could install the technologies to prevent it.
This discussion seems ambiguous to me. Is the question really, “How can small online retailers ensure that products purchased from suppliers are not counterfeit or stolen?” Or, are there instances of large online retailers unknowingly selling counterfeit or stolen products? None of the latter have been offered as examples, and as to the former, small online retailers are not prepared to employ whiz-bang technological means to vet their merchandise.
The issue of item tracking is raised again. This should be seen in the broad context of not just item, but people tracking. The reality is that we are moving to a society in which there will be total transparency/accountability. The question isn’t whether this will happen, with all its “big brother” implications, but how it will be managed.
The first response to this is usually to think, “Oh my god, everyone will know everything about ME!” Well, yes, they maybe, might, could. But if the trade-off is knowing everything about the bad guys–who they are, where they are and what they are up to–maybe you will accept that how this knowledge is managed is more important than maintaining anonymity for thieves, murderers, rapists and other miscreants.
The reality is that those tradeoffs are already being made. It is too late to stop the train, and even its destination seems pretty clear. But its speed, its staffing and management, and the accoutrements in the dining car are still open for negotiation.
I agree in principal with Karen Ribler. Online retailers, like other retailers, should know who their suppliers are. That doesn’t mean detailed background checks or supply-chain checks to make sure a given supplier is an authorized distributor. But it does mean verifying the tax ID and business address of their suppliers.
The onus of surveiling the online channels is on manufacturers– to identify both fake and stolen merchandise. With the rise of price-checking sites, there’s a market for a service aimed at manufacturers where they can monitor online sales activities – and investigate suspicious transactions. Online sale of retail gift cards is an area that retailers themselves can and should monitor using the same type of service.
Another issue is that it is harder for consumers to know who they are dealing with on the Internet than on the street. Walk into your local mall or down the street and it is pretty easy to determine who the legitimate retailers are and stay away from the small percentage that aren’t. Online it is much more difficult to tell when doing a Google search for, say “software,” which are the legitimate retailers and which are selling counterfeit goods or pulling some sort of scam. It would be nice if we had authorities or a business association that could get the scam artists off the web and/or develop a “seal of approval” for online retailers with best practices. The blessing and the curse of the Internet is it doesn’t take much beyond computer savvy to set up an e-commerce site that looks bigger and more honest than it is.
It doesn’t lessen the retailer’s responsibility to take action and I don’t know of a retailer who wouldn’t want to do something in the face of such incredible shrink.
However, retailers cannot do it alone. Thieves are very resourceful and will always find a way. The only way to combat this kind of organized crime is through partnerships with local law enforcement and the FBI which is in the process of setting up an organized retail crime task force.
It’s gong to be very difficult to stop this kind of trafficking online. But I think retailers could do a much better job of cracking down at the store level by beefing up loss prevention initiatives–again in partnership with law enforcement. Many major cities–and even smaller ones these days–actually have officers assigned full time to retail crime units. Get to know who they are, invite them into your stores for a risk assessment and take action.
Verifying the authenticity of goods is not the retailer’s responsibility. However, retailers should ensure that they are following sound, ethical and honest business practices when purchasing and selling products. Most retailers and their suppliers do business in an open and honest way. There are some who do not. This does not put the onus on retailers to spend the resources and time to ensure that the products they sell are bona fide. Authenticity is often difficult to determine, by even the best “experts.” Forcing retailers to become verifiers of the goods they sell is not reasonable, feasible nor practical. Retailers have enough issues just trying to exist in today’s global market without being burdened with another expense that does nothing to add to their bottom line.
As I was reading the moderator’s comments my thoughts went to using RFID tags, which is how the opening comments ended. The tags might serve as a deterrent initially, i.e. before a criminal figures out how to manipulate the data they carry. I don’t believe it is realistic to expect the cashier to catch incorrect bar code pricing…just like I don’t believe it will be realistic to expect this individual to catch incorrect pricing when read off an RFID tag…unless it is an obvious price error or training has been provided regarding potentially “hot” items.
Len’s idea to invite local authorities to conduct a retail risk assessment is a good idea. Getting this communication going is good for everyone but the criminals.
I do believe retailers have a responsibility to know where their product is coming from and to say otherwise is to acknowledge a tolerance for less than legitimate means of procurement. It’s not the technology, it’s the fast buck.
Being accountable isn’t only an obligation, it’s their competitive advantage in a big, fast world where trust counts most.
eBay can’t be reasonably expected to check its sellers’ sourcing. RFID is unlikely to stop counterfeiting, since RFID tags can be counterfeited. The best check against online sales of stolen and counterfeit merchandise: legit manufacturers can sample suspicious online offers and prosecute the guilty. The sellers can’t easily hide, since they actually ship the product, so their physical addresses can be accessed. Prosecuting even a small fraction of the guilty would have a significant deterrent effect. Ask the IRS. Of course, some bad guys will get away with it, but perfection is rarely an achievable goal.
And when will the legit manufacturers start seriously embarrassing the Chinese government? If the leaders of China wanted to do it, they’d wipe out counterfeiting in 24 hours.