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Understanding and mitigating fraud risks in the retail, leisure, and food & beverage industries

This blog discusses the risks of fraud in the retail, leisure, and food & beverage industries and provides best practices for fraud detection and prevention.
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By Thu Nguyen , 

Senior Consultant, Strategic Risk Consulting

08/04/2024 · 5 minute read

Fraud within the retail, leisure, and food and beverage industries can undermine customer and consumer confidence and, in more serious cases, negatively impact consumers’ health and wellbeing. Without appropriate mitigation measures, the impact of fraud incidents can result in both great financial cost and operational disruption to businesses.

Fraud is the most common type of crime in England and Wales. A National Crime Agency survey revealed, in 2022, 3.7 million recorded incidents of fraud amounted to £2.46 billion in losses for businesses and individuals. It is crucial that all organisations operating in the retail, leisure, and food and beverage sectors understand the current fraud landscape, the potential risks fraud poses, and best practices for fraud detection and prevention.

Retail fraud

With adverse economic conditions and a worsening cost of living crisis, retail crime has almost doubled in 2021/22 from pre-COVID levels. According to the British Retail Consortium’s Crime Survey Report 2023, the total cost of retail crime in 2021/22 was £1.76 billion. Of this total, £953 million was lost to customer theft and £722 million was spent on crime prevention.

Fraud is a major threat to retailers and can materialise in various ways, including:

  • Return fraud
    Return fraud involves illegitimate product return for a refund or store credit. Perpetrators may use stolen merchandise, counterfeit receipts, or manipulate existing return processes to exploit vulnerabilities within the system.
  • Employee theft
    Internal theft by employees is a common concern in the retail industry. This can occur through cash theft, inventory shrinkage, or collusion between employees and external actors.
  • E-commerce fraud
    With online shopping continuing to thrive, e-commerce fraud is on the rise. This includes credit card fraud, account takeover, and fraudulent chargebacks.

Best practices for retail fraud prevention;

  • Implement robust return policies with clear guidelines and verification procedures.
  • Conduct regular inventory audits and introduce security measures to deter employee theft.
  • Employ advanced fraud detection tools for online transactions, such as address verification and anomaly detection algorithms.

Food and beverage fraud

Fraud in the food and beverage industry can take the form of adulterant substances being added to products, falsified invoices, or the theft of food and drink products during transportation. The Food Standards Agency (FSA) estimated the total impact of food crime in the UK to be up to £1.96 billion, per year. The FSA’s study also estimated that the average cost of food fraud was £87,000 for small cases and £4.3 million for major cases.

Typically, these costs mostly fall on businesses to carry due to the company’s obligations to customers, the public, and the regulator. While some of these costs may be recovered through insurance claims, there can be much more significant, hidden costs to businesses that are unquantified and unreported. Beyond financial implications, fraud in food and beverage can compromise food safety, deceive customers, and harm brand integrity.

The top three fraud types in this sector include:

  • Food adulteration
    Unethical suppliers may engage in food adulteration, altering products with substandard or harmful ingredients to cut costs. This can pose serious health risks to consumers. It can also result in substantial reputational damage for the company. 
  • Point of sale (POS) fraud
    Manipulation of POS systems, either by employees or external actors, can lead to inaccurate sales records, revenue loss, and compromised customer data.
  • Vendor fraud
    Collusion with dishonest vendors can result in inflated prices, subpar product quality, or non-delivery of goods.

Best practices for food and beverage fraud prevention:

  • Establish a rigorous supplier vetting process − including thorough background checks.
  • Implement blockchain technology or supply chain tracking systems to trace the origin of ingredients.
  • Regularly update and secure POS systems and conduct surprise audits to deter internal fraud.

Leisure industry fraud

The travel and leisure sector was one of the most impacted industries globally for suspected digital fraud attempts in 2021 as countries began to reopen following COVID-19 lockdowns. The three primary types of fraud in this sector are:

  • Ticket Fraud
    Counterfeit tickets, unauthorised reselling, and ticket scalping are common issues − particularly in the entertainment and event industries.
  • Membership and loyalty program fraud
    Fraudsters may exploit membership or loyalty programs through identity theft, fake accounts, or fraudulent point redemption schemes.
  • Insider fraud
    Employees with access to sensitive information may engage in fraud, such as stealing customer data or manipulating reservations.

Best practices for leisure industry fraud prevention:

  • Utilise secure ticketing systems with advanced authentication features.
  • Implement multi-factor authentication for loyalty programs, and regularly audit member accounts.
  • Conduct thorough background checks on employees with access to sensitive data, and monitor employee activities.

What does good fraud risk management look like?

While each organisation’s fraud risk framework should be tailored to its needs, Marsh Advisory has identified four key areas for establishing an effective fraud risk management framework:

  • Organisation and guidelines
    Organisations should ensure roles and responsibilities related to fraud risk management are clearly defined with endorsement from leadership. Additionally, internal policies should be put in place and directly communicated to staff with sufficient training provided.
  • Fraud risk assessment
    Organisations should proactively identify and evaluate their fraud risks through frequent fraud risk assessments with inputs from external and internal stakeholders. Findings from assessments should be escalated appropriately and acted upon.
  • Fraud risk monitoring
    Depending on the size of the organisation, the use of data analytics tools should be explored to assist with identifying fraud in real time. If advanced technology is unavailable, regular monitoring activities, including random check, sample audits, inventory reviews, and records audits, are necessary.
  • Strategic insurance review
    For known fraud risks, in addition to mitigating and preventive controls, organisations should assess whether the fraud events are currently, or can be, covered by insurance.

Protecting your business

The increasing prevalence of fraud incidents poses a significant threat to the retail, leisure, and food and beverage sectors. Organisations should prioritise fraud detection and prevention measures to insulate themselves from the substantial financial losses and operational disruptions fraud can cause.

Understanding the industry specific fraud risks and implementing best practices can help businesses safeguard their operations, protect their customers, and maintain their brand integrity. To find out more on how to protect your organisation against fraud, please contact your Marsh adviser.

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