IHL: EMV costly, time consuming, out of date for most retailers

BY Marianne Wilson

Franklin, Tenn. — Most retailers will never recoup the expense that EMV imposes, according to research from IHL Group, and the study says there is a much better approach to protecting retailers and consumers.

The date October 1, 2015 looms as a deadline for U.S. retailers to conform to the new EMV card payment mandate being pushed by the credit card brands. If retailers are not compliant by that date, then liability for fraudulent card transactions shifts from the banks to the retailers.

“The single biggest problem with the EMV mandate is that it is focused on trying to solve last century’s problem and completely ignores the reality that retailers are facing today,” said Greg Buzek, president, IHL Group. “Twelve years ago when EMV was introduced into Europe it made tremendous sense. Today, it stands in the way of real data security by stealing critical budget away from focusing on the risks that retailers face from online hackers.”

According to IHL research, unless the merchant is on the front lines of fraudulent card transactions today (electronics, fuel, mass merchants or companies that sell gift cards for these retailers), the risk of fraudulent cards at the lane is extremely small compared to the other loss prevention and data security issues that retailers face.

Further, as seen in EMV implementations in Europe and Canada, over time the fraud simply moves online.

According to IHL, the risk of breach of customer data, retailers real concern, is almost entirely mitigated via end-to-end encryption and tokenization of the transactions. Basically, if the card data is never on the retailer’s network in any usable manner to hackers, it cannot be exploited. It allows for retailers to lock the doors to the entire house rather than just the front door like EMV and leaving the others open.

“Retailers who simply focus on EMV at checkout without focusing on end-to-end encryption and tokenization in all of their sales channels are actually opening up a significant security hole,” added Buzek. “Those retailers who do not put in extra security measures for online and mobile transactions for the holidays will find that their store fraud will simply move online (where EMV provides no protection), and they will still have hackers going after their data.”

Some other key highlights include the following:

• Today, the PCI process takes up to 55% of the total data security budget for retailers. Yet, until 75% of a given retailer’s card transactions are EMV compliant, the EMV costs are additive to what retailers are already paying for PCI compliance. Retailers have to do both.

• The typical EMV transaction will take five to eight seconds longer…. 1.3 seconds longer for card processing (according to POS Vendors), 4-6.5 seconds longer for customers to retrieve their cards, put them away, and complete the transaction process.

• Retailers will require more labor in their stores due to slower transactions and consumers leaving their cards in the payment device (EMV transactions require cards to stay inserted for the entire transaction, like old ATMs). 

• Consumers can expect much longer lines this holiday season as retailers and consumers struggle with a process introduced just before the critical shopping season.

• The average return-on-investment (ROI) for a $1 billion specialty store for EMV is – 77% over three years.


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Target to go mad for plaid


Target has quietly announced its next Lilly Pulitzer: a collaboration with another U.S. designer who will create a collection of new apparel, accessories, pet goods and home furnishings for the retailer.

Target announced on its Bullseye blog this week that it has chosen Adam Lippes to create more than 50 items inspired by buffalo plaid for the Adam Lippes for Target.

“When we started to think about fall, we knew we wanted to do something special, something that would usher in the season in a way that only Target could,” said Kathee Tesija, executive vice president and chief merchandising and supply chain officer. “Plaid has been a defining element of style for every generation, and we felt it would be the perfect centerpiece for this design moment: it can be both fun and fashionable, so it offered us a lot of flexibility as we thought through ways we could bring it to life for our guests.”

In April Target launched what may have been its most successful sales promotion in the store’s history: a collection from Lilly Pulitzer that sold out in minutes that created a backlash from customers but also priceless PR. Target not only benefitted by the ample positive media attention, but the Lilly Pulitzer brand also was thrust into a most flowery national spotlight given the unprecedented and widely publicized run on its products.

“What I love about this concept is that guests will find the expected, like fashion and home items, done in a way that we think will wow them, alongside the unexpected, like paper towels, Coke bottles and a Fitbit, that will surprise them in a way that only Target can," Tesija added. "I always have a hard time picking a favorite product. Let’s just say that I’ve got my eye on a few absolute must-haves and there will be no shortage of plaid in my home and closet this fall!”

Target’s plaid takeover begins in August and will continue through October. Prices will range from $1.99-$179.99, and availability in stores and on will vary.

Target operates nearly 2,000 stores in the United States.


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What to Do When Activists Attack

BY Stanley Kirk

Today, CEOs and corporate board members of retail chains must run simply to stand still. Executives of publicly traded retailers face intensive pressure from activist investors to quickly and decisively increase shareholder value. Activists are known to secretly accumulate a significant stake in a company and without notice blind side the CEO with risky restructuring plans, force firms into unwanted mergers to removing board members and CEOs that disagree with their speculative strategy. Industry giants across the board have been attacked and forced to accept precarious financial and operational restructuring plans.

No company regardless of size, profitability or cash stockpile is immune from an attack. Proctor & Gamble’s attacker owned less than 1% of the firm and orchestrated an event that ousted the CEO and forced a change in corporate strategy. Activists are prepared for battle. They are armed with innovative business plans containing a mixture of investment banking style analysis, strategy consulting and financial restructuring business plans that are comparable to the top consulting and “bulge bracket” investment banking firms.

Activists also maintain a massive cash war chest climbing into the tens of billions along with a rolodex of who’s who of institutional investors (those that own large shares of your company's stock) that are more than happy to lend their proxy vote to assist activists in unlocking shareholder value.

Mounting a defense to fight off an activist can be extremely expensive in both time and cost. A defense strategy can quickly run into the millions because it requires the hiring of investment bankers, accountants, attorneys and public relations gurus. Collateral damage from a public fight not only is costly, but also exposes the firm’s weakness to competitors, shareholders, customers and business partners.

What can a CEO do to avoid an activist attack? Improve stock prices.

1. Don’t be undervalued
Avoid the cross hairs of an activist by not being undervalued and underperforming. A preemptive activist audit is essential to gauging your firm’s vulnerability to an activist investor. The audit will provide management with a deep understanding of the value creating proposals that an activist is likely to present.

Executives that identify and address operational underperform will benefit by creating an internal “Value Creating Turnaround” plan without the cost and distraction of an activist campaign. A strategic communication plan exposed to the investment community will erode the attractiveness, thus reducing the activist viability of a large payout. In the event that an activist campaign is launched, management will have a plan that can lead to a fast track of compromise and collaboration.

2. Eliminate financial and operational underperformance
What attracts an activist? Financial and operational underperformance. Activists are attracted to firms that demonstrate fundamental underperformance when compared to industry peers. These include firms experiencing growing negative margin gaps, sluggish revenue and increasing sales but at a decreasing rate.

Additionally, other key performance indicators include poor returns on assets, equity and employee performance, as well as those that have sub-optimal real estate assets. Tech-savvy activists are increasingly launching attacks on companies that maintain outdated technology and marketing capabilities and are ill equipped to compete in today’s hyper-competitive digital ecosystem. A company experiencing financial and/or operational underperformance versus its peers is more than likely already on an activist watch list.

For example: Consider a firm that does $40 billion in revenue, SG&A spend is 5% higher than the industry average thus resulting in $2b in over spend. The SG&A problem alone can be a difference of $10-$15 in stock prices. If the activist purchases three million shares and the attacked firm’s SG&A is aligned with industry peers, the activist profits over $400 million. There is a high level of certainty that an activist is building a plan of attack.

What is an activist audit? A review of an organization through the eyes of an activist

3.Performing an activist audit
An activist audit is a review of an organization through the eyes of an activist. By undertaking a preemptive activist audit, an analysis of operational and financial underperformance helps prevent a bloody battle, as well as mitigate the thunder from a surprise activist attack. The audit will help to uncover weakness and arm management with a roadmap for creating additional shareholder value thus making the firm less attractive to an attack.

Focusing the audit process on benchmarking the firm’s operational and financial critical performance indicators against its peers will provide a value creation plan designed to identify where weakness exist, as well as the starting point for creating a transformation strategy to improve financial (EPS, P/E and ultimately stock prices) performance.

Key critical performance indicators include the following:

  • How well does EPS, net income and P/E growth rates over the past 18 months compare to peers;
  • How well does your debt to equity and capital structure compare to peers;
  • How much cash will return to net income if the financial structure is optimized;
  • How efficient is your sales and marketing operations when compared to key competitors;
  • How effective is the current governance strategy;
  • Does the board have deep expertise in technology (cloud, social-local-mobile, CRM, big data, analytics);
  • How efficient is human capital when compared to peers;
  • How efficient is revenue, margins and equity contributing to the business;
  • Where is the firm experiencing operational performance/underperformance;
  • How efficient is your technology environment;
  • Is the current technology environment capable of competing in tomorrow's digital world;
  • Does your firm operate more like Google or Barnes & Nobles;
  • How efficient is inventory and cash management;
  • Is your firm's real estate portfolio optimized to contribute maximum returns to shareholders; and
  • How well does your firm invite customers to co-design products and create new services.

4. Create an aggressive turnaround plan and communication your strategy to stakeholders
After completing an activist audit or vulnerability assessment, the next step is to prepare a shareholder outreach strategy. Show investors how your turnaround plan is going to increase stock prices

Highlight weaknesses, while providing a clear roadmap designed to mitigate underperformance and aggressively unlock shareholder value.

The plan should include any new members or advisors to the management team as well as plans for reducing cost, improving profitability and/or spinning off unproductive operations. A well-designed value creation plan will help ward off potential activists.

An activist audit provides management with an activist perspective regarding creating shareholder value. Executing a review gives management the ability to reverse poor performance on their terms, as well as avoid a potential conflict with a heavy-handed activist.

Stanley Kirk is a partner at River Walk Capital, a management consulting firm that advises CEOs and boards regarding their vulnerabilities to activist investors. His expertise in financial restructuring and technology driven turnarounds & transformations has assisted C-suite executives contest or avoid unwanted activist investors. He can be reached at 313 378-4940.


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What will your company do with the tax-reform windfall?