Macy's New Inventory Program Gave Cashier A Way To Steal

One of the very best times for a retail thief to strike is when technology is brand-new, because employees don't yet know what to expect and therefore can't recognize unusual activity. That's the hole an 18-year-old Macy's associate tried to use when his New York store had just started the chain's new Search-and-Send program, which allows one store to access the inventory from another store and have items shipped directly to the customer.

Indeed, the associate might have gotten away with it, had he not gotten too greedy and obvious. How obvious? He purchased the chain's most expensive Movado watch—a $2,995 Swiss timepiece with a tungsten carbide bracelet—but not before he "processed an unauthorized markdown" to make the price $2.95. Think a better-than 99.9 percent discount would trigger a flag? The good news for Macy's loss prevention: It did indeed trigger a flag. The bad news: Nothing in the system stopped the associate, who had worked for Macy's less than five months at the time, from processing it and having the product shipped.

Based on a review of court and police records, the fraud's particulars provide a rare look into the mechanics of early-adopter-fraud. (Given the age of the associate, the New York court is considering entering him into a youthful offender program, which would seal all of the criminal records. Because there is little benefit to our readership to have this incident crop up every time someone Googles this guy's name, StorefrontBacktalk is withholding it.)

The incident began at 6:20 PM on January 26, 2011, in the Dewitt, N.Y., Macy's in the Shoppingtown Mall. The associate manually marked down the watch, paid for it with his personal Visa card and then used Macy's Search-and-Send (a.k.a. an E-Send) to have UPS ship it to his home, using his real last name and a different first name.

As a nice touch, he included something to make it look like a gift. According to a statement the associate made to Macy's loss prevention, "I signed for my purchase on the electronic pad and completed my purchase with a giftcard message stating 'Sorry for your loss.'" (Note: In Dewitt, N.Y., is it traditional to accompany sympathy cards with a $3,000 watch? On the other hand, maybe the word was intended to taunt loss prevention. Then again, most LP people are not inclined to appreciate clever wordplay from a suspect.)The Search-and-Send program—which Macy's started late last year with a few West Coast stores and then expanded to 23 stores (including Dewitt) this year—is designed to let stores not only search the central warehouse and E-Commerce inventories but also have access to the inventory from nearby stores.

The program offers some benefits for fraudsters. The associate in this case would likely have been hesitant to ring up his in-store purchase himself—a policy violation that could easily be detected—and ringing it up through a fellow associate is also dangerous, because the other associate might recognize that the watch should cost $3,000.

But the anonymity of the Web is ideal, because those packers don't care about pricing. Given that the associate wouldn't have any ability to change prices online, the fraud would be difficult. Search-and-Send provides the best of both worlds; the price is under the store's control—and, therefore, the associate's control—but the shipping option provides the lack of a personal interaction. Had the discount been much more typical, there's a fine chance it might have never been detected.

Macy's CFO Karen Hoquet on August 10 told an investor call how much she liked Search-and-Send, which made the chain "more likely to be in-stock when the sales associate searched for an item and, therefore, satisfy more demand. So now, throughout the company, you're able to go to a Macy's store and have the associate search the inventory invisible to the sales associate but will pull it from stores in addition to the Internet warehouse. And this is all a part of trying to be able to better satisfy customer demand and also, over time, make our inventory investment far more productive. It's really quite exciting."

At least one store associate apparently felt the same way.

According to statements from police and Macy's loss prevention—statements that may not necessarily be precise—the associate gave conflicting explanations.

A typed loss-prevention statement, signed by the associate,said: "At no time did any manager or supervisor authorize me to process my own transaction, manually mark down the price of the watch or have it sent to my own address."

A police statement, which he did not sign (the police said he refused to sign), quoted the associate saying: "I placed an order for a watch and made a mistake. When I received the watch, I went to Macy's and tried to return it." In a court filing, police quoted the associate as saying: "I purchased the watch at my register. I entered the wrong price. I saw this when the receipt printed. I threw the receipt away."Many of the details are not clear. If he did try and return the watch, what happened? Given that police found the watch at his home, it seems as though his effort to return the watch—assuming it happened—was not successful. And why would he dispose of that receipt if it corroborated his version of events? And why didn't he cancel at once the receipt that revealed the problem?

Police charged the associate with grand larceny in the fourth degree and falsifying business records in the first degree.

Fraudsters love change and experimentation. Attacking before the bugs of a new system are worked out, and when no one yet knows what "normal" looks like, is a popular approach.

With mobile-payment and additional merged-channel efforts expected to soar in frequency over the next 12 months, retailers need to be extra-paranoid about these newly created security holes. The customer convenience of having transaction and CRM records moving seamlessly from in-store to online to mobile to social to call center is a wonderful thing, but it will also create petabytes of new cracks for fraudulent transactions to hide.

There is an IT tendency to cut back on security precautions for trials, because the costs are difficult to justify for a technology that may never be fully deployed and that is only being used at a few stores for a very limited period of time. In a sense, the limited trial is limiting the exposure. But to a fraudster, those not-yet-secure experiments are golden opportunities.

One chain recently learned of some security holes within a mobile trial. It opted to let the holes remain due to a simple ROI calculation. Given the small number of people who would likely try the experiment and the statistically small percentage of them who would like try to defraud the system, the chain calculated the likely costs of such fraud and compared it to the likely cost of fixing the holes. It opted to leave the holes, with a plan to fix them if the technology was ultimately approved for chain-wide deployment.

That's perfectly reasonable CFO thinking. But knowing that fraudsters bank on such thinking, it may be time to focus more on paranoia and less on strict ROI. The Macy's associate was caught primarily because of greed and a lack of subtlety. The next attacks are likely to be much more nuanced.