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Social Unrest Could Spur New Retail Strategies for Security, Insurance

Retailers across the country that had started the reopening process temporarily closed again this past week after protests and riots paused their reboot plans.

The social unrest across major cities around the world saw protestors fighting for racial equality and called for an end to police brutality. While many demonstrations were peaceful, New York’s SoHo neighborhood and Rodeo Drive attracted looters intent on doing damage and pilfering product.

While losses are expected to be covered by retail insurance policies, the current crisis raises questions on what companies might want to consider for store operations going forward.

Here are three different perspectives on what those considerations might be from a future point of view.

Cost of doing business

“I don’t think there’s much we can do differently. The plan for most of the stuff we’re doing that would insulate us from such a thing we’re already doing now,” said Vibhu Norby, co-founder of B8ta, the retail-as-a-service company. The retail tech startup has been spending more time and energy on e-commerce and digital efforts as many stores are still closed as a result of the coronavirus pandemic.

“If this was a normal week, we would have opened a couple more stores,” Vibhu said. “We’ve seen good recovery in Texas, where we’ve reopened stores for four weeks.”

Norby said he’s been keeping tabs on media reports regarding the demonstrations and the looting. “My concern has been how cops treat black people today… Most stores that were broken into have insurance and they will be okay… Our stores are in some areas where there have been break-ins. We continue to hear every couple of hours about locations at a mall or street where we have a store nearby. We are trying to keep people safe and trying our best to safely lock up store inventory,” he said.

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Norby said the company boarded up its Melrose store, but so far has been able to avoid any of the immediate areas that were impacted by vandalism. “In San Francisco, we’ve had private security for a long time. The store gets broken into a couple of times a year,” Norby said. “Most of the stores in the area are used to it and [everyone takes] safety precautions anyway…. Insurance will pay for damage, but it won’t pay for lost revenue and time.”

And if insurance premiums go up, Norby said, “If that’s a consequence, the price for change, we’re fine with it.”

Working with insurers on claims

Physical damage to store fronts, such as broken windows, would be standard coverage under most insurance policies, said Drew Olson, partner in BDO’s forensic investigation and litigation services practice.

“Before the riots, there were a lot of questions on insurance coverage for COVID-19. Claims have been submitted and insurance companies have issued denials so there’s a lot of litigation happening,” he said. However, the riots raise the question of business interruption and how to compensate for lost sales due to physical damage, Olson said.

“What would the sale have been had this [riot damage] not happened. COVID comes into play, either because the store was not open or was in ramp-up mode due to COVID, so it can get complicated. Because of COVID, some retailers might find themselves in a better situation if inventory was damaged due to the riot. Insurance typically compensates for inventory at the selling price,” Olson said.

Retailers have price sheets for what they are holding in inventory and the corresponding selling prices. The key will be whether a retailer has made any markdowns in advance to clear the goods. If so, then the marked-down prices would become the current selling price used for calculating the loss. “If the store was not open during COVID and there’s no recent sales history other than pre-COVID, insurance will work with [the retailer on the loss calculation],” he said.

That means retailers better hope they’ve kept good records. “The real challenge is proving the existence of the inventory and what they had in the store at the time of the event,” Olson said.

Going forward, anytime there’s any major financial economic loss covered by insurance, the companies review their portfolios to check on whether an insured is a risk the insurance company can continue to insure. Olson sees the possibility of insurance rates rising, but not necessarily any new provision that would exclude riots or civil commotions as that’s already part of traditional insurance coverage.

“I think the insurance industry is going to be understanding. This is a sensitive time for the country overall,” Olson said. “They are looking to meet their obligations under the policies, but [also have an obligation] to making sure they are doing due diligence on all claims.”

He suggested that retailers fully document any additional steps they will be taking to protect store locations going forward. That could help facilitate future negotiations with insurers on getting their insurance premiums lowered.

Security considerations to think about

“Fortunately, this is temporary. The rioting shall pass,”

Although global consultancy Kearney expects some operational changes ahead for retailers, Michael Brown, a partner in the consumer practice, described this current disruption as “temporary.”

“The rioting shall pass,” he added.

“There will be some new requirements on what justifies as security, whether windows become shatterproof or we start to see roll-down doors protecting every window in front of the stores so there’s less ability for them to be tampered,” Brown said. And in areas that are particularly prone to break-ins, there could be a rise in retailers working together to hire private security groups to keep the risks at bay.

“In many major cities and department stores, the jewelry cases are shatterproof [and some retailers] have armor-protected glass. The small mom-and-pops can’t afford that, but in [Manhattan’s] Diamond District the merchandise is put away and locked up in a safe where it’s protected every night. It will be up to the retailers themselves to understand what solutions they have to deploy in what locations and in what product categories,” Brown said.

While Brown sees the possibility of insurance premiums going up for some retailers heavily impacted by the physical damage and store looting, he also noted that ultimately any price increases will get passed to consumers.

Some of those costs will be borne by consumers now as they head back to the stores, whether because apparel retailers need to incorporate additional sanitizing costs for returned items or implement public health protocols. Brown expects retailers will rethink their brick-and-mortar locations, turning many into showrooms that require smaller footprints as they transition consumers to the digital shopping environment.