COUPON SABOTAGE

John Karolefski

What's next for Internet coupons?

The well-publicized instances of counterfeiting a few months ago prompted some retailers to announce that they would no longer accept coupons that shoppers print from their home computers. However, there still isn't an industry consensus on the issue. Most chains now accept these coupons, but some still don't. Too, there isn't an industry-accepted plan about what to do, although various vendors are now proposing solutions.

This issue presents a lingering dilemma, according to retailers and other executives familiar with these promotions. The targeting ability of Internet coupons is a major benefit that product manufacturers don't want to lose. Consumers who print out Internet coupons are pleased with the convenience. Retailers don't want to give their loyal shoppers a reason to change stores to redeem coupons.

The latest flap originated in August in Atlanta, where some supermarket shoppers tried to redeem fraudulently scanned and reproduced coupons for free product, or high-valued coupons that were initially distributed via direct mail and Sunday newspapers. In addition, Internet auction sites like eBay offered bulk coupons that included fraudulent ones for free product. Reacting to these reports, several retailers in the Southeast and later the Northeast decided not to accept any Internet coupons.

"The story became one about Internet printable coupons. Misinformation spreads faster than information. We quickly had a situation where retailers had been hearing about an Internet fraud issue, and erected a policy with non-acceptance of Internet coupons," said Steven Boal, president and chief executive officer of Coupons Inc., San Francisco, a firm that provides online coupon services to food and CPG manufacturers.

Boal said major retailers such as Wal-Mart, Kroger, Food Lion and Albertsons have announced they would accept computer-generated printable coupons.

Yet other chains are taking a different approach.

"Our official policy is that we do not accept Internet-generated coupons," said Mona Golub, manager of consumer services and public relations for Price Chopper, Schenectady, N.Y.

"We first started to receive these coupons in the middle of August. They surfaced within our own system. We created the policy. Then at the same time, we found out that the same issue had hit Publix and Kroger the week prior. Our policy will be in place until the time when we are able to distinguish legitimate coupons from fraudulent coupons," she said.

Penn Traffic's policy on Internet coupons went into effect Sept. 3. None of its supermarkets are accepting coupons that have been photocopied or printed from a home computer.

"It's faster and simpler for the cashiers and the customers not to have to get into judgment calls as to whether a particular coupon should be accepted or not. This way, it's easier to understand," said Joe Ramirez, spokesman for the Syracuse, N.Y.-based company.

Meanwhile, other retailers such as Giant Eagle, Pittsburgh, have a policy that is between the extremes of accepting all Internet coupons and not accepting any.

"We have notified all of our store employees and front-end cashiers regarding the specific coupons that we have identified as being fraudulent," said Brian Frey, a company spokesman.

"With the exception of those coupons, our policy is that we will continue to redeem Internet coupons unless they appear to be potentially fraudulent. Our stores have been instructed to take extra precaution when presented with any coupons for free product offers that were presumably printed off the Internet."

Such a policy places a burden on the checkout clerk, according to Dr. Arun Jain, professor and chair of the marketing department at the School of Management, University of Buffalo, Buffalo, N.Y. "They don't have time to look for fake coupons. The person at the checkout is rewarded for moving traffic fast, and is not there as a police person. The potential for loss is very high," he said.

How high can that loss be if Internet coupons only account for 1% of all coupons distributed today? What's the fuss?

"If Internet coupons are copied and widely distributed, they suddenly can become a large number of coupons, and potentially huge dollars that retailers have paid out to consumers and want to be reimbursed for by manufacturers," said Carlene Thissen, president of Retail Systems Consulting, Naples, Fla.

"The manufacturers will likely say they didn't issue the coupons, and the retailers are stuck with the cash outlay. Also, Internet use is growing dramatically, and with it, consumer access to these coupons. So retailers have a growing number of consumers who want the convenience of Internet coupons. Retailers can't afford to upset their customers."

Manufacturers also could lose out, Thissen added.

"If Internet coupons were to be eliminated, the real loss would be the ability of manufacturers to target specific consumers with specific coupons. The Internet provides that ability. It is also a much lower cost vehicle than direct mail for sending out coupons, targeted or not," said Thissen, who said this issue would be on the agenda at the Global Electronic Marketing Conference (GEMCON), Nov. 9 to 11, in Orlando, Fla.

Finding a Solution

With so much at stake, grocery executives are eager to resolve this issue.

"We're looking for solutions," said Golub of Price Chopper. "I don't know that there will ever be a foolproof system. Technology allows for the generation of clear-color print in which people can cut and paste UPCs and logos, as well as other important elements that distinguish such offers. Looking for solutions is viable. Looking for a foolproof solution, I'm not sure is realistic."

Grocery Manufacturers of America (GMA) and Food Marketing Institute (FMI) are working with trading partners and vendors to come up with solutions.

"Coupons are a valuable advertising tool for manufacturers and a great promotional tool. It obviously drives traffic for retailers. Nobody wants to do away with coupons. We have now become aware that this is a problem, and are looking into it. We are trying to figure out what kind of technological fixes there are," said Mike Diegel, spokesman for GMA. Ramirez said Penn Traffic is looking for a dramatic improvement in the security of Internet coupons. These security measures could be implemented by the manufacturer, distributor or the retailer, but it's important that they be simple and effective.

"The whole point of Internet distribution in the first place was to do something extremely easy and inexpensive for the people circulating them," he said. "You probably have to have some coding security in the digital file that would still be either visible or available for the retailer to read. Whether that's a combination of an image that would print out or a UPC code, we're not sure. There hasn't been much to address this yet, which is the reason for our policy. In the absence of that security and the high incidence of fraudulent use of this type of coupon, there's really no choice but to stop accepting them for the time being. Unfortunately, Internet coupons are relatively easy to fake and to make multiple copies of."

Frey said Giant Eagle wants to communicate more about the issue with manufacturers and vendors "to ensure coupon accuracy and prevent further fraudulent acts." He suggested using more innovative watermarks, numbered coupons, specific identifiers and personalized coupons.

Meanwhile, GMA and FMI have jointly asked eBay to put coupons on its list of banned items because some offers may be fraudulent. While the Web site has so far declined to do so, the trade associations continue to work with eBay for a resolution.

"The best-case scenario now is for eBay and other auction houses to stop coupon auctions," said Barry Kotek, managing partner of Retail Systems Consulting. "Also, manufacturers should stop issuing coupons for free product."

Several executives have called for an industry-accepted Internet coupon standard.

"A set of standards needs to be developed in order to create proper boundaries in this industry, which has clearly grown," said Boal of Coupons Inc. "What I believe needs to be done is that FMI, GMA, the major clearing firms, the coupon providers and the technology participants need to come together. I suspect we'll probably see a set of standards and best practices emerge somewhere over the course of the next 60 days." "The ultimate answer will be to eliminate the paper," said Carleen Thissen of Retail Systems. "One way is to get systems in place where consumers can load the coupons onto some kind of smart card. A consumer could select coupons on the Internet, and then the discounts are electronically transferred to the store or stores where that consumer shops. Retailers also should put in some means to monitor and control what's going on with coupons at their stores. Exceptions reports based on POS data could be easily generated for every store, every day, to show where there is excessive coupon activity." Meanwhile, vendors have come up with their own solutions to coupon fraud. Coupons Inc., for example, now has a security service called Veri-Fi that detects counterfeit and fraudulently altered coupons. Each of the firm's coupons bears a unique Veri-Fi code. E-centives Inc., a Bethesda, Md.-based provider of online relationship marketing technologies and services, just introduced a series of online coupon fraud-deterrence solutions. One enables retailers to identify coupon alteration in the store; another solution enables manufacturers to scour Internet auction sites for unauthorized coupon distribution.

WATCH OUT FOR SHOPPER BACKLASH

Some industry experts worry about the effect of not accepting Internet coupons.

"The retailers that aren't accepting any Internet coupons may lose some customers," said Barry Kotek, managing partner of Retail Systems Consulting, Naples, Fla.

He said that a recent survey by CoolSavings Inc., an online coupon vendor, found that when the consumer's Internet coupons were rejected, 53% of the 6,000 people polled did not buy the product, and 47% said they found another store that would accept the coupons. Greg Kahn, president of Kahn Research Group, said a rejected shopper's first reaction would be to go to another store. If the next store did not accept the coupons, the result would be anger. "Especially from those who have been using legitimate coupons for a while," he said.

"They won't understand why this is happening. It's not like they are breaking the law or anything. The majority of coupons that people are using are not fake. In that sense, you can anger a consumer group.

"However, I have a feeling they'll get more angry with the companies providing them with coupons online than they are going to get with retailers themselves. They'll be angry that there hasn't been a solution already, considering all the things we can do online and how far we've come with security," said Kahn, whose Huntersville, N.C.-based company studies shopper behavior in stores.

However, the feedback from retailers polled by SN did not indicate a backlash -- so far. "This has not been something that has generated a lot of problems with customers," said Joe Ramirez, a spokesman for Penn Traffic, Syracuse, N.Y. "In other words, the policy has been implemented smoothly. There are not that many people who use these coupons, and those that do have other alternatives. We're not shutting off the coupon world. There are plenty of good coupons available from traditional sources that people can use."

Giant Eagle has taken steps to communicate its policy on accepting Internet coupons to its shoppers and store employees. "Although this coupon fraud issue initially created a minor level of inconvenience for some of our customers, our policy has since been well received. Customer inquiries have been minimal," said Brian Frey, a spokesman for the Pittsburgh-based chain.

Shoppers at Price Chopper haven't complained to customer service about the store's ban on Internet coupons, according to Mona Golub, manager of consumer services and public relations for the Schenectady, N.Y.-based chain. "I think we've communicated to people that the issue is not with those who unwittingly use the coupons, but rather with those who wittingly generate them," she said.