It’s difficult to be a customer-focused retailer these days if you’re too busy worrying that your employees are stealing merchandise and money from right under your nose—and contributing to the $40 billion shrink problem that has slammed hard into U.S. retailers’ profits in 2007.
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Retailers surveyed by Retail Systems Research (RSR) are adamant in that belief, notes analyst Paula Rosenblum in a recent report. “They believe that their employees and customers are stealing merchandise and cash from them,” she writes. “Ironically, the worst performing retailers are more concerned about employee theft than their peers.”
But new technology tools can help the worst- and best-performing retailers keep an eye on employees who steal or give “sweetheart” deals to friends and family. Real-time business intelligence data can work hand in hand with such tools to make a big difference, industry analysts say.
In other words, IT has a real opportunity to help improve the bottom line for retailers when they need it more than ever.
One of the most disappointing earnings seasons in years has just passed, with many of the top U.S. retailers posting sluggish earnings and steep drops in profitability in 2007. Target, Home Depot, Lowe’s, J.C. Penney, Sears and Kmart were just some of the notable retailers listed among the walking wounded.
During the 2007 holiday season, customers’ satisfaction with retailers reached its lowest levels since 2001, reported the University of Michigan’s American Customer Satisfaction Index.
Compounding the industry slowdown, most macroeconomic indicators still point toward more distress (a looming recession and layoffs, high gas prices and a depressed real estate market), which could cut further into consumer spending in 2008.
Though retailers can’t cure the economy’s ills, several in-house fixes could help next year’s earnings, and IT can play a significant role in two of those areas: preventing financial losses from employee transaction fraud (giving “sweetheart” deals to friends and family at the cash register, for example) and shrink (lost, damaged or stolen merchandise due to outright employee theft or administrative error).
How much trouble do the companies face? A collection of survey data and industry-specific research estimates the enormity of retailers’ shrink and fraud troubles at $40 billion in 2006.
Even so, many retailers still struggle with how to slay the shrink beast. “Shrink and loss prevention may hold a high priority in retailers’ minds,” writes Rosenblum in the survey report, “but these same retailers have difficulty turning thoughts into action.”
The Source of Shrink
The largest source of shrink is the very people retailers entrust with the merchandise and the money: employees.
“Customers and employees steal both merchandise and money, employees provide sweetheart deals for their friends and family, and missed markdowns and other clerical errors create ‘paper shrink,'” Rosenblum writes in the 2007 RSR report, “Winning Trends in Loss Prevention.”
Nearly three-quarters of the retailers responding to the RSR survey, regardless of industry segment, size or company performance, agreed with the statement, “We can’t trust our employees.”
Richard Hollinger, a professor at the University of Florida, has tracked retail industry loss prevention and security practices since 1991. His annual “National Retail Security” survey is one of the best barometers of how retailers are managing loss prevention. According to the most recent survey data obtained from 151 retailers (including nearly all of the top 100), 47 percent of inventory shrinkage, which is the most of any type of loss, is attributable to employee theft. (The other categories are shoplifting at 32 percent; administrative error at 14 percent; vendor error at 4 percent; and “unknown” error at 3 percent.)
Hollinger estimates that employee theft alone costs retailers $19 billion a year, “a staggering monetary loss to come from a single crime type,” he writes in the 2006 survey results. “In fact, there is no other form of larceny that annually costs American citizens more money than employee theft.”
A December 2007 Aberdeen Group survey on retail losses found that 60 percent of retailers recorded year-over-year shrink of 1.75 percent of their total sales. (Hollinger’s 2006 research pegged retailer’s average shrink rate at 1.57 percent of total annual sales.)
Using retailer Target as an example, it’s easy to see shrink’s effect on the bottom line. Target’s most recently reported annual revenues were around $60 billion. If it had a theoretical shrink rate of 1.75 percent of sales, loss due to shrink would cost Target roughly $1 billion a year.
In May 2007, Wal-Mart executives disclosed that the world’s biggest retailer was experiencing an increase in shrink at its U.S.-based stores, though they did not elaborate on the causes. Retail analysts have estimated Wal-Mart’s annual shrink at around $3 billion, which would be a little less than 1 percent of its $349 billion in sales.
The Aberdeen research also showed that 30 percent of retailers responding to the survey reported between 2 percent to 6 percent of all its transactions were invalid, meaning they were unauthorized and fraudulent customer transactions. “This indicates,” writes Sahir Anand, a senior retail analyst, “that retailers may be faced with high transaction-fraud incidence due to organized retail crime, data loss and dishonest employees.”
How IT Can Help
Retailers know they have a shrinkage problem even though it’s sometimes so hard to see it: 93 percent of respondents to the RSR survey say that during the past two years shrink has become more important or is equally important as any other retail priority. Retailers have also started using technology tools, such as returns and void management programs, video surveillance and sales audit systems, to combat the loss problem, states the RSR report.
“But for a variety of reasons,” writes Rosenblum, “these tools have netted out to marginal long-term improvements.”
Given the complexity and scale of the shrink problem, what technology tools can offer meaningful help in decreasing shrink?
Because shrink is at its core a “people problem,” retail security experts say that IT-based educational training systems can complement existing loss-prevention awareness programs. “Training is the first step towards alleviating risks associated with internal and external threats both from a merchandise and transaction standpoint,” writes Anand in the Aberdeen report.
Retailers should develop a comprehensive Internet-based module for training so that progress can be monitored and tracked, and new loss-prevention techniques can be added as threats arise, Aberdeen advises. That way, executives will be able to verify that every store and headquarters employee is 100 percent trained on loss prevention, Anand notes.
Computer-based training, such as videos that show the “tricks of the trade” of merchandise thieves, or that alert employees to the downside of doing such things as keeping keys to locked cabinets on the shelf above them, has also proven successful, RSR’s Rosenblum says.
Technology is “a valuable enabler to improve loss prevention,” she writes, “but without focusing on the people that work in the retailing environment, initiatives will be trumped and shrink will remain the same.” Proving that point, Hollinger’s data shows that for 15 consecutive years shrinkage rates have been lower in retailers with low employee turnover.
Beyond solutions to the people problem, robust business intelligence applications and analytics tools can now monitor, analyze and report on fraud in near real-time. By implementing BI tools such as real-time or near-real time online fraud monitors, risk rating tools, exception-based reporting and case management, retailers struggling with shrink can improve data mining, analyses, reporting and performance management, Anand states.
What’s critical here is the use of real-time (or as close to real-time) BI data. “Weekly or monthly reports on price overrides, voids and returns do little to stem the tide of shrink,” Rosenblum writes. “With POS systems and cameras producing a steady stream of structured and unstructured data, there is no reason why retailers cannot get information to store managers and field personnel as soon as a pattern is recognized.”
Security vendors are starting to offer products that can help. For example, StopLift has developed a system that uses computer-vision technology to identify sweethearting as it happens, according to a recent Boston Globe article. Grocery store Hannaford Bros. began testing the system in 2007 at several of its 160 supermarkets and “found up to 20 percent of cashiers were involved in some type of sweethearting.”
“It’s probably the biggest advancement for loss prevention technology in 20 years,” said Tom Perkins, director of loss prevention at Hannaford, in the Globe article. “This is one of the more common types of thefts; it’s just so easy to do and if you don’t scan the items, there’s no record of it.”
Loss-prevention executives like Perkins have their work cut out for them. Not only is loss-prevention such a difficult task to track and stop, but Hollinger’s 2006 data also showed that loss-prevention budgets as a percentage of sales (.43 percent) hit its lowest point ever. In other words, it’s time for retailers to do more with less.
“With decreasing loss-prevention budgets and even less money for high-tech countermeasures,” Hollinger writes, “more of the day-to-day responsibility for loss prevention is being shifted to overworked store managers and untrained, inexperienced sales associates.”