By Al McClain
How worried are retailers about crime? Retail shrinkage accounted for $34 billion in 2007, according to the preliminary results of the National Retail Security Survey presented at the recent NRF Loss Prevention Conference. But in an indication of industry concern, the press was banned from four workshops at the show covering online investigations, cyber intrusion response, homeland security and shopping center shootings.
The good news is that shrink as a percentage of sales was actually down to 1.42 percent, the lowest percentage since the study started in 1991 and compares favorably to 2006 (1.57 percent).
Categories with lower than average shrink rates include jewelry, consumer electronics, office supplies, household furnishings, shoes and media/games. Categories with higher than average shrink rates include publications, auto supplies, cards/gifts, men’s and women’s apparel, and home improvement.
According to retail respondents to the survey, employee theft causes 44.5 percent of all shrink, followed by shoplifting (34.5 percent), administrative (14 percent) and vendor fraud (four percent). Fifty-one percent of respondents said organized retail crime (ORC) is increasing while only three percent believing it is decreasing.
Loss prevention budgets as a percentage of retail sales now represent 0.62 percent and 19 percent of companies have ORC task forces. The average robbery now nets $12,000, while the average burglary nets $1,706.
Bill Suthard, manager of organized retail crime investigations for Lowe’s Companies, outlined the scale of the organized crime component of retail shrinkage in a presentation.
Lowe’s had 200 ORC cases last year and is tracking 170 groups, according to Mr. Suthard. He outlined several ways theft schemes are practiced by organized thieves, including UPC switching (swapping tags from low and high priced items), refund fraud, and box stuffing (putting a bunch of small high-priced items inside larger items).
Mr. Suthard advocates a complete approach to stopping organized theft. Lowe’s tries to identify the method of operation and targeted merchandise, make the store aware of the situation, identify a solution to stop the immediate problem, review the case with legal counsel, collect evidence to support the prosecution effort, and work to provide law enforcement with a “ready made case.” They like to be able to show authorities exactly what happened (often via videotapes along with receipts), and show them the financial loss it caused.
As Lowe’s collects evidence it also investigates the suspects and perform background checks so that they can figure out if anyone else might be involved. A cautionary note here: Lowe’s says to be very careful to review only information related to the investigation and make sure to comply with consumer privacy regulations. They also track where the merchandise is going. With ORC, it often ends up as gift cards that are sold on eBay. The criminal(s) switches tags on high and low-priced items, buys the higher priced item with the lower-priced tag, then comes back for a no-receipt refund on the item, generating a gift card that gets sold online.
Another key point is to make sure the beat officer who first investigates the situation for law enforcement has an easy-to-understand case summary that can easily be presented for prosecution. In identifying “ordinary” shoplifting versus organized crime, Lowe’s relies on indicators such as whether
the person worked alone, how far away from the criminal’s home the crime occurred,
whether they used manufactured bar codes, etc.
Discussion question: Do you think
retailers in general are paying enough attention to shrink? What best practices
do you suggest retailers adapt to lessen their losses?
BrainTrust
Discussion Questions
Poll
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As the economy worsens and incomes drop, we will see shrink increase as more people turn to stealing to get what they want. How we manage shrink while still maintaining labor and budget targets are questions that have boggled store manager’s minds for decades. Outside of having uniformed or plainclothes personnel wander the store, we really should be expecting our in-house staff to prevent and detect all types of shrink.
External shrink (shoplifting by customers, robbery, break-ins etc) is really a difficult thing to tackle. We want our employees to feel safe and secure at their jobs while we protect the stores assets and investments. The best way to prevent external theft is to not give anyone the opportunity to steal. Most of these shoplifting and robbery cases happen because the criminal sees an opportunity or a hole in the system and takes advantage of it.
How do we prevent opportunities? By engaging the customer at every possible moment. A potential shoplifter does not want any attention drawn to him/her. Simply approaching customers and asking them if they need help could eliminate a huge number of shoplifting incidents. If the perp knows you are watching, they will most likely high tail it out and head to the next store. These people are always looking for ways to scam and if we don’t provide them with any, we could cut this type of shrink in half.
Preventing internal theft is a little more challenging. The 2 most effective ways of dealing with dishonest employees are, again, removing the temptation or opportunity to steal and to build a culture of ownership. We reduce opportunities by having a system of checks and balances in place. Proper item movement reporting, securing high ticket items, bag and parcel checks, proper supervision, daily task lists, etc. If employees are too busy to steal, chances are they won’t even think about it. Building a culture of ownership really starts from the top down and the store manager plays a key leadership role in developing feelings of ownership within the store. I have seen this work on many, many times. If given the tools, anonymous tip lines, open communication policy, etc; employees will report dishonest behavior when a culture of ownership is present. When a feeling of ownership exists, the thought process is “Hey, you are stealing from me!” and that employee is more likely to report such behavior.
To summarize, we need to take the people factor into account when dealing with internal and external shrink. Providing the best customer service at all times is really the most effective way of removing the opportunity to steal for customers. Leadership and communication is what reduces internal theft. And don’t forget, the safety and security of your staff is of the utmost importance. There is no value to someone being assaulted (or worse) over a pack of Gillette Phenom razor cartridges or a box of Claritin.
I think retailers may underestimate the impact of administrative shrink (i.e. bookkeeping error). I think weakness in retailer accounting systems for capturing point of purchase discounts and inability to associate returns with initial purchase transactions could be greatly reduced.
If a retailer is using retail accounting, bookkeeping systems need to record sales at “original retail” in addition to final sales price. This means the retail at which the item was charged to inventory. Then the bookkeeping systems can account for discounts used to determine the final selling price. Inventory shrink becomes a simple calculation of the difference between the opening inventory “original retail” value, sales at “original retail,” and the closing inventory “original retail” value.
Returns need to be associated with a sales transaction. This means the return policy cannot be applied to anonymous transactions. I always like to spend some time “behind the counter.” I spent a while observing the courtesy counter at a high-low operator. A couple came and returned several items, I don’t recall what the items were but the clerk knew the people by name. Every Monday they returned a few deeply discounted items that were on sale the week before (at least it was a relatively slow time at the courtesy counter). They received full retail. They knew what they were doing and the clerk knew it, but the policy was “no questions asked.” Not only is this financially harmful, the helplessness felt by the store employee was palatable. Returns need to be associated with sales transactions, either through a frequent shopper ID, credit or debit card, or a sales receipt. I believe legitimate customers will understand the policy, and even appreciate the retailer who makes an effort to minimize theft.
But if the majority of theft is occurring through employees, retailers have a lot of work to do in that area. It is a tough choice between more sophisticated monitoring equipment and changing employee behavior. One could argue more full time, higher paid, and incentive rewarded employees should have less reason to steal. I remember when we first installed checkout monitors. The reaction of the initial employees to be confronted was “everyone is doing it.” The head cashier with 17 years in the store was detected sweethearting. The store manager insisted there had to be something wrong with the system. It is obvious this will be a challenge.
Location sometimes has a lot to do with shrink. Many retailers have simply closed up shop in difficult neighborhoods to reduce shrink. Many of our inner city urban areas are void of supermarkets, often due to the high shrink levels. Combine that with acts of civil disobedience and the result is no stores in the area.
I would consider closing up stores in difficult neighborhoods to be a proactive measure to reduce shrink. Kmart closed some of their highest volume supercenters in Dearborn, Michigan a few years ago. The employees told me it was due to excessive theft. That made sense to me since it was probably the highest volume unit on the mainland.
Wow…the press wasn’t allowed in? That’s odd.
RSR’s data (which is about 6 months old at this point) indicates that while organized crime gets a lot of press and creates a lot of buzz, the sources of shrink remain the same–employees steal money and merchandise, and sweetheart their friends at the POS, and shoppers steal merchandise.
I can tell you that the response to our last LP study (in terms of readership) was phenomenal. There is no question that shrink has top-of-mind awareness across the retailing landscape. And well over half our survey respondents reported that shrink has a higher priority than ever in their organizations.
The deteriorating economy will likely add more shoplifting and potentially the threat of physical violence to the LP mix more than it will add to the organized crime issue. Retailers will have to be alert to high crime locations and respond, not just with cameras, but with real police presence. This isn’t cheap, but it could be very important.
Having worked with retailers on this problem, I am convinced that many just see this expense as a cost they can “pass on” to the customer. Some companies have shrink figures that are equal to their net profit…yet pay only lip service to loss prevention.
Organized retail crime is a huge issue with homeland security implications. You would think that some of the larger retailers (who are suffering the most losses) would rally around the flag and help stop ORC…but again, only lip service.
I don’t know at what point this becomes a big enough issue in the Board Room to trickle down to operations…meaning, putting real dollars behind loss prevention efforts.
If the consumer knew how much ORC and shrink adds to their cost of goods, they would be outraged!
One key to stopping shrink (particularly ORC) is figuring out a way to keep known offenders OUT of the stores.
First of all shrink detection starts at the back door, with retailers actually checking to see what was ordered is being delivered. For now, let’s call this an administrative issue, but it’s also about making sure vendors and delivery people are not short-changing the store.
As to ordinary shoplifting, let’s be realistic, the average 16 year-old clerk making $8 an hour is not going to take ownership and be proactive in stopping shoplifters. And you really don’t want him doing anything about it. The kid gets hurt, you’re liable. He hurts someone else, you’re liable. The best you can do is have them report it discreetly to the store manager who then makes the decision what to do.
There are also a number of computer programs out there that will stifle sweethearting. If you’re having a big problem, maybe it’s worth the investment.
Organized retail crime is a little tougher. It requires real diligence, close relationships with local law enforcement and, most of all, collaborative efforts between retailers. The FBI has set up a retail crime division. However, funding is scant and who knows if it will get through Congress. Best to do it yourself by joining retail databases like the one operated by the National Retail Federation.
My husband worked in retail loss prevention for 20 years. I know from watching him and listening to his friends that LP people are underfunded, under equipped, and not only don’t get enough attention from the executive suite, they don’t get much attention from law enforcement either.
Retailers will have to attack the shrink issue from a number of fronts, including paying store associates better, firing employees who violate policies, and staying on top of organized crime groups. When it’s easy to steal, regular customers wind up paying the bill.
The employees hired and the sense of pride in their workplace are the biggest weapons in the fight against shrink.
I’ve worked at the Disney Store since 1993. Everyone who works there works there because they are passionate about the Disney brand and what it represents (definitely not the for the pay!). When people steal from us, we take it personally. Our store has had a long history of having the lowest shrink in our district and in the company. We have had several people try to pull one over on us and return stolen merchandise and we’ve refused (we keep a list of the offenders). Eventually they moved on to other stores who were also given a copy of our list.
When employees are bored or are just at the job to collect a paycheck or are on their cell phones while on the sales floor, thieves are invited into the store.
Often it doesn’t pay to involve the criminal justice system. What pays best: shrink prevention, not criminal apprehension. Furthermore, many retailers weigh the cost of shrink reduction versus the possible shrink savings, and they find a point where it isn’t profitable to further reduce their losses. Translation: does it pay to spend $500 to catch $30 worth of errors and theft?