Shrinking Shrink

Retailers change status quo and use technology to g on the attack

At the beginning of the 21st century, Limited Brands was one of many big-ticket retailers whose loss-prevention policies were rooted in the past. The company, parent of The Limited, Victoria's Secret, Bath & Body Works and others, seemed to tolerate shrink so long as it didn't creep above the industry norm of around two percent of total sales. "There was a 'leave well enough alone' attitude," recalls Paul Jones, senior vice president of loss prevention. "We were accepting the status quo."

That was about to change. Urged forward by Jones and a host of tech-savvy C-level executives, Limited Brands announced a plan in early 2002 to restructure its loss-prevention operations. The company undertook a complete study of the loss-prevention function, asking retail security guru Dr. Richard Hollinger and execs from its human resources, legal and stores groups to participate. Loss-prevention and shrink targets were established throughout the organization. A "Loss Prevention Community Week" summit was convened and Jones himself started to report directly to vice chairman and chief operating officer Leonard Schlesinger. The result, nearly 20 months later: a culture that uses training, awareness and auditing to attack shrink in a uniform way across the company's many retail brands.

Working with Tyco's ADT Security Services, Limited Brands changed its loss-prevention model from security-focused to data-focused. "The wrong way to attack the problem is to go after shoplifters and employees that are stealing, then use the number of people you catch as the measure of how well you've done," Jones explains. "The right way is to study how you predict shrink as opposed to how you react to it. With us, [shrink] used to be brand-based. Now it is enterprise-based." Jones declines to quantify the results Limited Brands has seen, but pegs them as "substantial."

Statistical Surveys

Though many companies have emulated loss-prevention tactics and philosophies adopted by Limited Brands, shrink still remains a major problem for retailers large and small. According to the 2002 "National Retail Security Survey," U.S. retailers lost $31.3 billion last year to inventory shrinkage (defined in the report as employee theft, shoplifting, administrative and paperwork errors, and vendor errors/issues), or 1.7 percent of total annual sales. That total has increased nearly 22 percent from 1996, when losses were $25.7 billion.

A recent Ernst & Young report puts an even higher price tag on the problem. The firm's "Study of Loss Prevention," unveiled in May, estimates that the U.S. retail industry loses $46 billion per year to inventory shrinkage. And while the average study respondent spent $2 million per year on loss prevention, fewer than half are seeing results: only 45 percent reported a decrease in shrink over the past year.

"A company can employ a dozen or a thousand programs to deter theft, but if the discrepancies are simply being overlooked, then the problem clearly has roots in management, and not procedure," Jay McIntosh, Ernst & Young's Americas director, retail and consumer products, wrote in the report. "We believe that what's needed is a combination of analytics to better identify deviations, in-store procedures such as cycle counts of inventory and stronger corporate policies to enforce anti-theft programs."

Obviously, not every retailer has accepted this advice as gospel. Many, however, have come to realize that, done right, loss prevention can become a competitive advantage. Think of it this way: if you're a retailer, you can bust your back to grow margins at a time when such growth is near impossible to achieve. Or, for a comparatively low investment (some vendors estimate full ROI within three to six months), you can work with any number of companies to limit your losses from shrink.

Pure Profit

"We can sell a $50 item and make $2.50, maybe $3 on it. But if we stop somebody from stealing that item, that's a savings of 50 bucks," explains David Drake, loss prevention systems manager for the Army and Air Force Exchange Service (AAFES), which has implemented Triversity's FraudWatch system. "This company has always understood that those dollars we save [via loss-prevention techniques] are pure profit," adds Drake.

"Theoretically, shrink is a controllable expense," says Randy Meadows, vice president of loss prevention for Hollywood Video, which is currently partnering with Security Source for loss prevention. "If your top line isn't growing, you should look at your bottom line."

Hollywood Video and AAFES, like Limited Brands, attempt to attack shrink on a companywide basis, grounding their loss-prevention programs in education, training and support. And while the big-picture approach relieves individual stores of the burden of creating their own anti-shrink programs from scratch, such stores aren't entirely off the hook: they are expected to buy into the company's overarching philosophy and continually self-diagnose their loss-prevention outlook. In fact, retailers say that is one of the major difficulties in large-scale loss-prevention system overhauls — getting the entire organization to buy into the changes.

Best Buy, for example, attempts to communicate the overall impact of shrink by showing sales associates how such losses are reflected in their paychecks. A key part of the problem, of course, is that loss prevention is far from the most glamorous job in the organization, and employees often need such hands-on enlightenment to understand its importance. "If we do our jobs perfectly, nothing happens and nobody notices," says AAFES' Drake. "If we don't, there are usually big problems."

Ultimate LP Suite

As for vendors of loss-prevention technology, they have long been preaching that loss prevention has nothing to do with catching the bad guys. Technology from Retail Expert (NaviStor), CRS Retail Systems (the Focus Loss Prevention module) and Island Pacific (IP Gladiator) all attempt to condense exception/incident reports, data culled from electronic-article surveillance (EAS) and other information into user-friendly plans of action that are predictive of future behavior, rather than reactive. Web-based systems like Triversity's FraudWatch seem to be catching on, while ADT's Sensormatic Smart EAS product line has earned high marks from retailers for ease of integration. The race is on to develop the gold standard of loss-prevention suites.

Which brings us back to Limited Brands and Paul Jones, who anticipates that within two or three years such a comprehensive loss-prevention tool will become reality. "I think we'll see total integration of all data sets," he predicts. "The EAS sets will talk to point-of-sale and alarm systems. All information will be real-time, simple and immediately actionable."

As for his own wish list, Jones says, "The promised land is when our exception system talks to POS and stops an exception before it can even occur." He pauses, then laughs: "Not too much to ask for, right?"

Crooks Stock Up at Grocery

Staggering growth of employee theft

Grocery stores are really getting hammered as crooks stock up at their local markets. Losses are stemming primarily from shoplifting, employee theft and check fraud.

According to a recent study by the Food Marketing Institute (FMI), not only has the number of thefts gone up significantly over the past year, but the size of each "transaction" has skyrocketed. The biggest numbers are found in employee theft. According to the FMI study, employee theft grew by 17 percent in 2002 over the previous year, but the value of the items stolen jumped a staggering 70.3 percent.

A National Supermarket Research Group survey reports that employee theft makes up 57 percent of all retail loss at grocery. By comparison, shoplifting only accounts for 20 percent of loss in the segment.

More Sophisticated Techniques and Technology

In an industry that must constantly work with the tightest of margins to begin with, there is a trend toward aggressive tightening of controls and costs to combat employee theft. More retailers are locking up certain items. In the liquor category, new bottle caps are being used that require special devices for removal.

The number one product category on the crook hit-list is health and beauty aids, according to the FMI report, followed, perhaps surprisingly, by meats. Some grocers are now using advanced sensors — some as thin as a strand of hair — in the packaging of their premium meats. The sensors work in the same way as the more cumbersome apparel tags in department stores, setting off store alarms if not deactivated at check-out.

The supermarket industry faces a real quandary. As supermarkets expand their product mix to attract more customers, they are often adding product in high-theft categories, i.e., CDs, small appliances and so forth. The result is a complex sales and theft environment that requires more sophisticated loss prevention technology and techniques.

According to experts, the grocery segment needs to employ better hiring techniques, more extensive training and a greater use of technology to win this battle. Simply "catching" your way to lower shrink isn't going to be enough to win this war.