Special Feature: Lost Prevention: Master Basics Before Going High-Tech

A National Retail Security Survey shows that U.S. retailers lose an average of 1.7 percent of their gross sales, or $33 billion a year, to shoplifting, employee theft and supply chain shrinkage. But for apparel retailers, the average percentage of sales lost in this manner tends to reach a few percentage points higher, straining the bottom line considerably.

The national survey, conducted in 2002 but still used as a reference point by those close to the issue, points to retail inventory shrinkage in the range of 0.7 percent to 2.2 percent of gross sales, depending on the type of store. For apparel retailers specifically, “we often hear numbers stating that employee theft and shoplifting losses represent between 1.5 percent and 2.5 percent of sales,” reports Addison Chan, vice president of business development, loss prevention, for Triversity, a technology provider in this arena.

About one-third of the $33 billion loss total (or $10 billion to $13 billion) can be traced to shoplifting. Each year, more than 1 million shoplifting incidents are reported to local law enforcement agencies. It is estimated that less than half of the known incidents are reported. While juveniles between the ages of 13 and 17 represent only 7 percent of the total U.S. population, they account for about one-third of apprehended shoplifters. The most active months for shoplifting are March and December (which each account for 10 percent of the annual loss figure), and the most active day for shoplifting is Saturday (with 18 percent of crimes committed on this day).

But fighting shoplifting is only one side of the loss prevention picture. Theft of apparel by employees also is a huge problem, as is the financial impact of counterfeiting.

Loss prevention basics
The first step to reducing losses, whether you manage a large chain, a mid-sized chain or a small business, is to identify where and how losses are occurring, says Ralph Witherspoon, president of Witherspoon Security Consulting. “Don’t automatically assume that all losses are the result of employee theft or shoplifting,” he cautions, noting that in many cases, losses can result from paperwork errors or external theft (during transit through the supply chain). “If goods are not properly checked in, you can sustain losses.”

Next, create a loss prevention program, complete with detailed policies and strategies. For example, here are some questions Witherspoon recommends you address as you develop programs and policies:

• What do you want to do with a juvenile shoplifter?

• Do you want to call the police?

• Do you want to call the police in every case?

• Do you only want to call the police when there has been violence or threat of violence?

• What do you want to do with an elderly shoplifter?

• Is there a minimum dollar limit on the value of the shoplifted material?

“If you don’t make these decisions in advance, then it is often left to a store manager to make a snap decision, which might result in adverse publicity, litigation or other problems,” says Witherspoon. One good way to reduce employee theft is to implement employee background screening. “This is especially important when hiring temporary help in the summer and during the holiday season,” adds Witherspoon.

Know problem’s source before investing in systems
While the basic loss prevention tools have been around for years, and while it makes no sense to adopt other strategies until you have the basics in place, more and more retailers are looking into the potential benefits of technology to supplement their loss prevention programs.
Before running out and buying the latest-and-greatest gadget with all of the bells and whistles, though, you need to determine why you want the technology in the first place and what you can expect from it. For example, if you want to put the bite on shoplifting by adopting a shoplifting-prevention technology, you first need to determine just how much you’re losing to shoplifting vs. employee theft.

“Most of the technology available today is aimed at preventing shoplifting,” explains Witherspoon, stressing that employees often can find ways to circumvent these systems. “As such, you need to determine your potential return on investment based on the cost of the technology. If you end up finding that most of your losses are related to employee theft, supply chain theft or paperwork problems, then technology to prevent shoplifting probably won’t be cost effective.”

How can you determine what percentage of your losses is related to shoplifting? Again, it is advisable to follow Witherspoon’s basic recommendations for creating a formal loss prevention program. “If you don’t already have such a program in place, it may take two years or so to get reliable data,” he says.

The first place to start is in the receiving area. “In other words, if you don’t get your merchandise in the door in the first place, everything else is guesswork,” he explains.

If you decide it is necessary to invest in a shoplifting prevention technology, wade into your search carefully, and seek guidance from not only technology providers but also consultants and other retailers. Walter Palmer, CEO of PCGsolutions, which conducts strategic loss prevention assessments and loss prevention training for large national retailers, says it is important to consider the issue of software integration.

For example, he points to the challenge of integrating POS exception reporting systems and digital video shoplifting prevention systems, both of which have been around for years and are popular loss prevention tools among retailers.

A constraining factor has been determining how to use information generated from the two types of systems intelligently, he says. “As a result, what we are now seeing is an integration between the systems, such as finding ways to identify a specific POS exception report and then quickly link that to the appropriate digital clip,” Palmer observes.

Technology can help automate fight against fraud
Among loss prevention technology providers serving the apparel retail space is Datavantage Corp., which targets chains with 20 or more stores. The company offers POS systems; customer relationship management (CRM) applications; and various analytical applications, one of which includes a loss prevention feature called XBR (exception-based reporting).

The system resides at the retailer’s home office and reads transactions that come from the POS system. XBR scans through the POS transactions and looks for patterns or trends that might indicate fraud or other types of non-compliance. “One example of fraud might be a cash refund rung up after the close of business,” explains Tom Rittman, vice president of marketing, Datavantage.

When analysts at the retail headquarters find questionable situations, they can relay the information to field investigators. “We have even had some clients find fraudulent situations while we were training them in how to use the system, because we work with their live data,” continues Rittman.

Datavantage recently introduced a Web feature, which allows authorized field personnel to access XBR data. Rittman says that while XBR is a great tool, stores should not rely on it to solve all of their fraud problems. “It needs to be part of a complete loss prevention program,” he states.
Triversity’s offering in the loss prevention area is called Fraudwatch. The company reports that in developing the tool, it first gathered insights from hundreds of loss prevention investigators and then built the findings into some of the analytical algorithms driving Fraudwatch. “Of the thousands of transactions that occur every day, the system can pull out the relevant handful that require further action,” states Chan.

Triversity recently added workflow and case management components to Fraudwatch to collate and classify this “relevant handful.” This allows a central office analyst to forward the information to an investigator in the field, with instructions on how to handle the information and investigation. Triversity offers Fraudwatch both as licensed software (typically of interest to larger retailers) and also as a service (usually more of interest to smaller retailers).

RFID on radar for loss prevention, but with caveats
No discussion of technology these days seems complete without mention of RFID and its potential. “The topic of loss prevention frequently comes up at RFID meetings,” states Mary Howell, a spokesperson for the American Apparel & Footwear Association (AAFA). In addition to exploring RFID for supply chain management in general, apparel firms are seeing opportunities for using RFID as a loss prevention tool, Howell says. “The track-and-trace feature of RFID should certainly help to reduce employee theft,” she notes. “In fact, one reason many retailers want to get to the item level with RFID tagging is for loss-prevention purposes.”

Among technology providers targeting RFID solutions to the apparel industry is Checkpoint Solutions. “RFID will not only help with loss prevention but will help retailers sell more by reducing stockouts and ensuring more effective merchandising,” says Dave Shoemaker, vice president of strategic marketing for Checkpoint, which is layering RFID technology into its other products and services, such as product identification and labeling solutions.

Some stores are investigating reusable RFID tags, which are removed at the point of sale, keeping costs down and helping to eliminate consumers’ privacy concerns.

Yet while a number of technology providers are promoting RFID, some observers say they think its time has not yet come, at least not for most retailers. “Even though RFID is getting a lot of press and is considered ‘hot,’ there can be some problems,” says PCGsolutions’ Palmer.
First, from Palmer’s point of view, RFID is primarily a supply chain and logistics tool designed to better manage the flow of goods at the case and pallet level. It is not really a loss prevention tool, he notes. “Second, at the item level, there can be problems integrating RFID with existing technology systems,” he adds. “In other words, the hype is ahead of the actual practice.”

Third, Palmer says there is a risk that when retailers try to use RFID at the item level, they will become overwhelmed with the data and be unable to manage it and identify what is important.

Advice for the small apparel retailer
Loss prevention consultants Witherspoon and Palmer say they agree that it is important for retailers of all sizes, including single store operations, to set up basic loss prevention programs. “Most small retailers need to begin with basic controls — policies and procedures,” Palmer states. “It doesn’t make sense to look into advanced technology until you get these basics in place. In fact, a lot of technology is expensive and usually doesn’t provide an economy of scale.”

Some technology might be worth considering, though, in a scaled down version. Example: Datavantage’s XBR requires large amounts of data so that it can look for trends. “As such, it is not relevant for small retailers,” says Rittman. “However, some of the parameters that XBR utilizes can be integrated into a POS system, which is something that smaller retailers can utilize.”

For instance, Rittman says a POS system can be set up so that a manager has to enter a special password for a cash refund or a discount that is greater than a pre-designated percentage.

And smaller retailers can take advantage of some loss prevention solutions that are offered on an application service provider (ASP) or other service-plan basis. As Triversity’s Chan says of Fraudwatch: “Small retailers can send their data to us. We process it in our data center and send the results back to them.”

WILLIAM ATKINSON has been a full-time free-lance business writer for 28 years, covering virtually all aspects of business, industry and management. He lives in Carterville, IL.