Converting losses into profits

The National Retail Security Survey by the University of Florida reports that nearly $35 billion was lost by retailers as a result of inventory shrinkage last year. This equals about 1.5% of total retail sales. While the numbers have trended slightly down for six years in a row, the losses still equate to more than half of retailers' reported profits. It's not news that the primary culprits, employee theft and shoplifting, represent more than 80% of shrinkage.

Although studies show shrink figures in decline, sustaining the downward trend may be considerably more difficult in the current economic environment. During economic downturns, theft and fraud rates at retail tend to spike. So, before executives consider reassigning LP resources to conserve budgets, they should weigh the potentially negative impact of such a move in the current economic environment.

A more effective strategy under these circumstances may be to convert losses into profit--which creates an immediate improvement in margins--rather than trying to cut costs, attract new customers, or squeeze more margins out of fewer sales. New solutions provided through networked LP systems, are dramatically changing the shrink picture, which inherently changes margins upward. For example, a California supermarket recently implemented an LP network system in a number of stores and experienced a 90+ basis point reduction in shrink across the board.

Loss prevention strategies at retail companies vary, with most employing centralized departments that include security personnel stationed in stores. In terms of technology, most supermarkets deploy at least two types of systems to help detect employee theft and deter shoplifting: point-of-sale (POS) devices or programs and closed circuit TV (CCTV). These investments make sense because they are addressing some portion of the two biggest contributors to shrink.

Most POS systems feature exception reporting capabilities that can track any unusual amounts of voids or no sales, as well as detect discount and coupon fraud. CCTV is used to observe shoplifting and cashier fraud activity. Another system that had been deployed for the past several years is Electronic Article Surveillance (EAS), a theft deterrent system requiring the application of security tags on individual pieces of merchandise coupled with sensors at all customer exits.

While all of these systems have had some impact on shrink, the effect is slow and incremental, as noted by the research. Fortunately, there are now powerful, complementary ways to go after criminals.

New technologies are available to address fraud, shoplifting and organized retail crime, or ORC, a rapidly growing trend across all retail segments. Comprehensive databases operating in near real time can increasingly thwart credit card fraud. Similarly, new, networked push-out prevention systems can virtually stop shoplifting by preventing carts from leaving the store without first going through checkout lanes.

Bottom of the basket loss, a $2 billion per year problem, is now being addressed with new systems that employ small cameras and sensors in the lanes. A critical requirement of these newest systems is that they not only deliver an effective LP solution, but they must also be monitored and managed in such a way that they do not negatively impact customers and do not further burden store level employees.

The only way to achieve these critical operational requirements is through the intelligent application of new sensor networks and wireless technologies.

In the past, POS, CCTV, EAS and other systems performed as standalone units that have not communicated with each other or with central store computers that in turn talk with headquarters. Although each of these newer technologies can help in the LP battle to reduce shrink even further, dramatic improvements are realized by connecting multiple applications via intelligent networked systems.

When a network is configured to deliver real-time solutions, and does so while managing itself, store personnel can spend more time running the store and less time attending to burdensome tasks associated with loss prevention. Networks not only gives store management and local LP staff better support, but system wide monitoring and reporting also keeps headquarters apprised of individual theft events, LP trends and important store-level operations intelligence. They also dramatically reduce system downtimes by providing remote system monitoring and greatly accelerated maintenance operations.

Soon, the market should see one cohesive system including applications for shoplifting prevention, sweet hearting, bottom-of-the basket losses and even shopping cart theft all built on one self-managing store network. [RM1]

In these times, executives should consider bolstering their loss prevention budgets and investing in networked technologies because they are delivering payback in a matter of months. The bottom line is that losses can be turned into profits today, and the trend can be made permanent, to vastly improve an organization's chances for greater financial success.

About the author: John French is founder and president of San Diego-based Carttronics, a leading innovator in the area of networked retail loss prevention solutions.