the 2011 retail profit protection report · cctv electronic article surveillance (eas) most...

Profit Improvement Experts

THE 2011 RETAIL PROFIT

PROTECTION REPORT

CONTENTS

The 2011 Retail Profit Protection Report

Effective Shrinkage Management Strategy

Shoplifting

Employee Theft

Employee Error

Receiving

Non-Perishable Shrinkage

Perishable Shrinkage

Conclusion

c

Effective Shrinkage Management Strategy

What exactly is shrinkage or loss? Shrinkage can be defined as the loss or

decline in value of goods from the time they are received in the store to the

time they are actually sold. What causes the loss in value? (See Fig. 1)

In the retail industry, the Key Performance Indicator (KPI) is measured by

increasing sales – yet, does this necessarily equate to increasing profit as

well? The typical retailer profits about 1% on every dollar, while the

shrinkage in this industry is roughly 2.6% - almost 3 times the average profit

margin for retailers. Approximately 68% of retail shrinkage can be easily

controlled. Thus, if we do the math and reduce shrinkage by 50% (2.6 cents

to 1.3 cents), retail profits will increase correspondingly (1 cent to 2.3 cents)

– turning a loss into real profit.

How can retailers decrease shrinkage in order to increase their profit

margin?

Creating A Culture Of Loss Prevention

The most effective method for shrinkage management is the creation and

maintenance of a culture of loss prevention. But how exactly can a retailer

create and maintain a culture of loss prevention? They can do this by taking

the following steps:

Gain Senior management commitment

Train employees

Measure the scale of the problem

Accurate management of accounts

Create awareness

Continuous education and discipline

Create mechanism for monitoring compliance

Set measurable targets

Take advantage of technology

Make adjustments to current policies and procedures

Shift focus from increase sales to profit protection

Solicit employee buy-in


What You Are Losing

If your overall turnover is £10 million per

annum the below calculation will give you

an idea of what you are losing on a daily

basis.

Fig 1

Think! what £375.42 per day added to your

profit will do for your business.


Shoplifting

Today’s retail environment is faced with fierce competition and ever-

changing consumer demands. Retailers worldwide are challenged to present

a relaxed and friendly shopping environment, displaying goods easily while

simultaneously protecting those goods from shoplifting.

Shoplifting is evolving into a more organized profession. Organized Retail

Crime (ORC), like any crime syndicate, has increased their sophistication to

levels never before witnessed in the retail industry. These organisations

consist of highly trained and largely professional folks who shoplift with the

same level of professionalism as any professional approaches their job.

In today’s Internet age, websites like EBay, where goods can be traded

legally and freely in the open market, have opened tons of new doors for

shoplifters. ORC criminal gangs particularly love to target retail

organisations favouring customer service over loss prevention, where goods

are more openly displayed and easier to remove from the stores without

getting caught.

Today, shoplifting continues to be the number one source of retail

shrinkage in many parts of the world outside of the USA, Canada, and

Australia. The 2010 Global Retail Theft Barometer Report, for example,

reported that 42.4% or $45.5 billion of shrinkage occurred, due to

shoplifting.

How Can Shoplifting Impact Retailers? The National Association for Shoplifting Prevention reports that 89% of

youngsters confessed to knowing a shoplifter, and 66% socialize with them,

proving that shoplifting is quickly becoming a very serious social threat.

Shoplifting can be devastating to many retailers forcing some to go out of

business. There are indirect expenditures, such as the cost of loss

prevention personnel, equipment, additional staff wages and direct

consequences such as lost sales and profit, all of these factors are forcing

retailers to raise product prices which directly impact on consumers.

Shoplifting is a serious threat to retailers, forcing many to close

permanently. In order for retailers to stay afloat, the indirect expenses of

loss prevention staff, equipment, wages, in addition to the lost sales and

profit are passed on to the consumer in the form of higher prices., affecting

consumers across the board.

Organized Retail Crime – The New Dynamic In Shoplifting The ORC has introduced a completely new dynamic to the retail industry.

Typically, shoplifters are desperate individuals who need to feed habits,

survive or gain personally. ORC members do not fit this description, costing

retailers millions each year with no signs of slowing down their activities.

Preventative Measures:

● Change of policies and procedures

● Train employees

● Train loss prevention personnel

● Excellent customer service strategy

● CCTV

● Electronic Article Surveillance (EAS)

Most Frequently Targeted Departments

Health & Beauty

Cigarettes

BWS

Meat

Baby Products Other

Most Commonly Targeted Products

Health, Beauty

& Cosmetic

Items

Baby Milk Analgesics

Razor Blades

Alcohol

Batteries

22%

5%

8%

8% 8%

7%

Cigarettes 14%

Other* 14%

Meat 14%


Employee Theft

The second largest reason for retail shrinkage is employee theft – with the

exception of the USA, Canada, and Australia, in which countries this is the

leading cause of shrinkage. The 2010 Global Retail Theft Barometer Report

revealed that employee theft added up to 35.3% of all shrinkage ($37.8

billion), lower than the USA’s 43.7% ($17.2 billion). Employee theft costs

$93,000 to a supermarket, up to $243,000 to a hypermarket every year.

These employees can cause more economic harm to their employers than

shoplifters, due to their privileged positions in the company and ability to

bypass traditional security systems. The average customer related theft costs

a retailer £66, while the average employee theft is estimated to cost retailers

£1,318, per annum. Because of the insider nature, employee theft is very

challenging to detect. On average, employee theft can go undetected for

approximately 18 months and some can even go on discovered for many

years. Further, the situation can become increasingly complicated when the

individual involved holds a position of authority, such as a manager or

supervisor.

Do retailers have to endure employee theft as a cost of doing business? The

answer to this question is an emphatic ‘no!’ While employee theft will never

be eradicated, businesses, with the right policies and procedures properly

implemented can greatly reduce the impact of dishonest employees.

Why Do Employees Steal?

1. Theft cannot occur if the opportunity does not exist – improperly secured

merchandise, expensive items stored in unlocked warehouses, merchandise

placed in poor locations on the sales floor such as near exits or other places

where it can be easily removed from the store.

2. The employee does not see the consequences from getting caught to be

severe enough to discourage them from executing the theft

3. When the benefits gained from stealing greatly outweigh the costs of

being caught, the employee is far more likely to take on the risk.

4. The employee feels underpaid or perceives the organisation is rich

enough such that they will not be affected by the theft. This can also happen

when employees see other employees doing it.

Internal Fraud Triangle


Tangible Methods:

Access & Key Control

• Periodic & Random Audit

Security Measures

Shift Rotation & Mandatory

Holidays

Policies & Procedures for

• Scanning

Void & No-Sale

• Pre-employment Screening

Refund

• Employee Shopping

Receiving & Deliveries

• Mark-Down

Intangible Methods:

• Value & Mission Statement

• Incentive Scheme

• Bonus & Shares Scheme

• Education & Training

• Effective Communication Of

Polices & Procedures

• Create A Positive

Working Environment

• Team Building

• Staff Discount


Employee Error

Pricing errors, mistakes in accounting and receiving contribute

approximately 18% of retail shrinkage; this equates to £30,000 in losses to an

average supermarket or store and almost £80,000 in losses to a superstore.

Thus, a supermarket operating at a 1% net profit margin will need to make

an additional £3.6million in annual sales to recoup lost profits due to

employee errors. Similarly, a typical superstore will have to increase its

sales by £8million.

All retailers MUST document merchandise, receipts, damages, markdowns,

and promotional activity properly. Every retail employee should be held

responsible for keeping accurate and up-to-date records of their

department’s stock. Each department head (and supervisor) must be held

accountable for the accuracy of product flow records within their respective

departments. It is also imperative that sanctions be put in place to ensure

compliance.

Employee error has been consistently overlooked by loss prevention experts

when developing policies and procedures to protect retail profits. Instead,

more focus has been placed on employee or customer related theft and

fraud. As a result, loss prevention in many retail organisations has

continued to allow employee errors to go on uncontrolled.

How Much Does Employee Error Cost You?

Correcting errors and the cost associated with that process should be more

important to retailers than the amount of the error itself.

An 18% (which is £36,000 for a store with £10 million turnover) might seem

insignificant on the surface. However, once you remember that it would

require sales amounting to £3.6 million to recover the £36,000 employee

error, you will soon realise that it is cost effective to prevent the error in the

first place.


Ensure employees receive adequate

training

Ensure employees understand the

company’s policies/procedures

Ensure employees are competently

trained to use equipment and

technology

Issue all employees with clearly

defined job descriptions

Regular oversight is essential for

monitoring employee’s progress


Receiving

Many retail organisations have a very unstructured receiving process,

having no written policies and procedures. As a result, receiving shrinkage

accounts for an estimated 10% of their overall shrinkage, amounting to over

£37,750. Supplier fraud and employee theft are the key culprits responsible

for the overwhelming majority of receiving shrinkage.

The receiver has a very crucial role in any retail store. These folks act as the

gatekeeper through whom every item must pass. Should this person or

process lack integrity, it will adversely impact the entire store inventory

system. When suppliers become aware of the sloppy work done by receivers,

the chances for under-supplying or charging excess for goods not received

can be greatly increased.

For this reason, it is essential to any organisational operation that their

receivers are very well trained, with adequate knowledge of the products to

be received, as well as in the technology used to document their receipt.

Retailers large and small receive large quantities of products on a weekly

basis- or more frequently, in some cases. The size of the business will

determine if automated systems are to be used (a more complex receiving

setup) or if goods are inventoried by hand (smaller business operations).

Regardless of the size of the receiving operation, the goal remains identical:

to ensure all goods are received as promised and that they are in sellable

condition.

How Vendors Are Deceiving You:

Supplying fewer products than those charged for.

Manipulation of credit to avoid buying back stale or expired stock.

Inaccurate invoicing.

Supplying nearly expired merchandise but charging full price.

Partial delivery of merchandise.

Fiddling with merchandise to be credited.

How To Properly Receive Goods:

•When preparing to receive goods, the warehouse needs to be clean and tidy.

•Rotate stock in the warehouse and move some to the shop floor.

•Ensure extra staff are on hand to receive the goods.

•Count the number of cages or pallets ensuring that where possible, boxes are counted.

•Inspect the consignment for damage, distressed or leakage.

•Any shortage and overage should be recorded and ensured that credit requested from the supplier.

•Rotate receivers to prevent collision with suppliers.


● Authorised key control

● Train receivers

● Ensure policies & procedures are clearly

written

● Effective use of technology

● Good warehouse stock control

● Random and periodic auditing

Non-Perishable Shrinkage

Non-perishable goods such as groceries, health & beauty and general

merchandise, constitute an average of about 60% of a store’s sales.

Theft and accidental damage tend to be the most common causes of non-

perishable shrinkage.

Non-perishable shrinkage can be categorized into known and unknown. By

its very nature, non-perishable shrinkage is much easier to control than

perishable shrinkage, simply by implementing a number of specific policies

and procedures.

Classifications Of Non-Perishable Shrinkage

Known Shrinkage:

Known shrinkage involves losses where the source can be easily

identified. This could be the result of returned or damaged stock, or

administrative error.

Unknown Shrinkage:

Unknown shrinkage, conversely, involves losses where the cause

cannot be accurately identified at the moment of occurrence.

Incidents of theft, whether customer or employee related, can cause

unknown shrinkage. Since theft could potentially take days, weeks,

months or longer to be noticed, it falls into the unknown shrinkage

category. This is especially true if the store in question does not

have a good inventory management system.


● RECEIVING

Since receiving shrinkage accounts for

approximately 10% of retail shrinkage,

it is imperative that the receiving

process is paid due diligence. Policies

and procedures for goods receiving

have to be made proficient and secure.

● WAREHOUSE INVENTORY CONTROL

When the warehouse is well organised,

it becomes easy to locate missing

products. Secondly it sends a signal to

employee and suppliers alike that the

organisation is serious about shrinkage.

● CONTROL KNOWN LOSS

This requires the establishment of

mechanisms for ensuring proper

records are kept of all customer

returns, damaged, distressed or expired

goods.

● PRICING MANAGEMENT When addressing the issue of pricing discrepancies in the store, take into consideration procedures for pricing change, management of pricing/scan information and auditing of direct supplier pricing

Breakdown of Non-Perishable Shrinkage

14%

General Merchandise

19%

Grocery

56%

Health &

Beauty

Frozen Food 3%

Other 4%

BWS 4%



Perishable Shrinkage

If you have visited any large supermarket in the morning hours, most likely

you are greeted with the aroma of fresh baked bread. The reason for this is

that customers tend to frequent a particular supermarket over others due to

its perishable department. Therefore it is critical that freshness becomes the

primary operating philosophy of any retail organisation that wants to

remain profitable.

A produce department accurately merchandised is truly a sight to behold; it

is a symbol of beauty and magnificence. The message of freshness conveyed

to customers creates customer loyalty and develops a satisfying perception

about your supermarket.

It is also the perishable department which distinguishes one supermarket

from another. Product availability, freshness and quality all contribute to

one supermarket’s competitive edge over another.

It has been estimated that customers will spend 8% of their grocery

outgoings in a store they perceive to have fresh produce.

4 Essential Facts

1. Perishable department drives sales and profit.

2. Stores lose 20% of available perishable profit to shrinkage.

3. Reducing perishable shrinkage by 20% will increase total store

profit by 33%.

4. Perishable department contributes the highest income; ironically it

is also responsible for the highest level of shrinkage.


● Correct handling

● Order for 3 days

● Smart display space allocation

● Consider customer demand

● Refrigeration & storage

● Sell rather than lose

● Cashier awareness

● Code storage chiller

● Order smart

● Refrigeration blinds

● Deli product opening and resealing

● Open products at the right time

Breakdown Of Perishable

Shrinkage

Meat & Seafood

37%

Dairy

3% Floral

5% Deli

10%

Bakery

19%

Produce

37%

Profit Improvement Experts

Unit 1 Wilsons Park Monsall Road Manchester M40 8WN Tel: 0800 876 6608 International: +44 161 205 9060 Fax: 0650 244 995 Email: [email protected] Web: www.theprofitexperts.co.uk © Copyright Protected. All Rights Reserved. Richards International Group. 2011.

CONCLUSION

The rise of Google, YouTube and Facebook means pretty

much anyone can run a multi-million pounds retail operation

from the back of their car as long as there is an internet

connection. Gone are the days when people have to go to

book stores to buy books; now all one needs to do is log into

Amazon and the book will be delivered the very next day.

Shopping as we know it will never be the same again.

However, traditional shopping will never go away. The act of

going to the shops for some people is an event that they look

forward to. Interestingly enough, those people are fast

becoming the minority.

Today with the internet and the availability of literally

hundreds of thousands of alternatives, retailers will continue

to struggle to keep up with the trend. Just in case any retailers

have not heard this news yet: the internet will not go away.

Y2K did not materialise.

This means many retailers will fight for decreasing foothold in

the marketplace as shoppers go online. This is one problem

that no amount of advertising is going to solve. Aggressive

price reduction translates into lesser margins. Excellent

customer service - well isn’t that what everyone claims to

have?

An increase in sales does not translate into increased profits.

However, increased sales in conjunction with reduced

shrinkage are the only way of increasing retail profits.

ABOUT THE AUTHOR

Romeo Richards is a consultant and trainer with Profit

Improvement Experts (PIE), a division of Richards

International Group. He has an MA in International

Relations and over 15 years experience within the security

industry. He writes articles for industry magazines, and has

written whitepapers and best practices guides on retail

profit improvement and is at the forefront of efforts to

professionalise the UK security industry.

He has worked with retail giants such as Tesco, Marks &

Spencer, WH Smith, Brantano, Music Zone and Virgin

Music.

mailto:[email protected]

http://www.theprofitexperts.co.uk/

the 2011 retail profit protection report · cctv electronic article surveillance (eas) most...

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