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Retail Theft and Inventory Shrinkage

2002 Retail Security Survey Shows U.S. Retailers Losing $31 Billion to Theft

Inventory shrinkage, a combination of employee theft, shoplifting, vendor fraud and administrative error, cost United States retailers over $31 billion last year according to the latest National Retail Security Survey report on retail theft, which analyzed theft incidents from 118 of the largest U.S. retail chains.

According to University of Florida criminologist Richard C. Hollinger, Ph.D., who directs the National Retail Security Survey, retailers lost 1.7 percent of their total annual sales to inventory shrinkage last year. The surveyed portion of the retail economy transacts over $1.845 trillion dollars annually, making the loss worth over $31.3 billion. Total inventory shrinkage was down slightly from $32.3 billion in 2000.

While total inventory shrinkage was down slightly last year, to 1.7 percent from 1.75 percent two years ago, both employee theft and shoplifting are on the rise. Inventory shrinkage remains the single largest category of larceny in the United States, more than motor vehicle theft, bank robbery and household burglary combined.

Retail Theft: What's the Harm?

Hollinger warns that it isn't just retailers who should be concerned about retail theft. Retail theft impacts everyone. Ultimately it's consumers that are hurt the most in the form of higher prices.

"An average family of four will spend more than $440 this year in higher prices because of inventory theft," Hollinger said. "Thieves also generally target hot selling items, which means those must-have toys on your child's holiday wish list are less likely to be available on the store shelves."

Where Inventory Shrinkage Happens

Source of Inventory Shrinkage % of Loss* $ Lost
Employee Theft 48.5% $15.1 billion
Shoplifting 31.7% $9.7 billion
Administrative Error 15.3% $4.8 billion
Vendor Fraud 5.4% $1.7 billion
Total Inventory Shrinkage $31.3 billion

*total not equal to 100% due to rounding

Source: National Retail Security Survey, November 2002
(based on 2001 retail sales and inventory shrinkage)

Employee Theft at Record Levels

The study, conducted by the University of Florida with a funding grant from ADT Security Services, Inc., a unit of Tyco Fire and Security Services, discovered that retail security managers attributed more than 48.5 percent of their losses to employee theft, up from 46 percent the prior year. Internal theft by employees cost retailers a record $15 billion.

Shoplifting Also on the Rise

Shoplifting was also on the rise last year with 31.7 percent of retail losses resulting from shoplifting, compared to 30.6 percent two years ago. Shoplifting was responsible for nearly $10 billion in losses last year. Employee theft and shoplifting combined continue to account for the largest source of property crime committed annually in the United States.

Other Areas of Inventory Shrinkage

The remainder of the annual retail losses not due to employee theft and shoplifting are caused by paperwork errors and theft by vendors. Both administrative errors and vendor fraud have declined from two years ago.

Stopping Retail Theft

"The holiday shopping season is really a make or break season for many retailers. It is also an extremely busy time, which leaves stores more vulnerable to theft," said Mike Snyder, president of ADT Security Services. "Many retailers are using security technologies such as anti-shoplifting, digital video and point-of-sale systems to help their staff zero in on theft problems."

Among the newest security technologies being used by retailers this year to control losses due to theft:

Point-of-sale data mining software solutions that detect potential theft problems at the cash register and alert appropriate personnel in real-time. These data mining packages can be tied to digital video recorders to provide crisp, clear images of who sold what to whom with a click of a button and can delivered to any location around the world.

Source tagging programs where tiny anti-theft labels about the size of a paper clip are placed inside an actual product or product package, effectively hiding it from view.

Self-alarming anti-theft tags that broadcast an audible alarm throughout the store when a shoplifter attempts to improperly remove it from merchandise.
"Stores that utilize security technologies generally have lower overall inventory shrinkage than those retailers who do not," Snyder said. "Technology also allows employees to focus more time on assisting customers and less on patrolling the aisles."

Technology alone will not eliminate retail theft. Retailers who want to reduce losses should also strive to provide good customer service and promote high job satisfaction levels among its retail sales associates.

From Melody Vargas,
Your Guide to Retail Industry

Retailers Lose $46 Billion Annually to Inventory Shrinkage

from Ernst & Young

Ernst & Young's Study of Retail Loss Prevention

Ernst & Young's Study of Retail Loss Prevention examines how retailers manage one of their most significant costs -- inventory shrinkage, which includes employee theft, shoplifting, administrative and paperwork errors, and vendor errors/issues. In addition to the financial impact of "shrink," the survey provides new insight on the effectiveness of the programs and tools employed by retailers to combat it. The study estimates that the U.S. retail industry loses a staggering $46 billion annually to inventory shrinkage, and that employee theft delivers the heaviest blow in terms of dollars lost.

Companies are placing a renewed emphasis on managing shrink to help improve profitability in this difficult economic environment," said Jay McIntosh, Americas Director, Retail and Consumer Products, Ernst & Young, "Based on the results of our survey, which indicate a median loss of 1.7 percent, or $19 million per participant, translating to an industry-wide loss of $46 billion annually, the profit at risk most certainly justifies this renewed focus."

Retail Theft: The Employee Factor

According to the study, employee theft is the single biggest contributor to inventory shrinkage even though shoplifters far outpace dishonest employees. "This is because the dollar value of employee theft on a per incident basis is much higher than that of shoplifting," said McIntosh. "But according to our study, apprehensions of shoplifters far outpace apprehensions of employees." Though employees accounted for only 1 out of every 10 apprehensions, the average value of merchandise recovered was nearly seven times that of the average shoplifter, $1,525 and $223 respectively.

"These numbers should raise a red flag for retailers. If, as our study indicates, 47 percent of dollars lost to shrinkage are attributable to employee theft, there should be less satisfaction with the ability to catch shoplifters, and more emphasis on efforts to identify and deter in-house theft," said McIntosh.

The average study respondent spends more than $2 million a year on loss prevention. However, less than half the study respondents (45 percent) reported a decrease in shrink over the previous year, while 29 percent reported an increase and 27 percent said shrinkage was consistent. Respondents said they use a dozen different employee awareness programs including hotlines, codes of conduct and incentive compensation programs to try to address employee theft, but the problem is likely the way these programs are deployed. Simply having programs and procedures in place, or announcing them to employees, isn't enough. To maximize ROI, companies must follow up by enforcing the policies visibly and directly.

"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," said McIntosh. "We believe that what's needed is a combination of analytics to better identify deviations, better in-store procedures such as cycle counts of inventory, and stronger corporate policies to enforce anti-theft programs."

Enhancing Retail Loss Prevention Effectiveness

As capital markets continue to punish companies for poor performance and earnings surprises, substandard shrinkage reduction efforts pose a serious risk to retailers. An analytical approach can provide a valuable understanding of the causes of shrink and help retailers develop loss prevention measures that more effectively address their issues. Transactional systems such as Point of Sale (POS) systems have both increased the amount of data available to retailers and decreased the cost of collecting it.

"While rules of thumb or intuition have been employed in the past to make loss prevention investment decisions, today's environment demands a more rigorous approach," said McIntosh. " By using sophisticated analytics, retailers can make better loss prevention decisions. Just a relatively small improvement can have a significant impact on a retailer's bottom line."

Four-Step Loss Prevention Action Plan

1: Conduct a Thorough Analysis of Current State of Shrinkage within Stores

- Allows discovery of where and how much shrinkage is occurring
- Provides a view of the resources currently devoted to shrink reduction
- Enables categorization and estimation of spending in specific areas

2: Develop Cause-and-Effect Models for Data Analysis

- Relates shrinkage reduction to various types of loss prevention expenditures
- Reveals preliminary or directional ROI
- Identifies best and worst performing stores

3: Test the Optimal Strategy

- Validates the ROI of specific initiatives
- Justifies the reprioritization of existing loss prevention investments
- Allows for measurement

4: Implement and Roll Out

- Standard operating procedures for all stores
- Continually refine and monitor

About the Study
The companies that participated in the Ernst & Young study, which was conducted in 2002, include 55 of the largest and most successful American retailers operating a mean of 1,076 stores with mean revenues of approximately $ 8.8 billion. The average shrinkage loss at retail incurred by each respondent was 1.7 percent or approximately $19 million annually.

Study participants represent a cross-section of the retail industry: 14 percent from the apparel and footwear segment; 12 percent supermarket, grocery and convenience stores; 12 percent drug chains; 10 percent electronics and hard goods retailers; 6 percent department stores; 4 percent mass merchants and discounters; and 42 percent from other specialty retail formats. The information in the study was accumulated through interviews with financial executives at the participant companies.

The reliability of the information contained in this report depends on the quality of the information provided by the respondents to the survey. The number and type of retailers who responded also affect the trends outlined. Some trends might therefore not be representative of a particular segment or of the retail industry as a whole.

Source: Ernst & Young press release, May 13, 2003



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