Retail Shrinkage: Challenges to Retailers

Combating Retail Shrinkage: Challenges to Retailers

 

Organized retailers are mushrooming by leaps and bounds in India and across the world. Also growing with them is the problem of retail shrinkage. This article tries to throw light on the various forms of retail shrinkage and the challenges faced by the retailers in this regard. It also tries to find the common methods adopted by retailers to put a check on the loss of merchandise by way of these `unforeseen' discounts.

 

Over the last few years, retail has been one of the fastest growing sectors in the Indian economy contributing to about 10% of the GDP. Organized retail is expected to grow to 8-10% of the Indian retail industry by the end of the year 2010 and FDI in retail is one of the most talked about topics as of now. While the future of the retail industry appears to be bright, there are certain obstacles scarring the glossy picture. Retail shrinkage is one such problem that has grown due to the retail boom. The second annual Global Retail Theft Barometer 2008 Survey, covering 920 large retailers across 36 countries rated India first with the highest shrinkage rate of 3.10% in 2008, an increase of 6.9% over the previous year. This study put India in the topmost position closely followed by Thailand, South Africa and Malaysia. This study was undertaken by the Center for Retail Research, Nottingham, England and was funded by Checkpoint Systems Inc., a company which has been at the forefront of developing shrink-management solutions that are being used by retailers across the world. The organized retail sector in India lost $2.54 bn, or 3.1% of total sales, in 2008 due to shrinkage, according to The Global Retail Theft Barometer 2008.

There are various reasons for retail shrinkage, employee theft being the most important one. The industry estimates show that around 40-50% of retailers lose their stock due to employee theft. This is closely followed by shoplifting, which account for 30-40% of stock shrinkage and the rest due to administrative errors and vendor thefts. Studies show that there are an estimated 25 million shoplifters (1 in 11 Americans) in United States. Even famous and rich personalities have been caught in the act of stealing merchandise, which they can afford! Though the losses are not as big, Indian retailers are also now facing the problem of `the five finger discount', which is the common terminology or slang used for shoplifting in several countries including the US and Australia. Indian retailers incur an average loss of 30-40% of their businesses and many of the leading retailers record an average of 3 to 5 shoplifting cases per day.

What is Retail Shrinkage?

`Retail Shrinkage' is the term used for the unaccounted loss of merchandise due to shoplifting, employee thefts, administrative errors, etc. It is the difference between the stock volume as per the company's books and the actual stock volume that the company is holding. Shoplifting is the act of stealing merchandise from stores by person(s) with the intent of depriving the store of that property. In this case, the person takes the store items without paying for it. In the recent survey by Checkpoint Systems Inc., in which India topped the list among Asia-Pacific countries with the highest shrinkage rate of 3.10%, it was found that more than 60% of the loss was incurred due to shoplifting and employee thefts. According to Raghu Pillai, CEO, RPG Retail, "Shoplifting, or shrinkage as we call it, is a global phenomenon. Even the world's largest retailer, Wal-Mart, with turnover of $240 bn, suffers shrinkage of 0.6%, which works out to be more than $1 bn. But that is the way it is."

Causes of Retail Shrinkage

The major causes of retail shrinkage include: employee theft, shoplifting, administrative errors and vendor fraud.

Employee Theft

This is also known as internal shrinkage and formed the number one cause of retail shrinkage according to the National Retail Security Survey, 2008, conducted by University of Florida. As implied by the name, employees of the company resort to activities such as pilfering merchandise, cash, provisions, etc. Employee theft and accounts embezzlement account for almost 50% of the total retail shrinkage. Cashier-caused shrinkage occurs by way of wrong recording of transactions, forging receipts, misuse of the register or computer, etc., and accounts for almost 61% of the total employee-caused shrinkage. About 95% of the businesses experience employee theft and 75% of the theft goes unnoticed. In a retail store, all employees have better access to the cash register and merchandise or stock. This provides them ample opportunities to indulge in such activities.

One of the fastest growing employee theft techniques is refund fraud. Refund fraud is a system that allows the employee to refund merchandise and profit from the return. The most common method is to steal merchandise from the store floor and return it using fictitious customer information. This technique does not require a receipt and the employee will most likely receive cash for a purchase that was never made. Some stores require the customer returning the item to fill out information including name, address, and telephone number. The employee gives false information and receives a cash refund.

A company policy that allows `no receipt refunds' needs to be monitored closely because it is in this type of a system that breeds practices such as refund fraud. Unfortunately, this type of shrinkage poses more challenges to retailers as they lack an effective surveillance system to check this kind of loss. CCTV Monitoring, good store surveillance and maintaining good relations with employees will help to restrict this practice. Educating employees about accountability, theft and consequences will also go a long way in preventing employee thefts.

According to a study by Ernst & Young in US, employee theft is the single biggest contributor to inventory shrinkage even though shoplifters far outpace dishonest employees. The reason for this is that the currency value of employee theft on a per incident basis is much higher than that of customer thefts. Retailers are using different types of employee awareness programs including hotlines, codes of conduct and incentive compensation programs to try to address employee theft. However, unless these programs are effectively deployed, the problem is likely to remain. It is not just enough to have programs and procedures in place and announce them to the employees. A company has to enforce these policies visibly and directly. According to Jay McIntosh, Americas Director, Retail and Consumer Products, Ernst & Young, "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. 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."

Shoplifting

This is also called commercial burglary and is one of the most common crimes in retail sector. It is also known as `five-finger discount' in Australia and US, and as `Jacking', `Chaving' and `Nicking' in UK. Studies show that one out of twelve customers might be a shoplifter. Professional shoplifters are called boosters. Shoplifters generally use various methods for stealing their item of interest but some of the most noted methods are as follows:

Palming

In this method, the shoplifter conceals the item in the palm of the hand and later hides it.

Boosting

The shoplifters use variety of devices like boxes with false bottoms or coats, skirts and pants with false pockets, etc., to hide the stolen items.

Wearing Items Out

In this method, usually used for stealing apparel, shoplifters wear the stolen apparel below their dress. This is usually done in the trial rooms. They sometimes hide the stolen items between the legs, which is referred to as `crotching'.

Shielding

In this method, the shoplifters work in groups. While one of them blocks the view of the storekeepers of even diverts their attention, the others finish their task of shoplifting.

Strollers

In some cases, the shoplifters use the strollers to conceal stolen items.

Categories of Shoplifters

There is no clear categorization of shoplifters. People irrespective of age, gender or economic background has been caught in this act. However, there exists some broad classification based on the motives for which they steal. They are:

Professional Shoplifters

These people steal merchandise which are costly (e.g.; apparel and jewelry) and do the act for the purpose of generating revenue by selling it off elsewhere.

Amateur or Casual Shoplifters

Majority of the cases are categorized under this group. These shoplifters steal items just for the pure thrill of it or due to some reasons unknown to them. They do not usually go to the stores with an intention of stealing but commit the act once they get the opportunity to do so.

There are other classifications like the needy shoplifters, who steal because they highly need it and are not able to afford it. But these types of people generally steal items like food, clothes, etc., to satisfy their basic needs. The most interesting part is of cases where people who can afford to pay for the goods shoplift them.

People may shoplift for various reasons, some even unknown to them. There are assumptions that such shoplifters have mental disorders or Kleptomania (a compulsive urge to steal) but it is not true in all the cases. Psychologists say that people shoplift for variety of reasons. While some shoplift essential items like food, clothes, etc., some are addicted to stealing just to get out of their frustrations in life. It may be due to some personal or family pressure or peer pressure at work and they shoplift as a means of venting out their tension.

There have been many cases reported when teenagers have been caught shoplifting. Such teenagers claim to indulge in the act for pure fun/experience the thrill and excitement attached with shoplifting and many of the times they are not aware of the serious repercussions of being caught in this act.

Certain others do it because they feel that the shop is charging them with high prices and shoplifting is actually a fight against injustice. They feel that the store owners can afford the loss of the items. But there are group of people who shoplift not deliberately but due to their absentmindedness. These are usually old people who are suffering from memory loss and they come out of the store without paying for items they have bought or don't remember having taken the items.

Administrative Errors and Vendor Thefts

Another source of retail shrinkage is administrative errors and vendor thefts. Administrative and paperwork errors such as mark up and mark down of the prices cause around 15% of the retail shrinkage. Merchandise loss due to vendor theft is the smallest category of retail shrinkage.

Retail Shrinkage Prevention - Challenges to Retailers

Retailers in India have recently joined hands to ensure an end to the rising scourge of employee theft. Top Indian retailers like Future Group, Spencer's Retail, Reliance Retail and Aditya Birla Retail have decided to maintain a database of employees who have been caught indulging in such acts. This database would hold the names of all those employees who were found guilty of store thefts, indecent behavior to customers, quitting without notice and other unethical behavior. This database would help the retailers to do a background check while recruiting employees. The Retailers Association of India (RAI) is also planning to set up a list of delinquent employees to help the retailers do an easy and thorough background check of prospective employees. With the economy showing signs of revival, retailers are also looking for expansion plans and recruiting and this database would be very useful. Shoplifting has become a big problem to the retailers. It has been reported that retailers lose at least 30-40% of their business due to shoplifting. Hence, retailers are investing in equipments like CCTVs, Electronic Article Surveillance (EAS) to detect such acts. They are also working to improve the security in the shops by employing personnel for keeping a watch on the people entering the stores. The following are some of the methods adopted by shop owners to prevent shoplifting:

• CCTV (Closed Circuit Television) monitoring is an important tool to check and prevent shoplifting. Here, closed circuit TVs are installed in various areas of the store. An exclusive team monitors the videos taken from these cameras to detect any suspicious behavior.
• Electronic Article Surveillance (EAS) is another popular device used by retailers, especially in apparel stores. Security tags are attached to the garments, which require to be de-tagged on billing. If a shoplifter walks out with an item which is not de-tagged, the alarm of EAS system goes off warning the authorities about the theft. The disadvantage of this system is that there is an increasing incidence of false alarms as deactivated tags from other stores sets off the alarm if the customers walk in with it. CCTV, if used with EAS prove to be more beneficial as the alarm can be cross-checked with the videos so as to ensure customers are not subject to false accusations.
• Phony Shoppers is another arrangement commonly used by retailers wherein store surveillance personnel pose in as casual shoppers, and look for signs of shoplifting among the actual shoppers. Proper training is given to the surveillance team since wrongly accusing a customer can tarnish a store's image.
• Close customer service by store personnel also helps to identify the shoplifters' intentions. This requires the stores personnel to closely follow the customers and offer assistance to them if they are seen lurking around. This would curb the potential shoplifters' urge to steal.

Big businesses are today spending billions of rupees to prevent store thefts by installing anti-theft devices and by having improved security systems. But these systems unless used effectively may interfere with the retailers' ability to serve the customers well.

Role of RFID in Combating Retail Shrinkage

Radio Frequency Identification (RFID) is an emerging revolutionary technology which is all set to replace the bar code technology. RFID is a means of retrieving and storing data from tags attached to the merchandise through Frequency Modulated (FM) radio wave transmission. A very important feature of RFID technology is its ability to track merchandise from anywhere when a RFID reader is within the range. Large retail outlets such as Big Bazaar and Pantaloons have invested in RFID, CCTV and antennas to curb retail shrinkage. RFID, in particular, is being used widely by these retail majors. According to Rakesh Biyani, Director, Pantaloons, "If somebody steals goods without paying, it is the public who ends up paying for it. We identify compulsive shoplifters and often catch them three or more times in the same month. We try not to involve the police especially when teenagers are involved. This is where RFIDs are useful in protection of goods."

Conclusion

Retail crime is one malice that has crept up with the mushrooming of organized retailers and shopping malls and shoplifting is one of the most severe problems that has set retailers on the alert as a significant amount is lost due to consumer thefts, employee thefts and administrative errors. India is also facing the problem of retail shrinkage. With the retail industry growing rapidly, the typical problems of store thefts have begun to permeate this country also. Hence, retailers have to make their internal surveillance systems more foolproof and ensure that the personnel are trained to detect such acts without disrupting the atmosphere in the store for other shoppers. Even though the retailers are directly affected by store thefts, in a way the consumers also suffer as retailers tend to recoup losses of merchandise and the cost of theft insurance and installation of anti- shoplifting systems by increasing prices of the goods, which the customer ends up paying. Hence, retail security is a cause for concern for retail majors and retailers need to gear up to ensure a shopping environment which is safe and secure for the shops and merchandise.