By Robert L. DiLonardo
Contributor
Teens and young adults seem to have rediscovered the joy and pride associated with having a hot looking, high performance car. At first, they started with simple modifications, such as a new shift knob, neon light kits, a chrome exhaust tip and performance gauge cluster. But then they graduated to body modifications, speed enhancements and oversized rims and tires. The fast growth of this fascination with appearance and high performance has provided the automotive aftermarket retail chains with an opportunity to add expensive, high-profile products to their assortments. Unfortunately, the desirability of these items causes them to be targets for shoplifting, outright theft by employees or “sweetheart” deals between employees and friends.
The financial blow
Inventory shortage (or shrinkage) is a retailers’ annual financial loss attributable to a combination of employee theft, shoplifting, vendor fraud and administrative errors. Each retail chain calculates its shortage after its annual inventory and has its own perception of the breakdown among the causes. However, there are very few sources for retail industrywide data. The best-known and most respected source of shortage data is the National Retail Security Survey (NRSS), published by the Center for Studies in Criminology and Law, at the University of Florida (www.soc.ufl.edu/srp.htm). The survey’s purpose is to provide retail loss prevention executives with the most current market-specific information. This includes the magnitude and the sources of inventory loss, as well as the current trends in the use of effective countermeasures such as pre-employment integrity screening, video surveillance or electronic article surveillance (EAS). The recently released 2003 NRSS survey is the 12th annual report. The 103 responding chains reported an average shortage of 1.65 percent of sales — converting to about $33.6 billion in losses based upon a reported $2.038 trillion in sales for the retail sectors surveyed!
Of equal interest are the statistics on the perceived sources of shortage. While retailers can accurately calculate how much has been lost, loss prevention executives must make “educated guesses” about how the losses occurred. In the most recent NRSS survey, an average of 47 percent of losses were attributed to employee theft, 32 percent to shoplifting, 15 percent to administrative error and 6 percent to vendor fraud.
The full financial impact that shortage has on a retailer’s bottom line can be illustrated in the following example. Suppose a packaged set of do-it-yourself performance gauges with a retail price of about $40 is shoplifted instead of sold. The most obvious impact is the loss of cash invested in the merchandise, the freight and handling charges paid to put the item on the shelf and any promotional or advertising expenses. Additionally, there is a revenue shortfall from the loss of a potential sale, and a missed opportunity to make a profit. If another gauge set must be ordered to replace the stolen item, then those replacement costs must be added. To put this into financial terms, if the store is operating with a 5 percent net profit after taxes, 20 additional gauge sets must be procured, processed and sold to generate the profit required to replace the stolen item.
How much is enough?
Merchandise is the lifeblood of a retail store. Retailers realize that they have to invest in attractive, desirable items and also spend money on advertising and promotional activities in order to make money from product sales. The same logic applies to managing inventory shortage. It is imperative that retailers invest part of their capital and expense budget in technology and programs that protect the merchandise and help minimize losses of all types.
The NRSS measures the corporate commitment to retail loss prevention by asking respondents to provide the amount of the annual budget, reported as a percentage of sales, that is devoted to identifying, deterring or stopping inventory shortage of all types. The latest NRSS survey showed that, on average, retailers spent a little over half of one percent of their budget on loss prevention. Unfortunately, the trend for expenditures is slightly downward over the past few years, suggesting that loss prevention professionals have been asked to “do more with less.”
Adding what was lost (1.65 percent of sales) to what is spent to control losses (0.51 percent of sales) demonstrates that the average total cost of shortage is almost 2.2 percent of sales. When viewed together this way and ranked with all other retail store operating costs, the overall importance of shortage control is amplified significantly. For example, Federated Department Stores, the corporate parent of Macy’s and Bloomingdale’s, has identified and publicly stated that the total cost of shortage is its fifth largest operating expense, behind selling, advertising, real estate and employee wages and benefits. Federated spends more money on the total cost of shortage than it does on data processing, housekeeping, maintenance, utilities, visual merchandising or logistics. Clearly, shortage control is a priority.
Deterring the shoplifter
Shoplifting continues to be a chronic problem for retailers. The 103 respondents to the 2003 NRSS survey estimated that shoplifting accounted for 32 percent of their losses. While this estimate is a bit lower than it has been in recent years, it equates to 0.53 percent of sales — more money than is spent on the average retail loss prevention budget. There are a number of effective countermeasures used by retailers to combat shoplifting.
Good customer service remains the most basic way to deter thieves. Sales associates should always greet potential customers because thieves don’t really want to be noticed or identified. AutoZone, the leading auto parts and accessories retailer, has used this strategy for many years. The program is called “Drop/Stop 30/30,” which means that sales associates drop what they are doing and respond to a customer entering the store within 30 feet or the first 30 seconds. “This program is a great measure of customer service,” says Brenda Seeger, AutoZone’s director of loss prevention analysis, “and it puts the customers on notice that you know they have entered the store.”
Other tools used by retailers against shoplifters include video surveillance, large, round convex mirrors and locked fixtures. Cameras can be used to either deter or catch shoplifters and dishonest employees, but the most effective video surveillance requires trained manpower that may not fit into a store’s budget constraints. The mirrors are strategically placed on the sales floor, allowing sales associates to view large areas of a store from a single position. Unfortunately, they sometimes provide more assistance to the thief than to the sales associate. Thieves can use the mirrors to see if anyone is watching them. Locked fixtures provide a high level of security against theft, but inhibit impulse sales, because they require the attention of a sales associate to provide customer access to the merchandise.
Over the years, technology has displaced manpower as the best solution to either deterring or catching shoplifters. The most widely used technology is commonly referred to by its acronym — “EAS,” first introduced around 1968 and in widespread use since the mid-1980s. Electronic article surveillance is the term used to describe retail anti-shoplifting protection systems for all consumer products. The NRSS reports that EAS systems of all types have been, and continue to be, the most frequently used anti-shoplifting technology. Over 80 percent of the study’s respondents use one or more EAS technology. Industry research on EAS penetration indicates that about 44 percent of branch stores in the largest 450 retail chains in North America utilize EAS systems. Additionally, almost 100 of these same chains are saturated with EAS in every branch store — a true testament to its effectiveness.
AutoZone began testing EAS in 1994. In 1998, after an evaluation in about 100 stores, the chain decided to install ADT’s UltraMax® equipment in all its locations. UltraMax was chosen over its competition because it operates more effectively on products with high metal content, like auto parts.
In essence, an EAS system consists of three components — detection pedestals, “tags” and deactivation equipment. The tags contain an electronic element that is bonded to adhesive-backed paper and manufactured in rolls, much like pressure-sensitive pricing labels. Tags are affixed, by hand or by automated machinery, somewhere inside or outside consumer products packaging. The pedestals are placed at store exits in order to detect the presence of these tags as shoppers leave the stores. At the point of purchase, these tags are rendered electronically inoperative (deactivated), so that the purchaser may exit the premises without setting off an alarm. If a shoplifter were to attempt to leave the store while carrying items containing the “live” electronic elements, the detection equipment at the exit would sound an alarm and appropriate security countermeasures could be taken.
These systems have proved to be an effective psychological and physical deterrent to shoplifting, and in recent years technological improvements have provided smaller, more reliable and less expensive products. In concert with the social benefits of shopping in stores that are relatively free from crime, the use of EAS provides some very real and quantifiable economic benefits to the retailer. Academic studies have shown that EAS can reduce inventory shortage by anywhere from 30 to 80 percent. Loss reductions of this size can make the difference between a profitable and unprofitable product.
AutoZone’s experience with EAS is a good case in point. After the chainwide installation, the rate of reduction in losses was noticeable — as much as 40 percent for some protected items. In 2002, management decided to conduct a financial recertification to see if AutoZone was still reaping the benefits of EAS, and the analysis showed that the reduction in losses had been sustained.
EAS tagging at the ‘source’
In the early 1990s, a few very large U.S. retailers asked EAS manufacturers to develop labels that could be affixed to “high theft” items at the beginning of the manufacturing process rather than in the stores. In response, consumer product manufacturers and packaging experts developed automated, high speed systems to place the labels on either the outside or the inside of product packaging. The key perceived benefit to the retailer was to transfer the function of EAS tagging to a “source” in the manufacturing process where it could be accomplished most cost effectively. These retailers reasoned that merchandise would reach the shelves faster if it arrived at the store already protected with EAS.
By partnering to protect the merchandise, both the retailer and the manufacturer would benefit. Retailers would be encouraged to “open merchandise” tagged items, resulting in higher rates of sale and additional product gross margin. Cooperating merchandise manufacturers would benefit from higher sales rates, more profitable items and larger shelf space allotments. Thus, the concept of EAS source tagging was born. Since then, source tagging has been successfully employed in a wide range of retail sectors — most notably in the auto parts, home improvement, discount, recorded music/video and drugstore markets.
When the decision was being made to use EAS in all stores, AutoZone management conducted time and motion studies to evaluate the most cost effective place to affix the EAS tags. When the results were calculated, source tagging was the clear-cut choice. “We knew that in order to have any consistency with merchandise tagging, it had to happen before the product ever hit our distribution centers or stores,” Seeger states.
Now, almost 2,000 SKUs from 60 vendors are tagged as close to the beginning of the manufacturing process as possible.
Typically, merchandise with a history of high loss becomes a target for source tagging. Management has long understood that when merchandise is stolen instead of sold, it becomes very difficult to reach a departmental sales plan. In order to demonstrate the importance of source tagging to manufacturers, the AutoZone merchandising group deliberately measured the impact of EAS on sales. The data showed that enough additional sales were generated to offset the entire cost of buying and applying the EAS tags. Armed with these statistics, it became easier for the merchandise category managers to contact vendors and convince them of the importance of source tagging their products. As the AutoZone program has matured, the merchandisers now have a feel for when a new product might be prone to shoplifting. When this occurs, they try to build source tagging into the first product shipments, so losses can be minimized. This strategy has been a particularly effective form of insurance for new products.
Source tagging has become “mainstream” in the automotive aftermarket now that much of the groundwork has already been set. Source-tagged auto parts, accessories and tools can be found at Wal-Mart, Kmart, Meijer and Pep Boys.
Packaging for prevention
Often overlooked is the role that the manufacturing and packaging industries play in the security of the merchandise. In the overwhelming majority of cases, EAS tags are affixed to a product’s packaging rather than on the product itself. Most retailers would prefer the EAS tag to be integrated into the product or hidden on the inside of the packaging, within a few inches of the bar code. This way, the EAS tag can be deactivated at the same time the product is scanned. When the tags are affixed randomly on the outside of a package, it is more difficult and time-consuming for the sales associates to locate and deactivate them. More importantly, however, is that visible EAS tags are easy for thieves to remove. When an item is identified as a candidate for EAS source tagging, the merchandiser and the manufacturer work together with the EAS manufacturer to determine the best placement for the tag. “The packaging issue is huge for AutoZone,” says Seeger. “We spend a lot of time educating vendors on good and bad packaging and proper placement of the EAS tags.”
The construction of the packaging has a role, too. Thieves get wise to the fact that EAS tags are located somewhere in the packaging. Instead of running the risk of setting off an alarm by walking out of the store, they decide to remove the packaging and conceal the item. Flimsy and poorly constructed packages make it that much easier for thieves to get away with the crime. Today, packaging companies provide extra security protection by either enlarging the outer dimensions of packaging to thwart the concealment of items, or strengthening the actual merchandise packaging — with glue sealed, heavy-duty plastic “clamshell” packaging and tear resistant carton board — to make it more difficult to remove the item from the packaging before leaving the premises.
Priming yourself for profits
As the NRSS statistics show, the staggering amount of money lost annually from theft, fraud and paperwork errors cannot be dismissed as a cost of doing business. Too often, these losses prevent otherwise healthy businesses from earning an appropriate level of profit.
Automotive aftermarket retailers and their vendor community should consider following in the footsteps of industry leaders, like AutoZone, by investing money and management time in proven programs that effectively attack the sources of inventory shortage.
Seeger, the director of Loss Prevention Analysis for AutoZone, has been involved in AutoZone’s EAS and source tagging program from its inception and is willing to help retailers and manufacturers with questions. She can be reached by phone at (901) 495-7344 or via e-mail at [email protected].
Robert L. DiLonardo is a well-known consultant specializing in retail security issues. He is the principal of Retail Consulting and can be reached by phone at (727) 709-6961, or by e-mail at [email protected].
