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Last Updated: Sunday, 7 October 2007, 15:36 GMT 16:36 UK
Retail's shrinking feeling
By Jeremy Scott-Joynt
Business reporter, BBC News

Retailing, on the face of it, tends to be a straightforward business.

Barcode
Electronic scanners open up new opportunities for insider thieves

Buy cheap. Sell dear, and plenty. Keep costs down.

Do it right, and come home with a profit.

But even the best retailers are doing well if they make a margin that goes much beyond a single-digit percentage.

Consider what they are up against. There is competition. There is the fickle taste of customers.

And then there is the steady 2% or so of sales that drips away each year through what the trade, euphemistically, calls "shrinkage" - and what the rest of us would simply call theft.

Hard to ignore

With numbers this tight, snipping away at shrinkage can make a big difference to the bottom line.

Stores often end up spending millions on closed-circuit television, store detectives and so on - all to tackle a minority of the losses
Philip Payne, Intelliq

And if you could get the money back from the people taking the goods, that would be helpful as well.

So retail security - "loss prevention", as the jargon has it - is therefore big business.

From the basics, like closed circuit TV, to keeping a close eye on the books to see which outlets seem to be leaking the most, few retailers - small or large - are prepared to ignore the problem.

So keep the shoplifters out and the profits will benefit?

If only that were so.

In fact, shoplifting only accounts for 40% of the shrinkage problem, according to Philip Payne, director of professional services at loss reduction consultancy Intelliq.

"Stores often end up spending millions on closed-circuit television, store detectives and so on - all to tackle a minority of the losses," he says.

Another small slice disappears in simple mistakes by staff, often the result of practices and systems that are badly designed and over-complicated.

On the inside

But the biggest problem is leakage from within.

At the most basic level, there is the cashier with a hand in the till: relatively easy to spot, and to root out.

Then there are the more advanced cases, which happen when front-line staff either find ways of gaming the store's systems and processes - or managers do the same, often making significant amounts of money in the process.

For example, Lloyds Pharmacy - a chain of 1,700 stores across the UK - only realised it had a problem when it found large numbers of cancelled sales at several branches.

Till
Modern retail crime goes way beyond the simple hand in the till

Still, the tills balanced. So what was going on?

Lloyds found a few dishonest staff were scanning purchases - and then suspending the sale before taking the money and putting it in the till.

From a customer's perspective, everything looked normal. But CCTV showed the staff in question were totting up the suspended sales on a calculator, cancelling the sale - and then taking the total of cancelled sales out of the till in one go later in the day.

"On the surface everything seemed pretty well-controlled," says Alan Ledbrook, Lloyds' national loss prevention manager.

"But when we drilled down to the data coming out of the POS (point-of-sale equipment), and what was happening at the tills, it highlighted a lot of factors which would previously have been invisible."

'Shrink school'

This tip-of-the-iceberg issue can dog retailers who are not quite up to speed with the kind of data mining in which Intelliq specialises.

For those who do go the whole hog and exploit the millions of numbers that electronic POS and stock handling systems generate - not only for running their inventory, but actively looking for anomalies - the benefits are obvious.

If someone's really unlucky they might just get a caution... Where's the deterrent in that?
Alan Ledbrook, Lloyds Pharmacy

Lloyds cherry-picked outlets that were falling behind in terms of profitability, putting their staff through what Mr Ledbrook calls "shrink school": a workshop in how to tackle shrinkage.

Within a year, he says, they "went from underperformers to overperformers".

Deterrence

All this costs money to set up, of course, even if its proponents argue it pays for itself in terms of prevented losses.

Still, prevented losses can be difficult to prove to a sceptical board with the bottom line firmly on its radar.

And even if you do catch a thief - whether insider or shoplifter - what recourse do you have?

You can sack a member of staff, but they could easily get a job somewhere else - a problem moved, rather than solved, in a business where staff turnover is traditionally sky-high.

As for the police, their resources are focused elsewhere. "If someone's really unlucky they might just get a caution," says Mr Ledbrook, himself a former detective. "Where's the deterrent in that?"

Pile 'em high...

Instead, you could try to make crime pay.

According to Mike Schuck, chief executive of business-government joint venture Action Against Business Crime, all the UK's major High Street retailers now try to recover their losses from criminals.

The idea came from the US, where almost every one of the 50 states has legislation allowing retailers not only to sue thieves for the cost of goods lost or money stolen - but also to claim up to four times the value, as well as what they spent on investigations.

"We're never going to see that kind of legislation here," Mr Schuck says.

"But we've had a number of county court cases where the concept of civil recovery has been upheld by judges - and with judgements far in excess of what we could prove had been taken."

This multiplier is part of what makes civil recovery worthwhile - the bang that justifies the buck spent on detection.

Another is to minimise the costs incurred once the investigation is complete.

Drydens, a law firm used by several large High Street retailers, has developed the business of going after retail criminals into a production line.

In the seven years since its retail loss recovery work began, it has processed 75,000 cases - with clients filing details of shoplifting cases over the web and letters going out to suspects automatically.

Collaboration

A third solution would be to cut back on opportunities by getting ahead of the crooks - particularly the insiders who cause many of the biggest losses.

For that, Mr Schuck argues, retailers are going to have to work more closely together.

AABC is sponsoring databases of persistent offenders, both insiders and shoplifters, to make it more difficult for them to move from one target store to another with impunity.

Eventually, the data should be included in a national fraud reporting system - although that remains at least two years away from going live.

In the meantime, though, he is trying to encourage stores to share information: not only to prevent crime, but to provide more evidence to get the money back afterwards.

"The opportunities are there if we choose to grab them," he says.

"And if we don't, all the tools and opportunities for the criminals are there already."

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