The global recession has affected individual countries – and various businesses within those countries – in very different ways. Cultural, legal, demographic and economic considerations vary all over the world, which means it’s difficult to predict the exact response by people to unfortunate situations like collapsing industries, lower wages and job losses. One thing, though, is for sure. In every country, the impact of the economic downturn has come quickly, and it’s retailers who are often bearing the brunt of the impact.
As we all know, from an historic perspective retail has been one of the first sectors of the economy to feel the pinch of a recession, and this one may have had an even more acute impact than in days gone by. Without question, stores’ sales and profits have suffered extensively, driven to a large degree by big changes in shopping patterns and the reality that customers have become more frugal in their spending habits. Although some retailers have actually benefited from the change in business conditions, speakers at the recent World Retail Congress pointed out that retailers in virtually every country are experiencing the most challenging market in decades.
Of course, we didn’t need a worsening economy to make retail crime a bigger and more complex problem all over the world. Even before the economic downturn became evident, signs pointed to important changes in retail crime patterns.
Most types of retail crime were trending up before the fall of 2008, across all geographies and all vertical markets. Increased shoplifting, employee theft, burglary, robbery and organized retail crime and fraud have put further pressure on profit margins. While this is not yet a universal problem affecting every retailer in every market, there is plenty of indisputable data indicating that a significant proportion of retailers have been suffering major shrink problems. This research points out that both opportunistic and professional crime is on the rise, and violence – both threats and actual incidents – has increased.
Is higher shrink Inevitable?
Against this backdrop of bad economic news and retail crime trends, it might be natural to be pessimistic about retailers’ abilities to strengthen their operations against shrink. In a way, the bad news is an opportunity for retailers to re-examine their policies, analyse their use of cutting-edge shrink management technology and develop a more comprehensive, integrated and forward-thinking approach to loss prevention.
In fact, some clear Best Practices are emerging that smart, successful retailers are already putting to good use.
Let’s take a moment to reach agreement on the answer to a fundamental question: Is crime rising? Reports from both retailers and police show that as unemployment has risen, there has been an increase in retail crime. For example, a European survey by our organisation, carried out in January-February this year among the major retailers in Italy, Germany, the UK and France, reported that almost 40% of retailers had seen an increase in customer shoplifting as a result of the recession compared to the previous six months.
Police sources in the US, the UK and Australia in the same period focus attention on a significant increase in recession-related retail theft. A major rise in shoplifting and employee crime has been seen in the U.S. (news reports from different areas include Dorfman 2008, Boyce 2008, Husty 2008 and Gary 2008). In the UK, police figures show shoplifting increasing over 12 months in the North East by 22% and by 11% in London. In Australia, Silvester (2008) discusses how Australian police services are coping with the rise in shoplifting and other business crime.
It’s probable that recession, unemployment, uncertainty, lower incomes and fear of the future may make some people more willing to steal or overcome their reservations about buying stolen goods. Without seeking to minimise their crimes, others may feel that the business, national and international failures which permitted the banking crisis and created a global recession devalues honesty and gives them some entitlement or justification to commit retail theft.
Different trends in theft
Retailers in several countries have reported that just as there has been a switch by customers away from high-cost product lines towards ‘own label’ and cheaper products, so a wider range of merchandise is now being stolen by thieves. Thefts of cheaper cuts of meat, household products, cheese and hair dyes have all risen just as demand for these items has also increased among honest shoppers.
Also on the rise is theft of expensive items such as razor blades, perfume, DVDs, electronic games, Apple phones, Wii video consoles, sunglasses, clothing, fashion accessories and power drills. In short, no product group or market segment is immune to this trend.
Another disturbing trend is to be found in the diversification of types of thieves. At one end of the spectrum, many retailers report that more ‘amateur’ thieves are committing crimes in their stores, while there also is more organised retail crime leading to bulk thefts, and more violence and intimidation of employees.
It seems likely that employee theft will also be increasing, although at this stage there’s less evidence than for the growth in shoplifting. There has also been a significant rise in robbery and burglary.
Key statistical trends to note
Of course, it helps to have cold, hard facts – statistical data – to help retailers make smarter decisions. One important source of quantitative data is the Centre for Retail Research’s annual Global Retail Theft Barometer. Surveys for this year’s study were mailed out in May and June, and among our goals are to pinpoint the countries where shrink has been most negatively impacted by the weak economy, and to identify changes in retail crime patterns compared to other, non-recessionary years.
The Barometer is the most comprehensive global study of retail crime costs and shrinkage patterns, covering 42 countries in the 2009 report, which will be released in November. It is funded by an independent grant from Checkpoint Systems, and prepared by the Centre for Retail Research.
In last year’s report, we raised the possibility that retail crime and shrink rates could start to rise in 2009, reversing a five-year trend our data had uncovered previously. Clearly, this rise in shrink rates has started taking place, and most retail loss prevention managers agree that the problem of retail crime is greater than any time in the last decade.
Let’s take a step back for a moment. Last year’s Global Retail Theft Barometer – along with other national retail crime surveys – indicated that retail crime rates in many countries was lower than it had been for many years. In fact, shrink had fallen to 1.34% of retail sales. However, although the percentage had fallen, the financial cost was still huge. The global cost of retail crime (cost of merchandise stolen, plus the cost of loss prevention investments) hit $112.8 billion, equivalent to nearly $230 per family. Keep in mind that this cost is just for one year, and is paid by retailers and the shopping public.
What can be done about the problem?
Even though the data pointing to higher global shrink in the current recession are conclusive, it also is by no means universal.
Specifically, not every retailer is experiencing higher shrink. Retailers are becoming smarter and more sophisticated about how to thwart thieves before they get out of the door and, even more importantly, prevent theft attempts from taking place.
Perhaps the key first step is for loss prevention professionals, their members of staff and their management to understand that higher theft is not necessarily inevitable, even in difficult economies. The problem with talking in terms of recession-induced crime is that the phrase implies that every retailer will inevitably experience a growth in crime that cannot be avoided – any more than one can avoid a major flood or a cyclone. Yet the Barometer has shown that every year a significant number of retail businesses improve their shrinkage and crime figures even when most businesses in their country suffer adverse results.
So, while current crime trends indicate that all retailers now face a major problem, there may be nothing inevitable about any increase in the costs of crime.
Just what are these retailers doing to fortify their organisations against shrink threats? First, it’s important to understand that improvement doesn’t necessarily require revolutionary change: As many commentators have pointed out, loss prevention is about doings lots of different things right rather than doing one thing brilliantly.
That said, a few Best Practice techniques are emerging based on our own Baromerer and other data, and from conversations with innovative retail leaders:
– Take a strategic view of shrink management
Many retailers respond to the threat of the moment, be it shoplifting or organised retail crime. The smartest companies see shrink management as an interrelated set of business processes facilitated by smart technology investments. Shrink management should be part of a retailer’s most vital business operations from both a planning and deployment standpoint.
– Monitor and understand the latest crime trends
This may seem obvious, but we continue to be surprised by the number of retailers who don’t keep track of local crime patterns, or who don’t meet regularly with local law-enforcement agencies. Following these trends, for instance, helps retailers to understand what kinds of products are most at risk, and what steps thieves are taking to go after this merchandise.
– Makeloss prevention policy compliance a standard part of day-to-day business activities
This is an area where many retailers can make quick, measurable and cost-effective improvements in their shrink management. Regular audits of compliance activities and ongoing training are essential, yet not enough companies are actually making this a standard procedure.
– Do more thorough checks of new hires
While nobody wants to turn into “Big Brother”, there’s no doubt that the economic downturn has created a much larger pool of potentially viable new employees from which to choose. Even when considering local privacy laws, most companies can, and should, do more and better screening of new employees.
– Raise the profile of loss prevention inside your company
This is similar to the trend in Information Technology departments in the 1990s, when chief information officers started to be viewed as strategic business leaders, not technical personnel who kept computer systems running. Having loss prevention be seen as a strategic activity will require new tools to measure its effectiveness and demonstrate return on investment.
– Stay up-to-date on your shrink management technology investments
Understand what’s working for you and what needs to be updated, altered or replaced.
Loss prevention spending examined
Every retailer is scrutinising the amount spent in each budget category, including loss prevention. Loss prevention professionals are reporting this year that the loss prevention budget is very restricted, and that they have to make the best of what they have received. In a tough commercial environment like the present, where sales growth and operating cost control are both equally difficult to manage, loss prevention and shrink management may prove to be one of the few areas where improvements in net profitability can be made.
Cuts in loss prevention spending at a time when potential crime is rising may well be extremely short-sighted – particularly if the losses from higher shrinkage and out-of-stocks prove to be much greater than the gains from reduced loss prevention budgets. Obviously, every retailer has to make its own decision. Smaller loss prevention projects dealing with discrete issues such as improving loss prevention outcomes in the worst high-shrink retail outlets, new processes to reduce losses of high shrinkage lines and investigating employee theft can produce rapid payback.
The Pareto 80:20 rule still has wide applicability in loss prevention and means that the discriminating loss prevention executive who chooses his or her projects carefully can have a considerable impact over performance. This is even more important now when the gains in shrinkage reduction are under threat
What about the rrelationship between total shrinkage by country and total loss prevention spending? There is a definite relationship between losses from shrinkage and loss prevention spending. Countries with higher shrinkage naturally spend more on security to keep the problem under control. At a time when retailers are under threat, where world conditions are no longer benign, and crime and shrinkage are likely to increase, businesses need to be sure that they have taken care to combat the higher crime losses that they potentially face.
Retailers spent $25.5 billion in 2008 on loss prevention and security, equivalent to 0.33% of retail sales. Of this total, more than one-half (54.8%) was spent on security personnel, both in-house and hired from third-party corporations. Loss prevention personnel are an important part of retail security, but the truth is that they only identify a small proportion of what is stolen by criminals. Figures in the 2008 Global Retail Theft Barometer show that thieves responsible for only 3.4% of the amount stolen from retailers were apprehended by retailers last year. Even in North America, that figure was only 5.7%.
Loss prevention through deterrent activities
Without decrying in any way the value of in-store security personnel, loss prevention through deterring or preventing criminal activity is likely to be a more successful policy than apprehending thieves per se. Shoppers or employees can be tempted to steal if they think it is relatively easy to do and the chances of detection are low. More people may well be inclined to try their hand at crime at a time of recession, but the key factor affecting whether people attempt to steal is based upon that person’s notional risk/reward ratio of retail crime. If they have been successful once, then profitable theft can provide further reinforcement, making them more confident and willing to steal next time.
In those countries where the criminal justice system is perceived to be weak in dealing with persons apprehended for retail theft, then this will of course weight the risk/reward ratio increasingly in favor of theft.
There’s little question that these difficult times are making life a lot more challenging for all retailers, and the job of loss prevention is more complex than ever due to new threats, increased sophistication by thieves and, to some degree, a stronger sense of desperation by potential thieves both inside and outside the store.
However, don’t forget this fact – there’s nothing inevitable about higher shrink in any retail establishment. Threats can be identified, and strategies to deter and detect put in place. Through a combination of better strategic planning, vigilance in maintaining reasonable loss prevention technology investment, and an understanding of why and how shrink takes place, retailers can continue to reduce shrink as a percentage of revenue, and protect their organisations’ profitability.
Professor Joshua Bamfield is the director of the Centre for Retail Research