Shrinkage has long been an issue for retailers, but as the economic crisis continues to bite, the problem is widely reported as increasing.
The impact of theft on a retailer’s margins can be considerable, and now, more than ever, it is essential that stores of all sizes protect profits to help them through this difficult time.
When the combined impact of retail fraud is evaluated, studies have found that it can equal anything up to 25 per cent of gross profit – a staggering figure when put in any context but even more so in the current climate.
The retail environment has become hugely complex over the years, which makes it inevitable that there will be margin erosion either during the supply chain, on the shop floor, at point of sale or in the back office.
Of course, there is a certain proportion of this loss that is largely unavoidable, but minimising the scale of internal losses will be a key element to success in these turbulent times.
A people problem
But, before you can begin to tackle the problem of internal fraud, it is paramount to understand why your staff might steal from you. The answer to this is quite clear; the opportunity and temptation to commit theft and fraud in the retail environment are everywhere.
Research has found that in retail, 10-20 per cent of staff will never steal from their employer, but 10-20 per cent will always steal, leaving up to 80 per cent of staff who may, at some point, try and steal from their employer. Whether they actually go through with it is determined by a number of factors including their personal financial circumstances, morale, commitment to the job and the perceived risk of getting caught.
Employees, suppliers and internal error cost Europe’s retailers GB pound 11.5 billion and accounted for almost 53.2 per cent of all stock losses in 2008, according to the Global Retail Theft Barometer.
However, despite knowing that some employees will inevitably steal from you, quickly identifying the culprits is a difficult exercise. Ultimately it is a people problem, and that makes the issue unpredictable, dynamic and continually evolving.
One of the biggest hindrances to tackling internal fraud is believing that you are generally dealing with stupid criminals; unfortunately this is a complete myth. The ones that do the real damage are often very intelligent, know exactly how the systems work and conceal their activities in the complex world that is modern retail.
Tackling the problem
Over the years, data mining has become a popular method of tackling internal loss. Data mining is a powerful tool that allows the analysis of large amounts of data from different sources to extracting useful information to establish correlations or patterns.
The loss prevention team can sift through the enormous volumes of data available to a retailer, quickly and efficiently, enabling them to get to the root of the problem instantly.
And EPoS data is just one piece of the puzzle that is internal fraud. Combining multiple data sources, including stock management and supply chain data, increases the value of data mining results and gives the team the bigger picture of what’s happening inside the store.
By using data mining software effectively, a retailer can look beyond just the fraud. The big wins come from the identification of process-based weaknesses. These can lead to much higher levels of loss than individual cases of fraud.
Essentially, a process-based weakness is a non-compliance to store policy that results in a loss. For example, refunds taking place after the refund period allowed by the policy (typically 28 days). These issues can be identified by matching refund transactions to the original sale.
In my opinion, now is a perfect time to focus on tackling internal loss. Over the years, I have seen the effects internal fraud can have on overall shrinkage levels and without continuous effort and new ideas, staff theft and internal loss grows rapidly, particularly in today’s economic conditions.
