‘Retail Shrink’ Could Lose Retailers $115B in 2009
Now mounting to over $100 billion* worldwide, retail shrink from theft, crime, and waste is having a damaging impact on retailers’ profit margins, with over half the losses attributable to point of sale (POS) shrink—loss incurred through cashier error, theft, and fraudulent transactions.
A new report from Datamonitor, “Using Business Intelligence and CCTV to Reduce Shrink in Retail (Strategic Focus),” predicts that global retail shrinkage will climb to almost $115 billion by the end of 2009.
With global retail sales growth expected to be small or even negative, technology such as data mining used in conjunction with CCTV is one of the key solutions being tipped to combat shrink and improve the bottom line; moreover, they have a use beyond loss prevention—marketing and merchandising—according to the report.
“Retailers need to be efficient in dealing with shrink. Loss prevention will be a high priority in the coming years because of the hard business climate, so there will be growing pressure on retailers to invest,” said Christine Bardwell, retail technology analyst at Datamonitor and the report’s author.
“Using technology to uncover internal fraud quickly will enable them to discipline or retrain the staff responsible without further damage to the bottom line.”
Below, a summary of the report, as provided by Datamonitor.
Process Error, ‘Sweethearting’ Biggest Causes of Loss
The three biggest causes of loss at POS are cash theft, fraud, and process error.
“Sweethearting,” a form of theft involving collusion between an employee and customer, (usually a friend or family member), falls under all three categories, because it can involve cash theft and fraud and is very difficult to distinguish from process error.
Retailers agree that process error and sweethearting, combined, form the biggest part of loss incurred at the POS.
Technology Can Help
Two technologies are at the forefront of the fight against the major causes of shrink at the POS: Data mining identifies patterns that signal cash theft, fraud, and process errors; CCTV provides visual evidence to separate actual shrink from false positives.
A data mining application, relatively inexpensive, can quickly highlight weaknesses and fraud in the system and has a huge deterrent effect as stealing employees are caught. It is also useful for picking up external crime scams such as organized refund fraud and credit card fraud, as data mining will establish whether a card has been cloned and is refunded at numerous stores.
A major advantage for using data mining rather than a simple exception reporting or business intelligence (BI) application is that retailers can monitor multiple aspects, such as the cashier, location, product, and credit card details. Using train-of-thought analysis, a system can re-write queries.
Marketing and Merchandising Use
Data mining and CCTV have uses that extend beyond loss prevention. Retailers can also benefit by using them for marketing and merchandising.
Data mining can assist in providing data for overall performance and, more specifically, basket analysis and customer loyalty. Video analytics can aid marketing and merchandising. Staff training could benefit from CCTV footage. Internet protocol (IP) networks could help retailers realize further cost savings across the business.
For example, British clothing brand Jaeger rolled out a loss-prevention program with a view to cut fraud by a fifth. Shoplifting was only 30% of the problem: Analysis estimated that internal theft accounted for 42% of losses, and process errors for 21%. In August 2008, Jaeger completed the implementation of a data mining system. Data from the POS and other sources such as the supply chain, product development, and design are merged to allow Jaeger to identify sources of loss. The system enables the retailer to spot process errors and potential fraud, and it is also being used for basket analysis. Jaeger expects to improve its bottom line by 2%.
Virgin Megastores in the US provides a good case study for the overall benefits of IP. The retailer has networked “Digital Listening Stations” that allow customers to play album samples and search through the inventory in stock at that location. In addition, the IP WAN is connected to IP phones, servers, kiosks, and POS registers. If there is a problem with any device, an alert is triggered.
Technology vendors will need to prove to retailers that the investment will deliver a quick return through a trial or working case studies before a retailer will part with their money.
*Source: The Global Retail Theft Barometer by the Centre for Retail Research
About the report: “Using Business Intelligence and CCTV to Reduce Shrink in Retail (Strategic Focus)” discusses the impact of the economic downturn on the retail environment, forecasting global shrink to 2013. The report analyzes the two technologies at the forefront of the fight against shrink at the point of sale: business intelligence and CCTV. It provides a discussion on analog CCTV versus digital surveillance, looking at the business and technological issues. The report also highlights the key retail loss prevention pain points for developing effective go to market strategies.