Accepting Loss or Protecting Profit?
 The retail industry is having a tough time. Retailers constantly search for ways to deliver a profitable business. Yet few adequately tackle ‘shrinkage’ or more accurately ‘loss’. Many see loss as an inevitable cost of doing business. Why? The question is this: “If you’re losing 20% of your profits to loss why don’t you do something about it?”
Much of the problem stems from the word ‘shrinkage’. It is a comfortable word; it brings to mind a natural process such as evaporation. Loss is an uncomfortable word, but it’s more accurate. Although many retailers migrate from ‘shrinkage’ to ‘loss’ the more astute now see ‘profit protection’. This is a better description as it focuses retailers on anything that leads to falling profit. More than theft; it also covers policies, processes and compliance.
“A way of doing business and impossible to stop”
That’s the point – it isn’t. Most retailers place shrinkage between 1% and 2%, which many consider tolerable. The justification is: “Our loss level is not that bad compared to the average, so why should we focus on it? Besides it’s endemic in the industry.” They should measure how and where that loss occurs - and then do something about it.
In any human environment there are those ‘on the side of the angels’, then there’s the ‘criminal’ element, and the majority somewhere in the middle. Leaving aside deliberate theft or fraud, employees do things because they can. People take the line of least resistance, so if systems allow employees to skip processes they will. If it’s easy for them to ignore a 28-day refund policy, they will. If it’s quicker and easier to give a refund in cash rather than to a credit card, which the customer may not have with them, they will.
This is not employees stealing; it’s the retailer allowing it to happen. If retailers neglect to provide employees with clear responsibilities and procedures, or these are too ambiguous to understand - loss is the result.
Preventing the problems where they exist
Rather than retailers complaining about loss hitting their business they should be saying: “We’re allowing loss to happen.”
There are loss prevention solutions available; however there is resistance to making the initial investment. Retailers look at the ‘cost-of-loss’ against the ‘cost-of-prevention’, and see a capital cost spike - so many retailers live with loss rather than the solution.
Because retailers focus capital on opening more stores or increasing ranges, they close the door on loss relegating it to ‘out of mind’. Although implementing loss prevention solutions impact costs, once they’re in place business costs reduce. Retailers that have implemented loss prevention solutions experience payback periods of between three and six months. And most of that comes from controlling theft. Once they start dealing with their business processes and procedures larger paybacks arrive.
Consider a retailer with a turnover of £1 billion and a loss of 1.5% - that’s £15 million vanishing off the bottom line. Assume 20% due to poor processes, 30% external theft and 50% caused by internal theft. So the retailer loses £7.5 million through employees unilaterally giving themselves pay rises, retailers allow a further £3 million to disappear because of poor processes. Even if retailers control only 10% they can save over a million pounds in a year. That’s the business case for implementing a loss prevention system.
The traditional business position of loss prevention is part of the problem. It’s either an audit issue or the responsibility of an ex-policeman reporting into operations or finance. Loss is integral to the business but retailers need effective loss prevention systems to see what’s happening.
Many loss investigators and auditors work on the premise that ‘something doesn’t feel right’, however, it can take weeks to build a case. Data is often inaccessible or ‘lost’, making it difficult to revise procedures or find sufficient case-value to prosecute. Loss prevention tools enable retailers to isolate poor processes or develop an effective prosecution. In turn, employees understand what processes to follow and offenders are more likely to receive a large fine and a criminal record.
‘My team just don’t do that’
Many retailers argue: “Our team does not steal from our team.” These are laudable sentiments but largely inaccurate. Retailers also develop cultures that everyone shares the same team spirit and ‘lives the brand’ unfortunately this is too much belief in you own mission statement.
It’s easy for retail executives to look at their teams in their corporate uniforms (or non-uniforms) and believe that they are all batting with the same commitment for the same side. But some staff don’t get corporate bonuses and some will look to other means to bolster their wages (if you let them). Retailers must face an uncomfortable fact to confront loss – a sizeable minority of your employees are ripping you off! And often they’ve been doing it for years.
A good example of unintentional loss, not theft, occurs around the BOGOF. Without a clearly defined process ‘Buy One Get One Free’ allows employees scan one item and put one over the scanner. The result – no retro-payment from the supplier and the stock balance is wrong. It doesn’t take long for this to cause major issues. And on the subject of multibuys, do you honestly believe that all store staff understand your returns policy on one item of a ‘Three-for-Two’?
Consider loyalty cards. The shopper makes a purchase but doesn’t have their card with them. The potential (and it happens) is for the person behind the till to add the points to their own card. The rationalisation for this is: “I did it because the points were there anyway, so no one has lost out.”
In some mobile phone companies the commission structure improves as phone sales rise. Employees soon realise that if all sales go through the top salesperson the bonus increases, which is split between the employees involved. Also there’s the cancellation process. Unless a process links sales, commissions and cancellations, phones can be ‘sold’ to friends who then cancel after two days.
Petrol stations are another example. People rush in, say: “£30 on pump two,” leave the cash on the desk and run. You would like to think that staff would always ring it through, but many don’t - they’re human beings and it’s a temptation too far.
Changing the culture
When questioned, employees involved in process-driven loss or direct theft rarely see that they’re hurting anyone; neither do they see it as committing a crime. Many practices have been going on for so long they have become ‘the way it’s always been’. That’s the problem - once loss begins it spreads. Most people know right from wrong but loss is a grey area. The majority don’t think that they are committing fraud or theft, and often they are not – they’re simply not following processes and the result is loss.
This is not a tough business decision. Up to 20% of profits disappear to loss. A sizeable element of this can be controlled and prevented. All it requires is the correct mix of systems, people, procedures and policy.
For further information please contact enquiries@paulmasonconsulting.co.uk |
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