Retail: In a League by Itself
If the retail market was a sport it would definitely be baseball. That’s because everything is measured in retail, similarly to that in baseball. Baseball tracks stolen bases and RBIs; retailers focus on stolen goods (shrinkage) and ROI. This article, one in a series profiling vertical markets, examines the needs, goals and buying trends of retailers and what bases security dealers and integrators must touch to win business in this large, vibrant market.
Diverse Market/Shared NeedsWhile top-of-mind awareness is dominated by large global and national retailers ranging from Wal-Mart and Walgreens to Office Depot and Home Depot, the retail market is quite diverse in goods and services sold and in size. Single store businesses make up an estimated 95 percent of the total retail market.
Steve Surfaro, group manager, industry liaison, Panasonic Systems Solutions, Secaucus, N.J., categorizes retailers as:
- Ultra-small, convenience kiosks/stores deployed in malls and businesses.
- Multi-site, smaller chain convenience stores.
- Larger retail chains, some of which combine traditional retail and distribution.
- Distribution businesses focused on Internet sales, catalog sales, retail fulfillment.
Market DifferentiatorsThe retail market differs from other commercial verticals in several important ways, including:
- Market size. Retail is one of the largest markets worldwide and the second largest in the U.S. in terms of employees and establishments. It also is a growing market. “The top 25 national retailers build nearly 6,000 locations a year,” says Michael T. Grady, senior vice president, Vector Security, a national integrator headquartered in Pittsburgh that serves more than 90 national retail customers including Best Buy, CVS Pharmacy and Lowe’s across the country. “The National Retail Federation estimates there will be 94,000 new retail locations by 2010,” he adds.
- Collaborative purchasing. “There are more stakeholders in the purchasing decision today,” states Terry Fredrickson, business development manager-vertical markets for Bosch Security Systems, a Fairport, N.Y., manufacturer. “Product selection can involve security and loss prevention, as well as risk management, marketing, and as more network solutions are deployed, the IT team. Selling is more of a challenge now because so many stakeholders are involved, often beyond the security department.”
- Fast pace. Retailers only make money when they’re open, so construction/installation deadlines often are only days and weeks away. For example, a customer notified its integrator, Vector Security, in mid-July that it wanted 58 video systems running in stores around the country by August 25 to avoid disrupting Labor Day weekend shopping. Starbucks opened 668 new retail stores in the third quarter of 2007 alone.
- Open door policy. Retailers could reduce losses if they took a page from other market segments and closed earlier, hired more guards and made their assets less accessible. But they’d also go out of business. “Risk factors are different in the retail market,” comments Jack Finefrock, vice president, retail solutions, Diebold, Inc., a Canton, Ohio integrator. “Some challenges facing retailers are extended hours, inventory that is readily accessible to theft, consumer and employee fraud and tight security budgets. All these factor into the security needs of the retail market.”
Aligning with Business StrategySteve Wood, manager of Partner & Asset Protection, Starbucks, Seattle, oversees physical security in U.S. stores. “Our security goals grow from the company’s strategic positioning of Starbucks stores as the ‘third place’ people want to go, after home and work, to relax and enjoy time with friends,” he says. “Our contribution to that positioning is creation of a physical security presence that, without being overly apparent, prevents violence, protects our partners [employees] and customers, respects customer privacy and makes people feel safe.”
Shrinkage and ROIIn addition to aligning security with business goals, virtually every retailer is concerned with reducing shrinkage, which the National Retail Federation (NRF) defines as “inventory losses occurring from employee theft, shoplifting, organized retail crime, administrative error and vendor fraud.” Retail shrinkage averaged 1.61 percent of retail sales, or $41.6 billion, in 2006, according to the National Retail Security Survey conducted by the University of Florida in partnership with the NRF. ADT is one of the underwriters of this study. As a result, systems that can reduce shrinkage are retail’s “grand slams.”
“Retailers are hungry for more and more information about what people buy and, especially, what they steal and how they get away with it,” states Vector’s Grady. “They tell us reducing shrinkage is the ‘only free money left on the table.’ Retailers don’t need to have a sale, extend hours or advertise. What they save goes right to the bottom line.” Grady adds that, typically, retailers budget 0.5 percent of sales for loss prevention related services. “Industry sources indicate that amount could exceed $2.7 billion in 2008. If the past holds true, most of this will be spent on video surveillance and electronic article surveillance, followed by alarm systems and access control,” he says.
Before they can count on getting money for shrinkage and loss prevention solutions, retail security professionals have to justify those solutions to management. “Simply saying money will be used to buy security and safety systems is not enough. There must be a clear ROI on those expenditures,” comments Tony Byerly, senior vice president, HSM Electronic Protection Services, a Stanley Works Company, Lisle, Ill. Retail is the largest vertical market in the company’s national accounts division, accounting for approximately 40 percent of that division’s total sales.
To deliver the desired ROI, retailers are seeking solutions that can increase efficiency, lower costs, reduce risks and offer more enterprise-wide benefits. Video is one of those solutions.
Panasonic’s Surfaro says video is recorded, though usually not monitored, in ultra-small stores and kiosks. “Retailers can review video not only to look for theft, but also to see how well customers are treated and how quickly they get in and out,” he notes. “The latter information can be used by training.”
HSM’s Byerly has seen increasing interest in video monitoring from all segments of the retail market. “We’re getting more requests for video in unattended receiving areas and loading docks as a way to reduce losses and costs,” he says. “Retailers need flexibility on deliveries and want to reduce the need for required staffing at different hours. It’s another value add for an installed system.”
Though still evolving, video analytics is being added to network video surveillance systems by larger retailers. “Video analytics can be used to automatically detect suspicious behavior or track items inside and outside the store,” explains Dvir Doron, vice president of marketing, ioimage, an Israeli company specializing in video surveillance and analytics. “Inside, analytics can provide valuable information to legal, marketing and other departments in areas such as accident investigation, end-cap analysis and buyer dwell time. As a result, it can contribute to operational performance as well as to safety and security.”
Fredrickson says Bosch also is seeing high interest in video analytics as costs come down. “Retailers are using analytics to identify specific events or threats in their place of business,” he notes. “It’s not just about having a quality camera anymore. It’s the content of the video provided by the camera that’s important.”
Retail Theft: The Crime, the Cost, the OpportunityClose to press time, the results of a major new study on retail crime and security was announced. The interesting aspect of this study is that it covers the retail market globally, and its segment on the United States market are in line with the National Retail Security Survey.
The Global Retail Theft Barometer (2007), states: “The report proves that retailers worldwide are coming to the same conclusion: investing in security technology is seen as a priority and can provide a significant return on investment.
“For example, the study shows that up to 46 percent of retailers worldwide expect to increase open merchandising of products in the next two years. In order to avoid a rise in shrink while using open merchandising to increase sales, retailers will be presented with some interesting challenges to protect their products. One solution retailers are employing to control shrink globally is the application of EAS tags at source. According to the study, more than 65 percent of retailers expect to use this method of protection within the next two years.”
Retail Loss in North AmericaBased on the study’s sample of 228 North American retail corporations with combined retail sales of $376 billion, average shrink (stock loss from crime or waste expressed as a percentage of retail sales) in the 12 months to June 2007 was 1.52 percent of U.S. retail sales and 1.49 percent of Canadian retail sales.
The overall cost of retail shrink in 2007 for U.S. retailers was almost $40 billion and in Canada $3.6 billion, a combined total of $43.5 billion. (See the accompanying table, Retail Shrink in North America.) This shrink figure has to be met ultimately by consumers, stockholders and employees through a mixture of higher prices, lower profits and lower bonuses and wage levels. In 2007, shrink cost each man, woman and child in the United States $139.06 and $112.59 (U.S. dollars) in Canada.
“Shrink” is a term that reflects the difference between the financial revenue the business should have received and the amount actually received, the study says. Shrink losses are caused mainly by people stealing goods or money from the company and also by a range of small or large process errors, accounting lapses and pricing mistakes that produce apparent inventory losses.
North American retailers who participated in the survey found the largest source of loss was attributed to a number of dishonest employees, responsible for 45.8 percent of retail shrink (See the accompanying table, Sources of Shrink.) This also includes fraudulent employees placed in retail organizations by organized crime.
The second most significant source of retail shrink loss in North America was reported to be shoplifters, responsible for 32.5 percent of shrink. Vendor crime (including losses in the distribution chain and theft by delivery employees) was responsible for 5.4 percent of shrink. Lastly, administrative error, which includes accounting mistakes, pricing errors and process failures, accounted for 16 percent of shrink losses.
Shoplifters in the United States stole or admitted to stealing an average of $658 per incident, and employee thieves to $1,755 per incident, according to the study.
Survey responses from U.S. retail corporations indicated that 24.6 percent of internal theft was believed to take place at the checkout or cash desk, 43.2 percent on the sales floor and 32.2 percent in the back office, delivery bay or stockroom.
The location of losses is very important because it determines what means are used to prevent or detect internal fraud. The most significant method of internal theft in North America was thought to be merchandise theft, followed by cash thefts (including coupons, vouchers and gift cards); refund fraud and markdowns; collusion; and financial fraud.
Retail Loss Prevention & Security SpendingLoss prevention spending in the United States was $11.8 billion (0.45 percent of retail sales), made up of revenue spending of $8.1 billion and capital spending on security equipment, IT and other long-term assets of $3.7 billion. As a percentage of sales, revenue spending was 0.31 percent of sales and capital 0.14 percent.
The most significant retail loss prevention spending in North America is for loss prevention employees, which, at $7.1 billion, represented 55.4 percent of total spending. (Of that, direct employees cost $3.1 billion and spending on contract employees was $3.97 billion.) Retailers allocated $3.9 billion (30.8 percent) to security equipment including electronic surveillance, CCTV, IT and depreciation.
The remaining budgeted items were armored vehicle cash collection ($0.88 billion or 6.9 percent of loss prevention spending) and other ($0.88 billion or 6.9 percent of the loss prevention budget).
The Global Retail Theft Barometer (2007), sponsored by Checkpoint Systems Inc., covers all retail sectors and vertical markets in 32 countries in order to capture the scale of crime-related losses and shrinkage and to examine trends in loss prevention policies adopted by retail corporations.
Sidebar: Preventing Trailer TheftMerchandise trailers make juicy targets for thieves, especially when they’re dropped off at unattended loading docks at night. This can be a high-level loss, says Tony Byerly, senior vice president, HSM. “There’s a black market for virtually everything. One tractor trailer can be a significant loss to a retailer,” he says. Because trailer thefts can create such big dollar losses, HSM developed the Leash Alarm to help reduce those losses. Drivers park their trailers at a designated receiving bay door, loop a cord through the suicide bar on the trailer and plug the cord into the Leash Alarm box. The device time/date stamps delivery. “Leash Alarms have a substantial ROI,” concludes Byerly, “because they save customers’ time, provide record of delivery and protect their merchandise.”
Sidebar: The Most-Stolen Merchandise from Retailers1 Cosmetics and skincare
2 Ladies’ apparel
3 Perfumes and fine fragrances
5 Designer apparel
6 Razor blades
7 Video games and console
8 Small electronic items, e.g., memory stick
11 High cost and specialty food (e.g. fresh meat, cheese, pate)
13 Infant formula
14 Computer laptops
15 OTC medications
16 Health products, vitamins
18 Accessories (apparel)
19 Leather belts, designer bags, etc.
20 Office supplies
21 Hand tools
22 Men’s apparel
24 Power tools
26 Children’s clothing
27 Shoes and trainers
28 Baby products, diapers, etc.
29 Sports equipment and sports accessories
31 Interior furnishings, lamps, etc.
33 Hair care, other beauty products
34 Home security products, e.g. door/window locks, cameras
Table courtesy of The Global Retail Theft Barometer (2007)
Listed in rank order are the merchandise items that North American retailers reported as being most frequently stolen, based on data provided by the retail corporations that responded to a survey. In 2007, the most heavily stolen products from retail stores in North America were cosmetics and skin care.