COVER STORY: LOSS PREVENTION: A pound of prevention

"Loss prevention isn't a department or a function --it's a mindset." So says John Guenther, director of loss prevention for Heinen's Fine Foods. His sentiment is echoed by the voices of thousands of other committed loss prevention executives employed by supermarket operators across the country. The challenge, they say, is that in the face of growing competition and increasingly complex problems that are sources for losses in the system, efforts to stem the tide are ultimately not going to work unless they become everyone's responsibility -- not just that of the loss prevention department.

"Loss prevention has to be addressed throughout the entire organization. Everyone has to live it and breathe it," says Tim Bartkowiak, director of security at Spartan Stores, Inc., a chain of 54 supermarkets and 20 deep-discount drug stores, based in Grand Rapids, Mich. "Within our organization, the motto is 'Share the responsibility.' Everyone can share the responsibility of loss prevention, whether it's the c.e.o. or the bagger."

Bartkowiak's view is catching on with a growing number of supermarkets, indicating that a more holistic attitude toward loss prevention is an industry model for the future.

Spartan and other operators are encouraging more dialogue among all the factions inside their companies, by beefing up training and internal communications. Some are formalizing the effort, with companywide campaigns such as the one at Spartan, which includes quiz cards and loss prevention posters. Spartan is also kicking it up a notch by extending its expertise to its independent retail customers via training and consultation.

Heinen's, a family-owned chain of 15 stores in Warrensville Heights, Ohio, kicked off its own campaign a year and a half ago, as "the first step toward generating awareness and buy-in from owners and executives," notes Guenther.

A total-company strategy for fighting losses must address the major sources of loss today, according to the experts. The most vexing drains on profits are:

-Organized retail theft (ORT)

-The internal problems of employee theft and cashier errors

-Unacceptably high shrink rates in perishables

Supermarkets are assembling an impressive and growing array of technological tools to fight the battle, including:

-Digital CCTV

-POS data mining

-Biometric finger scanning

-Robotic systems that detect bottom-of-basket loss

In short, the loss prevention movement appears to be on the cutting edge of strategic planning for smart retailers.

But putting the promise of technology aside, human assets remain the first and best defense in any loss prevention strategy, say loss experts. Even some technology suppliers agree.

"If you want to achieve true loss prevention with the biggest bang for your buck, do it with your people," says Larry Miller, president of Trax Retail Solutions, based in Scottsdale, Ariz. "Training people and implementing people systems are precursors to [using] technology."

By adapting a collaborative mindset that includes formal training, as well as less formal discussions among the different departments, retailers will not only find that every link on the chain of command helps cut shrink, but they may also discover new ways that loss prevention tools can benefit their specific areas of business.

An obvious example at store level is having a more engaged team of associates. By being more observant of shoppers, store personnel not only deter shoplifting, they also automatically provide better customer service.

Loss prevention tools can also support the efforts of merchandisers. "Merchandisers need to get on board with security, because we can help them in ways they have no idea about," observes Bruce Adams, director of security at Buehler Food Markets, Inc., an independent chain of 10 stores based in Wooster, Ohio. "For instance, security cameras can also be used to observe how merchandise is turning, how people are shopping."

Likewise Bartkowiak says he's been "floating the idea" of using CCTV public viewing monitors to partner with the marketing and merchandising departments. "We could seek out opportunities to offer advertising space on the public viewing monitors. It would not only pay for the system, but also bring in incremental revenue."

Several retailers also point to the built-in insurance that security cameras provide in the face of fraudulent slip-and-fall lawsuits.

It all boils down to the bottom line. "Loss prevention is a non-sales-driven department, so we have to constantly measure the things we do, and maximize our resources," notes Bartkowiak.

Looking internally

Of the problems facing retailers today, internal theft remains a critical one. Progressive Grocer recently conducted an online poll in which readers were asked to name the one area of loss that's most costly to supermarkets. Fifty-one percent chose employee theft. That coincides with findings from the Food Marketing Institute and the 2004 National Retail Security Survey published by the University of Florida's department of criminology, law, and society.

"Employee theft, without exception, has to account for the greatest loss in every company that I've dealt with," confirms Bartkowiak, whose career spans more than 15 years. "It affects companies almost 10 times the amount, monetarily, as shoplifting. We respect and trust employees, but they also turn out to be the ones who can hurt us the most."

Curbing employee theft is particularly tough in the supermarket industry, where such a high turnover rate almost ensures a certain level of disloyal employees.

"You have to have awareness programs to let the employees know you're watching and that you'll make apprehensions," observes Adams. "Part of our new employee training emphasizes that if you get caught stealing, you will get prosecuted."

Spartan Stores tries to stop the problem before it begins, by using a negative theft database, which lists names of associates who have been terminated elsewhere for stealing. "When we do a background screening, we can hit the database to find out if the person was termed for theft," says Bartkowiak.

Exception POS reporting is an increasingly popular tool for measuring both purposeful and accidental front end loss generated by employees. "We're at the beginning implementation stages of this with Retail Expert," notes Bartkowiak. "The technology enables you to run an automatic report every day of cashiers that have, for example, certain even-dollar bottle return slips. You can curtail that based on when they work and what the store average is. You can start analyzing those folks who fall out of the norm, and address specific issues."

Farm Fresh uses ShrinkTrax technology from Trax Retail Solutions to measure discrepancies at the front end and throughout the store, notes Scott Bayne, v.p. of operations and loss prevention for the Supervalu-owned chain of 38 stores, based in Virginia Beach, Va. "We pull what we call 'policies' to help us define specific issues. For instance, we have a lot of items, particularly in produce, which employees pull off the scale too quick. The computer ends up counting the price as a penny or under. We can pull policies on produce ringing up under a dollar, and look if part of that is from the cashier."

Fighting professional thieves

To continuously improve its front end practices, Farm Fresh counsels three cashiers a week, based on the reports, notes Bayne. A plan of action is included to help cashiers correct their deficiencies.

After front end losses, retailers unanimously agree that professional, or organized, shoplifting is their next-greatest concern. "Retail loss prevention people are struggling with creating awareness among our owners about the magnitude of this problem," notes Heinen's Guenther. "It's an area that we have to work on with other retailers and law enforcement."

Guenther deals with this and other loss prevention matters through his membership in the Ohio Grocers Association, the Food Marketing Institute's Loss Prevention Committee, and the National Retail Federation's new Food Advisory Council (see sidebar at left for more information on what trade associations are doing about loss prevention).

"It's tough to measure the total loss from organized retail theft, because, as with any shoplifting, you're trying to measure how much you're losing vs. other causes. I'd say historically there's been a slight increase over the last five years," he says.

As any retailer knows, one of the hottest lifted items in the past few years has been medicine that contains pseudoephedrine, which is used to make the illegal drug methamphetamine. The problem has become so bad that Target and other retailers have voluntarily moved these products behind the pharmacy counter, lawmakers are working on bills to restrict the products' access, and drug makers are looking into product reformulations.

When it comes to prevention, it's "survival of the fittest," notes Guenther. "You want to make yourself a less attractive target than the retailer down the street. The biggest thing you can do, however, is to get employees to understand the magnitude of the problem and to provide excellent customer service.

"The golden rule of the shoplifter is that they want time and space to do what they want to do. By offering shoppers assistance, accompanying them to product, and demonstrating product, you can make a difference. It blows away cameras, tags, and everything else," he adds.

Heinen's and other retailers have at times been pushed to remove high-targeted products off the shelves, but generally they try not to counter the problem at the expense of shoppers. "There's a thin line you have to walk between decreasing shrink [and] improving sales," notes Farm Fresh's Bayne.

Sometimes just reducing the quantity available on the shelf deters shoplifters, since they're typically trying to steal a lot of product at once.

Video surveillance can also be a deterrent to shoplifting, especially if the surrounding retailers don't have cameras, notes Guenther. On the other hand, "If everyone's using video as a precaution, they are less fazed."

Meanwhile a number of retailers have incorporated stamps -- both visible and invisible -- listing store banner and location to easily track products once they're in the market.

Depending on the states they operate in, some retailers have been aided by legislation designed to deter organized theft. "We're part of a retail alliance here in Hampton Roads that has worked closely on legislation," notes Farm Fresh's Bayne. "We've helped get laws passed in the past few years that require flea market vendors to provide proof of where they purchased high-theft HBC items."

Digital recorders are proving to be invaluable resources to retailers who want to track both internal and external theft, literally at the push of a button. "There's no comparison with what you can do with digital," notes Adams, who has converted four of his stores to digital surveillance and plans to do the rest within the year. "If I want to know what happened at 1:47 p.m. at register No. 4, I can access that footage within minutes. It's probably one of the biggest assets our area of retail has gotten in years."

Taking the technology a step further, vendors such as Westec InterActive Security, Inc. in Irvine, Calif. are interfacing video with POS data. "Our auditing people, who have retail backgrounds, will download several hours of video and POS data. They'll look for those red flags at the point of sale -- voids, discounts, no sales, or suspended transactions," says Michael Upp, v.p. of marketing and business development. "They then can literally burn a CD with POS and video data, write up a report of what they observed, and forward it to the loss prevention manager. When an employee is faced with this evidence, he or she usually confesses."

Fresh take on perishables

While many retailers are focusing their efforts on organized retail theft and internal loss, others are taking a fresh look at what they're losing in perishables. The trend is likely being driven by the many supermarkets that are emphasizing fresh departments as a point of differentiation.

Meat is the second-largest product category shoplifted in supermarkets, according to FMI. Several retailers report cases in which customers have shoplifted packaged meat and then resold it on the street or even in local bars.

In retail, however, there are many factors other than shoplifting that cut into perishables profits.

"Perishables present the biggest shrink challenge at Farm Fresh," notes Bayne. "We're over 5 percent in our perishable shrink, and the industry average is around 6.36 percent. You have to make sure you're receiving it at the right temperature and that it doesn't stay on the receiving dock too long."

To measure the process more closely, Farm Fresh conducts quarterly shrink audits in each of its perishable departments. "A plan of action is developed by the store director, with input from the district manager," explains Bayne. "We are making progress."

Farm Fresh also periodically conducts truck audits to make sure perishable product weighs what it's supposed to, and that the retailer is being billed correctly.

The chain developed a system called SOS -- or Shrink of Census -- that keys in on 19 categories, ranging from shrink to billing profit, in each department. It compares the department with its counterparts at other stores, using a color grading system displaying yellow for caution and red to indicate that performance ranks among the bottom of store averages."

" Most retailers just track gross margin, but it's extremely important to know what your shrink is," says Bayne. "I think if a lot of them tracked it, they would be alarmed at how high it is. If you reduce shrink, it will drop right to your bottom line."

One reason retailers don't track shrink is that in many cases, department managers feel they know their business by gut feel and may not be well versed in technology applications, notes Mark Chandler, grocery industry specialist for Kurt Salmon Associates. "It's a tremendous change management for retailers. You're talking about departments that historically haven't had much technology in them, except for maybe some fancy scales."

Once they're open to technological aids, retailers can choose from what Chandler calls the "Yugo" version—systems that provide the basic information on sales and shrink -- all the way to the "Ferrari" version, or systems that offer guidance on improving category management processes, as well as production plans or cutting lists for cut fruit or even meat.

The more detail retailers can delve into, the better, says Chandler. "If you can get granular data, for instance, drilling down to what you're selling at the flavor level, you can get a handle on how many items you need at a certain time of the day. Some of the more advanced retailers, like Publix, Price Chopper, and Schnucks, are using software tools to read the actual sales of product at flavor level."

Chandler recommends that instead of monitoring shrink in generic terms, retailers need to look at it on a more macro level. "There are products where 20 percent shrink might be OK, like for cookies. For elaborate cakes, however, that would not be a satisfactory rate."

Trax Retail Solutions' Miller encourages his retail clients to make store managers carry a store performance report card around the store, which lists the amount of shrink in each department. "It's small in size, but it's a practical tool to help them set appropriate goals."

However, Miller cautions that retailers "can't make a leapfrog jump into best-in-class performance."

The right touch

A growing number of retailers are signing on to test biometric identification technology to cut down on check and credit card fraud, as well as payroll check fraud. Retailers lose about $12 billion a year to bad checks, and about half of that comes from fraud, according to industry estimates. But supermarkets are also motivated by the high fees charged by credit card providers, and many see it as a more convenient payment option for shoppers.

"I think this is another edge in our business," notes Farm Fresh's Bayne. (Farm Fresh last month began piloting a solution by San Francisco-based Pay By Touch, the same vendor that the grocer's sister company, Cub Foods, uses.) "It will be convenient for customers and will make them feel safer. They don't have to worry about their purse or wallet being stolen."

The systems are very "plug and play," says Pay By Touch director of marketing Shannon Riordan. "We easily integrate with supermarkets' technology applications. All they have to do is install a scanner on their existing PIN pad."

Although the systems are relatively simple to implement, there has been some resistance from retailers who feel that their shoppers aren't ready for biometric technology. "There's a perception about consumer acceptance, but we're installing these at all types of merchants, and it hasn't been an issue," says Tim Robinson, president of Herndon, Va.-based BioPay, whose clients include Bi-Lo/Bruno's, Lowes Foods, and Marsh.

BioPay offers a point-of-sale payment system, as well as a check-cashing application called Paycheck Secure. "Payroll fraud is a much bigger loss for retailers," estimates Robinson.

Pay By Touch is preparing to pilot a check-cashing application with Supervalu, says Riordan.

Another cutting-edge technology being used to combat shrink is robotic in nature. The LaneHawk from Pasadena, Calif.-based Evolution Robotics is a new visual scanning solution designed to help companies reduce bottom-of-basket loss. Using advanced visual pattern-recognition software, which was initially developed for the robotics industry, the tool detects whether shoppers either intentionally or accidentally leave large items, such as beverage packs, in the bottom of their carts. It then notifies the cashier, who can easily scan in the product based on data already entered into the POS system. Carteret, N.J.-based Pathmark Stores, Inc. is testing LaneHawk in three of its stores over the summer.

"Retailers are losing around $10 a day per lane due to bottom-of-basket loss. This ends up equating to .1 percent of their annual sales," says Alec Hudnut, c.e.o. of Evolution Robotics.

Evolution Robotics is busy developing other "smart" tools that could benefit retailers in loss prevention, he adds. "We're working on several products for 2007. One is taking the video monitoring systems in grocery stores and turning them into more intelligent systems that would look for specific people or specific actions that are abnormal."

While some of these solutions may be a little futuristic for today's bread-and-butter retailer, there are plenty of practical ways that grocers are currently cutting loss. But many of these solutions come out of conversations among loss prevention managers and other managers in the store.

"It's important to have good relationships with your operations people, your category merchandising department, and even your store planners," emphasizes Spartan's Bartkowiak. "You want to let them know that you're not there to lock everything up, that you can partner to achieve more sales. It's a partnership in educating them on what our issues are, getting them to know our language."

Indeed, it's a language that all facets of the retail organization should learn.
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