G
Ghost Employees
The term “ghost employees” refers to nonexistent people on the payroll; i.e., a check is regularly issued to an alleged employee who doesn’t exist. Typically, someone in the human resources department or timekeeper/payroll department creates this “ghost” and creates the necessary paperwork to cause this “ghost” to become part of the organization.
A regular payroll check is automatically issued and is either intercepted in the check distribution system or is automatically mailed to a designated address (or post office box) for subsequent cashing by the culprit employee who is managing this fraud.
A “ghost” may also be a real person who is unaware of this payroll fraud; e.g., when the employee is discharged or otherwise terminates employment, an HR employee, rather than processing the status to “terminated,” keeps the now ex-employee on the payroll and intercepts the check.
This risk and problem are usually checked, in a well-managed and sophisticated company, by someone in the finance division, such as internal auditors. Loss prevention investigators may be called in to assist during early stages of the discovery, to verify actual addresses or bank accounts, and depending on corporate policy may be charged with the interrogation of the employee identified as being a principal in the fraud.
Gift Card Fraud
A prerequisite of understanding gift card fraud is understanding both the history of the gift card as well as how it fits into the overall structure of retail business. According to published sources, the domestic gift card market grew from $1 billion in 1995 to roughly $70 billion as of 2006. Gift cards began as a substitute to paper gift certificates. Companies such as Kmart and Blockbuster began testing their use in 1995. They initially were utilized in the retail business to reduce the headcount associated with the accounting of the certificates and ancillary escheatable property records. The industry grew from roughly $1 billion in sales to approximately $70 billion today. The initial reticence to their being given as a gift has long since subsided. It is estimated that stored value cards represented 12% of holiday sales.
Marketing studies have published that 75% of all adults have either given or received gift cards and 93% of all U.S. teens have bought or received a gift card. The reason for such explosive growth and maintained interest in gift cards is not only due to sales, but also due to a concept known within the industry as “lift.” Lift has been defined as the amount of funds that a consumer spends above the original gift card amount. It is estimated at anywhere between 40% and 200%. Other factors include “breakage,” or the residual amount that is left on gift cards and not redeemed. Accounting for breakage in a more refined manner allows the retailer to recoup these funds rather than escheat them to the state. Publicly traded companies have reported significant amounts of below-the-line income in their annual statements due to breakage. It is estimated that consumers never redeem between 3% and 5% of the value of a gift card. While this estimate may be aggressive, you can plainly see that the combined financial leverage of breakage and lift make the gift card a financially attractive product to the retailer.
Understanding both the financial model and history is essential to understanding the strategic importance of gift cards to retailers and why they will be here to stay.
Gift cards for most retailers operate in a closed loop environment. A closed loop gift card can be redeemed for merchandise only at the same retailer who sold the card. The life cycle of a gift card begins with their manufacture and personalization. Personalization is the process in which a specific account is assigned to the piece of plastic. Gift cards, unlike credit cards, are not limit based. The process of valuation and redemption is similar to that of opening and maintaining a safety deposit box at a bank. Simply put, the bank has a safety deposit box available to any customer. Once a safety deposit box account is opened, you still need both keys (the customer and the bank) to open it, and if there is nothing in it to retrieve, it is due to the fact that the customer has not placed anything in the box. Prepaid cards such as gift cards have no value until the customer places value on them by recording the transaction; when a card is used, the value is subtracted accordingly.
Some cards can be used only once, and some cards can be revalued. Gift cards can also be sold at third-party locations as well. Gift cards are valued using either a magnetic stripe or bar code method. The vast majority of gift cards utilize the magnetic stripe method, but many large retailers use the bar code as well. As mentioned earlier, using the safety deposit box analogy, the gift card’s magnetic stripe or bar code represents the key. When the retailer values the card, the “value” is placed in the safety deposit box. This transaction is recorded in the POS system of the retailer, as well as in a gift card processing system. Security features present in the magnetic stripe of the gift card prevent mass counterfeiting of cards. These features are similar to the complex algorithm created by the Card Verification Code (CVC) when a credit card is issued. Similar technology such as two-dimensional bar codes offers protection on bar code gift cards as well. Since the focus of this book is on retail loss prevention efforts, a more detailed discussion of the manufacturing security features is not warranted here.
According to published research, gift cards presently represent between 3% and 5% of tender types at point of sale. This is an important statistic to keep in mind.
In 2005 the highly respected annual National Retail Security Survey undertook to study gift card fraud. Their findings attribute the average loss to retailers from gift card fraud were approximately $72,000. The retailers that responded to the survey attributed 62% of the losses to employee conduct, 13% due to counterfeit or “skimmed” cards, and 13% to stolen cards. This study was the first loss prevention effort to quantify the issue of gift card fraud. Retailers will undoubtedly draw their own conclusions as to the quantity and type of gift card fraud that exist within their own organizations. The study attempted to provide some answers on a broad base as to how much fraud exists specific to gift cards.
As in any discussion of fraud, you must understand that fraud, by its very nature, defies scientific measurement. After all, if fraud is not concealed, it would be easily discoverable, and fraud investigators would probably need to find another line of work. That being said, the experiential nature of individuals in the fraud fighting business would apply that set of skills to the issue of gift card fraud and would be able to deduce intuitively the conclusions of the survey.
One adage that has always been forefront in the mind of this author is that there is only one area of any retailer where one individual controls almost all the assets of a retail institution, and that is at the point of sale. Simply put, it is where the customer, the tender, the inventory, the employee, and most important, the reputation of the retailer meet. Any loss prevention effort that does not consider that as a crucial opportunity for control will undoubtedly be less than effective. This is also true for gift cards as well. Good loss prevention controls at point of valuation and redemption are essential to a successful gift card loss prevention effort.
The types of theft that can occur at point of sale utilizing gift cards are numerous, but all controllable. An example of a simple fraud is when an employee gives the customer a blank card and retains the one that he or she just valued. A sleight of hand is all that is really required. Controls at point of sale would include a regular inspection of the cash wrap area to ensure that gift cards are not hidden or separated from their packaging.
A variation of this type of fraud is when an employee retains a gift card with a residual balance, using that balance for tender in exchange for a cash sale, and then keeping the cash. Good POS controls, including a regular review of multiple tender sales, would be warranted here. Some firms utilize gift cards rather than script or cash for nonreceipted returns. Dishonest employees in these environments are restrained from stealing cash by creating fictitious returns; however, they may attempt to create fraudulent returns and retain the gift cards for sale. Retailers that track returns by employee and utilize separate gift cards for returns (separate bin numbers, signature panels, and nontransferability language) are better protected against this type of fraud as well.
An employee who switches bar codes on gift cards will also utilize these schemes as well, but with a slightly different twist. The dishonest employee will switch the bar code of another item with that of the gift card. When an individual purchases the item, he or she is actually valuing a gift card, one that the dishonest employee retains. Again, with exception reporting, the smart employer can highlight and eliminate this type of fraudulent behavior. With the present state of exception reporting in the retail environment, many retailers can design reports that highlight or model potentially fraudulent behaviors involving gift cards.
Prior to discussing exception reports and their use in fighting employee fraud, we need first to cover another operational aspect of gift cards—that of making balance inquiries through use of an 800 number. This is often referred to as an Interactive Voice Response, or IVR, number. Customers often want to determine the balance of a gift card without going to the store. Most gift cards offer an IVR number to check out balances or check transactions on cards. Some gift card companies utilize an Automatic Name Identification (ANI) platform to capture information about the caller. This information is useful in obtaining information that can assist in investigation and prevention of gift card fraud both externally and internally. Exception reports that utilize information from the ANI platform are often effective. A powerful exception platform that includes IVR information and various aspects of timing is very useful in fighting internal types of gift card fraud. Indicators of gift card fraud are not usually detected at store level. Some of the more common indicators of internal fraud are
• Customers who complain about not having balances on their card at time of first redemption
• Gift cards that are redeemed within hours of valuation
• POS terminal shortages that match or follow gift card sales
• High numbers of manually entered valuations and redemptions and multiple gift cards offered for tender on employee sales
These are just some of the more common indicators of internal fraud that can be highlighted through comprehensive exception reporting.
For purposes of brevity, I have compiled a number of the more useful exception reports that can be utilized when fighting gift card fraud. The list is hardly comprehensive but has been useful in modeling fraudulent behavior patterns with gift cards:
1. Gift cards with the number of balance IVR inquiries greater than X (X is user defined)
2. Phone numbers with multiple IVR inquiries on multiple cards
3. Store phone numbers with multiple IVR balance inquires
4. Sequentially numbered gift cards with the same phone number making the IVR balance inquiry
5. $0 balance gift cards with the number of IVR balance inquiries greater than X (X is user defined)
6. Gift cards with the number of balance inquiries (POS generated) greater than X (X is user defined)
7. Stores with multiple balance inquires (POS generated)
8. $0 balance gift cards with the number of balance inquiries (POS generated) greater than X (X is user defined)
9. Valued gift card transactions immediately followed by balance inquiries (POS generated) in the same day
10. Valued gift card transactions followed by IVR balance inquiries in the same day
11. Mass valuation cards redeemed on employee purchases
12. Mass valuation cards redeemed on employee purchases greater than $X or by frequency
13. Mass valuation cards valued and redeemed on the same day
14. Multiple mass valued cards redeemed within a single store within X number (user-defined) of transactions
15. Gift cards valued at store with insufficient funds (check) transactions
16. Gift cards valued at store with stolen or over-limit credit cards
17. Gift cards valued at store and redeemed online the same day
18. Gift cards valued at store and redeemed online more than X (user-defined) times
19. Mass valuation valued and redeemed online in the same day
20. Cards sold at store and redeemed at same store within 1 day more
21. Cards issued and redeemed in same day by same associate
22. More than X (user-defined) issued by same associate
23. Gift card sales followed by either line item or post transaction voids
While the list is hardly comprehensive, many of the reports are easily compiled with existing POS data and are extremely useful in noting internal fraud trends at point of sale.
An interesting trend of late has also emerged in the area of gift card fraud. That is dishonest employees working with members of organized retail crime groups to obtain receipts. This is usually done so that ORC groups can obtain gift cards for shoplifted items returned to the store. This topic provides a good segue into external gift card fraud. This topic is one of great interest to the media especially around holiday time and is laced often with more rumor than fact; however, as in any good news/bad news story, the good news is that external gift card fraud has not been a major problem facing retailers; the bad news is that most individuals engaged in committing gift card fraud are usually organized at some level.
There are three areas of interest when it comes to external fraud and gift cards:
(a) Skimming or making duplicates of gift cards
(b) Intentionally purchasing gift cards with bad tender (either NSF checks or stolen or skimmed credit cards), and
(c) Utilizing the Internet to sell gift cards of questionable value
“Skimming” is the fraudulent act of reading, storing, and sometimes recopying the encoded information on either a bar code or magnetic stripe of a gift card. Individuals will steal amounts of blank gift cards, utilize a bar code or magnetic stripe reader-writer to read these cards, and transfer them on to other cards, thus making two copies of one card. An individual replaces these cards in stock and waits for a legitimate customer to value “his” card and then immediately uses the card, beating the customer to the funds. As you can imagine, this makes for incredible effort with little reward, so it is not frequently seen. However, when this act is discovered, the number of cards stolen will be significant. Good loss prevention would suggest regular inspections of gift cards to ensure that they are intact.
Additionally, some retailers use a gift card with a scratch-off electronic security code (an algorithm that validates the account number of the gift card). This feature can be used when a gift card is redeemed online or even in stores. Skimming (sometimes referred to as “cloning”) requires some knowledge of the account layout of the magnetic stripe as well as equipment. The important point to remember is that good loss prevention controls, protective packaging, and scratch-off electronic codes prevent skimming from happening.
You must also understand that, under the law, there is no distinction between a counterfeit or skimmed gift card and its corollary, credit cards. In other words, cloning gift cards is the same offense as cloning credit cards and is often prosecuted as such. There are also groups of organized retail criminals who, after sending in shoplifting crews, send in return crews to obtain gift cards from retailers, offering them for nonreceipted returns. These cards are usually offered in some alternative venue, as they provide more of a return for the criminal than more classical pawn shops and fences. The gift card industry and retailers have utilized techniques such as the 800 number to capture telephone numbers and, working with law enforcement, have made significant inroads in stopping these individuals as well.
Perhaps one of the more common uses of gift cards for the external fraudster is to try to extend the life of an identity theft or credit card theft by buying and utilizing gift cards with a stolen credit card or manufactured identity. The gift card is then sold in some electronic venue. With real-time accounting of gift cards, they are often devalued quickly after finding out that the tender used to purchase them was bad. As a result, the gift card is often left without value.
Since this text emphasizes loss prevention, I have strived to provide techniques meant to dissuade the ethically challenged from getting away with gift card fraud. Good loss prevention is holistic and often provides ancillary benefits to all assets. This is also true for gift card fraud as well. There are some generic best practices that will greatly stem any gift card fraud from occurring, and that list is included here as well. As this area of the business evolves, each retailer will need to find the correct return on loss prevention effort based on the commodity and opportunity that gift cards offer to the consumer.
Good loss prevention technique and process will need to evolve at a rate commensurate with the business changes in the gift card industry. Collaboration and cooperation will always overcome the challenges presented by the fraudster when it comes to gift cards.
“10” Loss Prevention Practices for Gift Cards
1. Ensure that the POS sequence values the card upon completion of the transaction.
3. PIN-based cards to be used on all redemptions and online purchases
4. Active review of IVR exception reporting tools on a regular basis:
5. Exception reporting in conjunction with external or internal POS IT resources that address certain gift card transactions (see attached spreadsheet)
6. Placement of gift cards in highly trafficked areas that provide “heat and light” on the offering
7. Periodic in-store counts of prevalued gift cards to account for any possible large shortages
8. Periodic reviews of personalization vendors to review process and physical security issues
9. Active liaison by gift card vendor in industry LP forums such as Food Marketing Institute, Retail Industry Leaders Association, and the National Retail Federation to discuss antifraud trends and developments
10. Active participation with the gift card vendor and in-house loss prevention staff to consolidate active investigations and discuss cross-client issues as well as provide a conduit to the proper government agencies that will investigate issues of suspected gift card fraud
Good Housekeeping as a Shrinkage Prevention Tool
While engaged in a survey of a chain of drug stores, I had occasion to inspect a small outbuilding serving as a warehouse for a remote store. It was dusty, dimly lit, poorly ventilated, and jammed full of off-season goods. My focus was on the physical security of the merchandise in this building; i.e., could the building’s physical security features be breached and theft occur without management’s knowledge? As I moved through one aisle, I found myself walking on Halloween paper goods, i.e., paper pumpkins, black cats, orange and black paper tablecloths, merchandise stored for the fall. Closer examination of just that aisle disclosed some of those goods had been on the floor and walked on for some period of time. Further examination revealed similar conditions in two other areas of this mini-warehouse. Generally, both the store and its warehouse lacked good housekeeping practices, and interestingly, this store led the chain in inventory shrinkage. The company’s executive who accompanied me on my visits to various locations was embarrassed by this condition, but a very important message came out of this experience. My reaction and my message as the consultant was: How can you expect employees to relate to the importance of a company-wide shortage prevention program when there’s an obvious disrespect for merchandise? If the paper goods on the floor were paper money, would people walk on it? Merchandise is money, not necessarily negotiable money, but a direct representative of the value of money, and deserves respect.
This whole issue of respect for merchandise is reflected in retail stores by well-illuminated, clean, neat displays and presentations of goods in their proper locations.
Merchandise tossed about and ignored in empty fitting rooms is clearly an invitation to theft. There’s a relationship between unkempt stores or departments within stores and theft, if not by customers, by employees who sense no one is really concerned about the merchandise. Conversely, clean, orderly, neat, folded merchandise in clean, well-illuminated stores and stockrooms, reflecting good housekeeping, commands increased respect. Similarly, new merchandise or seasonal merchandise being stored for future use must be carefully identified, stored, and preserved and protected.
Grab and Run
The “grab & run” theft technique is simple: The thief simply runs into the store, grabs an armload of merchandise from a display or a large bag of preselected goods staged in a specific and agreed-upon location, and runs out the nearest exit, to a waiting car driven by an accomplice. These kinds of sizeable “shoplifting” losses are accomplished in less than a minute.
The grab-and-run technique is the most unsophisticated, brazen, and thug-like shoplifting technique that will be encountered. Of course, there are some variations, such as a confederate can precede the runner and arrange the goods on the designated display stand or rack. If the merchandise, such as leather jackets are on hangers which are reversed, the confederate, in making ready for the “hit” can turn the hangers to all face the same direction to accommodate the quick lifting and removal for the run. Or, if secured with plastic ties, the confederate can cut the ties, defeating that obstacle to prevent the loss of an armload of expensive jackets. Or, as referred to previously, the goods can be already bagged and stashed by a different confederate (or even the guy who eventually runs in and grabs it) waiting for its quick removal from the store.
In those uncommon events, when LP agents may be in the area, and even aware of and waiting for this crime to unfold (based on investigative or intelligence information), it should be anticipated the results would be for the runner to dump or throw down the merchandise or throw it at the pursuing agents and further, if intercepted before reaching the waiting vehicle, use violent force to resist and escape.
The most vulnerable store areas are those near entrances and exits, particularly those with streets or roadways immediately outside. Such vulnerability can be somewhat minimized by placing displays containing expensive goods deeper into the interior of the store, and preferably close to employee workstations.
All available information connected with such losses should be memorialized, shared with other merchants where such sharing is an ongoing protection strategy, and reported to the police.
Grocery Loss Prevention
The purpose of this section is to present and consider some different areas of grocery loss prevention to operators who are looking for ways to add value and dollars to their bottom line. We will cover areas such as combining services to the improper trimming of lettuce. Yes, the small things really do count!
According to the Progressive Grocer (1), as of 2005 there were 34,052 supermarkets in the United States. The Food Marketing Institute (FMI) (2) reports that the average supermarket consists of 48,058 square feet and has annual sales of over $27 million. According to the 2005 National Retail Security Survey Final Report (NRSS) (3), retailers spent just 0.47% of annual sales on their overall loss prevention budget. The NRSS reported shrink in the supermarket/grocery segment was 2.38% as compared to 1.59% for the overall retail market. When you consider the profit margins in grocery are historically low, that translates to big dollars. Just reducing shrink from 2% to 1% is like adding 35–40% in profits to the bottom line. Industry experts put the per-store loss to shrink at over $400,000.
Combining Services
Combining services under one loss prevention umbrella makes good business sense.
Operations such as internal audit, check and credit/debit card fraud, external/internal investigations, crisis management, facilities security, and food safety are all functions directly related to loss prevention services.
Today’s loss prevention personnel are better educated, are more business oriented, and are partners and true assets to their organizations. This can be directly attributed to organizations like the Food Marketing Institute (FMI) and leaders like Charles I. (Chuck) Miller, who held the position of Vice President of Loss Prevention Services at the Food Marketing Institute for 15 years. Grocery operators realize the benefits of seeking out the best-qualified individuals to head their security efforts.
During a recent conversation with a group of supermarket executives, I was asked to describe, in one word, what one quality it took to be successful in grocery loss prevention. My immediate thought was this is impossible but then boldly stated, “A jack-of-all trades.” A member of the discussion group quickly pointed out that my answer was more than one word. I told him—not when you hyphenate it. This made for a humorous moment but made me think about the question more in depth. The Loss Prevention Director or Security Director in a grocery operation today is viewed as a true expert in many phases of the operation. Some areas of knowledge include but are certainly not limited to
• External theft (shoplifting)
• Organized retail theft (ORT)
• Internal audit, compliance and financial
• Crisis management operations
• Food safety/product tampering
• Physical security measures—corporate, warehousing, and manufacturing.
Some additional areas of proficiency should include
As you can see, the Manager or Director of Loss Prevention Services must be well versed in many areas of the entire operation. It makes good business sense to combine numerous service areas under one department.
Paying attention to the bottom line is the focus of any effective asset protection department. The subsequent highlighted topics are just a number of areas that can add value to your business. They are not meant to be all encompassing, just informative.
Electric Article Surveillance (EAS)
One of the most effective ways to reduce shrink in grocery is to use a tag-and-alarm system, also known as “electronic article surveillance” or EAS. In the early stages, the supermarket industry was slower to embrace electric article surveillance systems due to issues with the different climate variations found in the stores. As technology progresses, grocery retailers find EAS to be a real profit saver. My own experience found the monthly return on investment (ROI) from $2,500 to $5,000 per store. Being the first in a geographic location helped.
Systems are used primarily to protect high theft areas around the store like meat, liquor, razor blades, and other high-ticket items or merchandise targeted by professional thieves. One of the real benefits of a tag system is you can choose what products to tag. One grocer tags school supplies at the start of the new school year. He says that it only takes about a week until the message gets out.
A part of any successful EAS campaign is communicating with your customers. A month before installing a system in your store, develop a bag stuffer and signage that explains to your customers you are installing an antishoplifting device. Explain that theft of products causes retailers to raise their prices, thus penalizing honest customers. Communicating this early message to customers has a positive impact on your business. EAS is not for every store location. Careful planning and research of crime statistics will guide you in the proper placement of systems. Don’t forget, proper training and effective customer communication are just two of the keys to a successful EAS program.
Employing Biometrics
Biometric readers are used for recording employee work time, ensuring backdoor security, cashing customer checks, and processing payments at the checkouts. Using a biometric payment system at the checkout reduces the transaction costs to the grocer as credit and debit card transaction fees continue to increase. Biometric payment is also considered safer to use when considering increasing concerns regarding identity theft. Using biometrics at the back door makes sense when considering the costs of constantly issuing and replacing lost or stolen keys and reader cards. Although the use of biometrics in the grocery setting is stronger in Europe, the technology is catching on in the United States.
Closed-Circuit Television (CCTV)
Within the grocery industry, CCTV has a wide array of uses including recording (and deterring) employee theft, shoplifter activity (external theft), and one my favorites, observing and recording high-risk areas of the stores, looking for situations that could cause injury to customers. Very early in my grocery loss prevention career while I was observing, with CCTV, a high-theft aisle in a store, a woman entered the aisle pushing a grocery cart. She stopped, pulled a small plastic squeeze bottle from her purse, and sprayed water on the floor. She then ran her foot through the water and sat on the floor, yelling very loudly for someone to come help her. Had we not been using CCTV and been able to prove her false claim of injury, our potential for liability could have severely impacted the company’s bottom line. Grocers spend $450 million annually to defend slip and fall claims. It makes good sense to use technology to protect your business.
With concerns mounting about food safety and product tampering, the use of CCTV in the grocery environment is a valuable tool. Many supermarkets have salad bars and public space areas for food preparation. It is important to take all necessary measures to protect your business. In another section of this book, I wrote about a product tampering case, “The Turkey Crisis.” This is just one example in which a tampering incident or threat of tampering can have a very devastating, negative impact on your profit margin.
Direct Store Delivery (DSD)
Direct Store Delivery systems are now commonplace in large grocery companies. This electronic, paperless receiving system automatically checks in a vendor delivery by scanning the incoming inventory. DSD removes the chance for potentially inaccurate or fraudulent hand counts. This procedure removes the invoice from the vendor’s hands, thus greatly reducing the possibility of fraud or collusion with the receiving employee. Benefits of a DSD system include
Not all grocery operators use a DSD system. If you are a small, independent operator and rely on a “hands-on” receiving system, here are some tips to help you save your bottom line.
• A vendor who gives out samples.
• A vendor who unloads his truck on the sidewalk area away from the store.
• A vendor who is constantly “on the move” in and out of your store.
• A vendor who begins servicing his product before signing in.
• A vendor who wants to evenly exchange product without issuing a credit slip.
• A vendor who enters no description-of-merchandise invoice for merchandise delivered.
• A vendor who does not extend the unit costs on the invoices.
• A vendor who extends or adds invoices incorrectly or adds the date or invoice number into sales.
• A vendor who charges the store for merchandise not delivered.
• A vendor who states the missing merchandise was “left on the truck.” If, for any reason, you give the invoice back to the vendor after checking it, he may alter it. The vendor can set you up by asking you for the invoice to add on additional product.
• A vendor who wants to deliver merchandise before the store opens.
• A vendor who gives you an invoice pad to sign without separating the blank invoice underneath.
Alarm Systems: Getting More for Your Money
I once worked for a grocery chain that was open 24 hours a day. The stores did not even have front doors, just a continuous curtain of air to keep out the outside environment. A wire gate rolled down when we closed early on Thanksgiving and Christmas Day. We were having trouble with backdoor thefts, and our key system had been compromised. Loss prevention was able to sell the idea of a card access alarm system only because we were able to show added value. In other words, the system would do more than keep track of who was coming and going. One of the big selling points was the system had the ability to monitor the temperatures of all the freezer cases and cold boxes. If a case temperature fell outside the acceptable range, an alarm was activated within the store and at the monitoring station. The system was also able to monitor the produce cases and activate the automated watering system, keeping the produce fresh.
There was much resistance to installing an alarm system, as we were open 24-7. Some company executives thought it was an unnecessary expense. This is just one example in which the loss prevention demonstrated added benefits in order to move a security program forward.
External Theft (Shoplifting)
According to the 2005 National Retail Security Survey (NRSS), shoplifting, or retail theft, accounted for 31.3% of the shrinkage in the grocery industry. The average percentage rate for the retail industry as a whole was 32.6%. Typically, small grocery operators do not employ security or loss prevention staff to work in individual locations, but hire small, traveling teams to work all their stores, concentrating on larger high-volume units or stores in high crime areas. It is also popular to outsource this function, keeping the investigative staff in-house. Outsourcing the shoplifting functions requires close monitoring of the contractor’s activities in your stores. Develop an operating policy and ensure your contractor follows your policies. Using an outside contractor for this function has the potential to add value to your bottom line by reducing your payroll and benefits expense. There is also a potential savings on liability claims. As an example, when I outsourced the shoplifting apprehension efforts at a company, we saved over $200,000 in the first year alone. This included salary, benefits, company vehicles, and reduction in liability insurance premiums. During my overall experience with outsourcing shoplift apprehension activities, a lawsuit was never filed; this was not the case with in-house operations.
Internal Theft (Employee)
The rate of internal theft in the grocery business is historically higher than other segments of the retail industry. According to the NRSS report in 2005, the percentage of employee theft in grocery was 51.3% vs. an average of 47.6% for the rest of retail. I think one of the reasons for this higher rate of internal theft is the high turnover rate within the associate ranks. For example, the turnover rate in the courtesy clerk or bagger positions is typically 200% or higher. These are young people, often starting at the early age of 15, who are experiencing their first job and have yet to develop any loyalty to their employer. The temptation and peer pressures are great, and these young employees find it hard to resist. Even though most companies have policies regarding key control, store managers still give keys indiscriminately to clerks, telling them to “clean up the back room and when you’re through, return the keys to me.” Consider the manager who fails to inspect the daily bookkeeping process (as per policy), thus enabling a dishonest bookkeeper to walk out of the store with $50,000. When he went to make the deposit, he found the bag contained cutup paper.
In my experience, I have found that the majority of internal, or employee, theft is due to management, at all levels, not following their own policy and procedures, thus creating opportunity for people to steal.
Organized Retail Theft (ORT)
My first experience with organized retail theft was when I worked for a, then small, retailer in Northeastern Ohio. We had received a memo, from the corporate office, on a “gang” of record album thieves (this tells you how long ago this took place), who were traveling throughout the Northeastern United States in a group of about five individuals, stealing large quantities of record albums. About 3 hours after receiving the memo (no email in those days), I was sitting in an observation tower overlooking the record department when I spotted four individuals sorting and stacking albums on the floor. They were showing all the signs, such as looking around to see if anyone was watching. Little did they know, I was only 15 feet away.
They proceeded to make their selections and hide the albums in their coats. It was later discovered they had very large pocket areas sewn inside their coats. By that time, I had alerted management who contacted the police. When these individuals exited the building, walking with some difficulty due to the weight of the albums, the police apprehended them, thus ending their criminal spree. I later found that these individuals were linked to an organized crime ring based out of New Jersey. Before they were apprehended, it was estimated this group of criminals had stolen over $15,000 in record albums from our store alone.
Organized retail theft threatens every grocery company’s profitability. Some of the most common items targeted by professional thieves are
ORT activity injures not only the retailer, but also the consumer, who has to pay higher prices at the register. The loss to communities has a real, direct impact to the tax base. “The Retail Alliance, an organization serving retailers in the Virginia Beach, Norfolk, Chesapeake, and Hampton Roads communities in Virginia, estimates that retailers in these communities suffered $200 million of loss to shoplifters in 2001. Tax loss to Virginia amounted to $9 million; $5 million of that loss would have gone into the state budget and $4 million to local cities and schools. Organized retail theft is a crime that has spread to all reaches of the U.S. The tax loss nationally is hundreds of millions of dollars.” (4)
Today’s large grocery retailers have investigation units within their loss prevention departments that exclusively direct their energies toward organized retail theft activities, working closely with local, state, and federal law enforcement agencies. The small, independent grocery operator has limited resources to devote to this type of retail crime but can help reduce losses by reporting suspected activities to local law enforcement agencies.
Exception Reporting
Exception reporting is, basically, the collection of information that falls outside a predetermined value. Exception reporting is fast becoming a favorite tool in the fight to combat internal theft. As an example, a clerk attaches a $0.98 price tag to the bottom of her wrist and then proceeds to price scan a stack of porterhouse steaks. The exception reporting system, programmed to record such an event, activated the CCTV system, capturing the transaction on video. Such a system can be set up to report the violation at either the store or corporate office. There are many software retailers in the marketplace offering exception-reporting programming, and large retailers often develop their own.
Risk Management
Risk management is exactly what the title implies—managing your risk. Most small grocery operators employ a risk management or insurance company to implement and run their risk programs. At some point, it becomes economically feasible to bring risk management operations in-house. In many grocery companies, this function falls under the auspices of the loss prevention department. Some areas under the risk management umbrella are described next.
General liability includes customer accidents. One of the most common customer accidents in a grocery store is slips and falls. Grocers spend $450 million annually to defend slip-and-fall claims.(5) Constant attention to floor care must be maintained, as this is one area you can effectively reduce your exposure. Use non-slip floor waxes or all-weather carpeting at the store entryways. Put down special matting during grape sales. I once consulted with a grocery company that was bagging its grapes but still experiencing customer accidents due to grapes falling on the sales floor. By using special floor matting, along with increased attention by store staff, the store reduced its risk exposure.
Workmen’s compensation—employee accidents. There are many ways for employees to become injured. One of the most common, in grocery stores, is the improper use of box cutters. Make sure your safety program includes the proper use of box cutters. Use box cutters that have a protective covering over the blade and limit the depth of blade, thus not only saving your employees from injury, but also saving product from being damaged.
Strict adherence to laws that restrict minors from using machinery, such as trash compactors or working in the meat preparation room, is mandatory. The Occupational Safety and Health Administration (OSHA) fines and the focused scrutiny of your operations can be devastating to your business. Make sure your managers are training staff about the proper use of power equipment. Full documentation of the training received will help in reducing fines. It is not uncommon for OSHA fines, for allowing minors to operate restricted equipment, to exceed $100,000.
Proactive vs. Reactive Loss Prevention
Ed Van Fleet, CCP of Brookshire Grocery Company, has written an excellent article titled “Why Are You Here? Reflections on the Role and Impact of Loss Prevention in the Retail Supermarket World.” On the subject of proactive and productive efforts, Mr. Van Fleet writes:
With proactive and productive efforts in any of these areas, you can impact the two most important lines of business-the top line (sales) and the bottom line (profits). Combine the two and you have profitable sales. Remember, profitable sales are the lifeline of your company. What can you do to increase sales?
• Help keep your associates on the job and accident free.
• Prevent out-of-stocks by reducing theft.
• Find ways to open merchandise rather than lock it up.
• Improve shelf life and product integrity through proper sanitation.
• Make your stores safe and enticing places to shop through crime prevention.
• Reduce costs related to associate or customer accidents.
• Deter theft of assets, not just merchandise.
• Increase recycling income, and/or reduce supply costs.
• Avoid lawsuits, regulatory fines, or other penalties.
• Increase productivity through an improved work environment.
The grocery business is a simple business. We bring the merchandise in the back and sell it out the front. It is the same as it always has been, yet everything has changed in how we do it. You have to change as well.(6)
The article also appears in FMI’s 2006 Supermarket Security and Loss Prevention Survey Report. This report, produced annually, may be obtained through the Food Marketing Institutes website at www.fmi.org.
Paying Attention to the Small Details
Remember earlier where I mentioned that the small things really do count? Consider this: A bunch of leaf lettuce sells for 90 cents per pound. If the company standard is to trim a very thin slice from the butt, and a produce clerk slices too deep into the butt and cuts off just one leaf at an average retail of 9 cents per leaf, the store would lose an average of 85 cents per day, assuming the lettuce is packed 12 bunches to a case. The loss would amount to $8.10 per day for just one store, or $421 dollars a year, by just one clerk in one store. If your grocery chain has 100 stores, and this scenario occurred in every store throughout the chain, the loss could amount to $42,120 annually.
If just one apple per day, at 25 cents each, falls from a display onto the sales floor and becomes bruised, the cost to a single store amounts to $1.75 per week, or $91 a year. The loss to a chain of 100 stores amounts to $9,100. These two examples demonstrate how paying attention to the seemingly little things will protect your bottom line profits.
Christman J., Sennewald C. Shoplifting–Managing the problem. ASIS International, 2006.
FMI. Supermarket Security and Loss Prevention – 2006. http://www.fmi.org/forms/store/ProductFormPublic/search?action=1&Product_productNumber=2145.
Miller C.I. A report on organized retail theft. Available online in PDF format at http://www.fmi.org/loss/ORT/ORT_report.pdf.
Sennewald C. Shoplifters vs. retailers—The rights of both. New Century Press, 2000.
(1) Progressive Grocer. (2006). 73rd Annual Report of the Grocery Industry. (April) 55.
(2) FMI Facts and Figures. www.fmi.org/facts_figs/keyfacts/stores.html.
(3) National Retail Security Survey Final Report. (2005). University of Florida. Supervised by Richard C. Hollinger, Ph.D.
(4) Miller C.I. A report on organized retail theft. Food Marketing Institute, 2003.
(5) National Floor Safety Institute (NFSI).
(6) Van Fleet E. Why are you here? Reflections on the role and impact of loss prevention in the retail supermarket world. Loss Prevention Magazine. 2006;November–December:92–93.