Tuesday, March 18, 2008

Daylight robbery

Organised retailers are recognising the need to take tough steps against losses from pilfering and waste.

This would make a great question for the strategist quiz: What is the link between baby formula, Levi’s jeans and Gillette razors? The answer, as it happens, is equally interesting.

Across the world, these three are the most popular targets of retail theft. And as losses due to pilfering and fraud increase worldwide — and in India — retailers are worried that other products, too, will find favour with the wrong people.

It’s called “shrinkage” in retail lingo — when goods leave the retail store or the warehouse without a matching payment. And according to a recent study conducted by the UK-based Centre for Retail Research, shrinkage cost the world’s retailers approximately $98.6 billion — that’s more than six times the $16-billion organised retail trade in India — last year. Retail giant Wal-Mart alone is believed to have lost over $3 billion in shrinkage last year.

Considering the minuscule size of organised retail in India, you would assume shrink isn’t that big a problem here. But the global retail theft barometer survey conducted by the same agency states that Indian retail’s shrinkage woes are actually more acute, and worse in the unorganised sector. At 2.9 per cent of sales, India’s shrinkage rate is said to be the highest in 32 countries surveyed by the company.

Of course, most established players believe that number is dated or just plain wrong, claiming their shrinkage rates are less than or close to 1 per cent. But even that hurts, as shrinkage is a direct loss of revenue and not an expense that contributes to sales. Organised retailers agree shrinkage is a problem, but quickly add that they have kept the problem under control.

“Shrinkage exists and can’t be eradicated completely. It can only be constantly monitored and lowered. It is similar to how manufacturing companies spend on maintaining and monitoring their machinery,” says B S Nagesh, managing director, Shoppers’ Stop.

Other industry heads agree. “Shrinkage is a industry hazard. Since retail is a new business, companies are learning to adapt quickly and find ways around it,” says R Subramanian, managing director, Subhiksha Trading Services.

Before that, though, they need to digest some rather unpalatable facts. Retail theft can usually be traced to four causes: employee pilfering, shoplifting, accounting errors and vendor fraud.

And contrary to popular belief, it isn’t light-fingered customers who are walking away with unpaid goods: internal theft is the biggest cause worldwide, and in India.

In Western markets, shoplifting consumers are responsible for just over 40 per cent of all pilfering losses; the figure for India is much lower — 25 per cent.

What strategies are Indian organised retailers adopting to negotiate this admittedly tricky territory, where the people they need most — employees and customers — are also the cause of some of their biggest losses?

The ethical codeResearch shows that the most common method of employee theft is to allow a friend to slip away with high-value items after charging him for other, low-value items. And if an employee gets away with it once, he is likely to repeat his actions.

Retailers are aware of these grim facts. HyperCITY Retail Chief of Operations John Wilcox points out that 40 per cent of any retailer’s employees are likely to steal from the store or the warehouse.

Which explains why one of the first steps retail consultants recommend is creating an organisation culture that fights loss. That means protecting whistle-blowers, rewarding staff who help reduce fraud and investing in employees to create an experienced and loyal work force.

“As employees quit in a very short time — less than six months in most cases — they do not have any sense of attachment or empathy with their employers. Hence, building a stable employee pool is one of the most important measures,” agrees Pinaki Mishra, partner, retail, Ernst & Young.

The high attrition rate in the retail industry — 40 to 60 per cent annually for floor staff — is one of the biggest reasons for internal theft, agree retailers. To combat that, they are working to creating a sense of responsibility in their employees.

Big Bazaar, for instance, puts all its employees through training modules that highlight the importance of “Indian values” like honesty and integrity and also focus on building a sense of ownership among employees.

“You are more careful about something you personally own. Hence we believe in making employees feel that they are the owners of their counters,” says Rajan Malhotra, CEO, Big Bazaar.

It also helps if employees have a vested interest in keeping theft under control. HyperCITY, Spinach and Subhiksha all link financial incentives to shrinkage rates and reward positive behaviour. At Subhiksha, for instance, targets for shrink are set at the beginning of each month.

Teams that maintain shrinkage below that level are awarded bonuses. “A good rewards programme for containing shrinkage and identifying miscreants should motivate employees,” approves Gibson Vedamani, CEO, Retail Association of India.

But if the carrot doesn’t work, there’s always the stick. Most retailers dismiss dishonest employees immediately, believing the permanent blot on the résumé is punishment enough. Recently though, some retailers have adopted a zero-tolerance policy — they initiate criminal proceedings against erring employees. “It is a matter of integrity. Besides, it sets an example for others in the organisation,” points out the head of a large retail chain.

Constant vigilanceHarry Potter fans will be familiar with Alastair Moody’s severe instruction for fighting evil: constant vigilance. Well, retail shrink isn’t that far gone, but Indian retailers already recognise the soundness of that advice.

There’s only one way to reduce losses from administrative and supply chain errors — check entire stocks against furnished records, pack by pack. Needless to say, that can’t be done more than once or twice a year. Instead, retailers are depending on snap checks and increased, specialised audits to reduce shrinkage.

When Subhiksha changed from the over-the-counter model to the supermarket model, it found shrinkage increased from near-zero levels to well over 1 per cent. The company then changed from its annual stock taking to checking the stocks thrice a year, while certain high-value items like electric razors are audited twice a month. Subramanian says the always-on approach has helped bring shrinkage losses in the retail chain to under 0.25 per cent.

Others have opted for daily checks on high-value items. At Big Bazaar, mobile phones and LCD monitors are inventoried everyday. For its part, Shoppers’ Stop has divided all its products into three categories. Category A, which is checked four times a year, includes high-value and often-stolen items — jeans and dupattas, lists Nagesh.

Lesser value items are in category B and bulk and low-value items like imitation jewellery form category C, which is checked only once a year. (Incidentally, imitation jewellery is exceptionally easy to nick but most retailers shrug that loss off as an occupational hazard.)

Industry observers approve of this strategy. “Regular checking helps. If something goes missing companies can investigate the loss immediately. They can check their CCTV recordings, talk to the employees manning the counter and take action. None of this would work if the product is found missing after months,” says Arvind Singhal, chairman of retail consultancy Technopak Advisors.

TaggedBarcodes only go so far. RFID tags on products would be a more effective solution to shrinkage. But they’re not cost efficient: each tag costs between Rs 5 and Rs 50. For consumer goods and small-ticket items, then, retailers like Spinach and HyperCITY rely on closed circuit TVs.

Experts believe this feature can be used even more effectively. Rather than concealing the cameras, they advocate displaying them prominently. Large signages that mention the store is under electronic surveillance are also important.

In fact, one expert recommends a display screen in the store that screens the movement of customers. “More than the recording or monitoring, it is the perception that you are constantly monitored that will deter shoplifters,” says Vedamani.

Companies agree. When HyperCITY Retail first began operations, it had over five shoplifting incidents everyday. “In the first six months, we filed many cases. Soon we built a reputation of being a store with good security systems in place and this has reduced shrinkage,” says Andrew Levermore, CEO, HyperCITY Retail.

In storeIndian consumers may not be as dishonest as their Western counterparts, but retailers are taking no chances. Which is why they are tweaking store layouts to ensure shoplifters aren’t tempted. Rule number 1, then: No dead corners in the store.

“All our stores are square. If we do find an odd corner, we place a mirror in it so it becomes visible,” says HyperCITY Retail’s Wilcox. HyperCITY also advises plenty of open, well-lit spaces and wide aisles to ensure high visibility.

Other retailers have their own ways of minimising shoplifting. Product shelves in Subhiksha stores are under 4 feet so that customers are always visible to sales staff. Spinach has its own experiment. Most frequently pilfered items — like razors and chocolates — are placed next to the cash counter, under employee supervision.

Big Bazaar, for its part, is experimenting with dummy models of high-value products that are used for explaining features. The real product is brought out of the store only when the customer confirms purchase.

That’s not all. At HyperCITY Retail, plainclothes securitymen walk through the store, constantly monitoring activities. Spinach has a team of mystery shoppers who visit its various outlets looking out for suspicious behaviour — from customers and employees.

What more should retailers be doing? Here are some recommendations: additional security measures during sales and festive shopping seasons; and prominent signages and alarms to deter shoplifters.

Nationwide chains should make loss prevention a centralised function so that multiple store and regional problems can be easily spotted. Most important, perhaps, is that retailers need to understand their losses accurately: measuring at full retail value rather than cost will provide a truer picture of retail theft and, hopefully, prompt them to act faster and more effectively.

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