How To Allocate Retail Loss Prevention

Profit in any business requires an increase in income and decrease in expenditure. The same theory applies to the retail industry. To make profit in retail requires an in increase sales and reduction in shrinkage. This concept has so far been non-existence in the retail industry where the focus has always only been on increase sales and hoping that the problem of shrinkage will miraculously disappear.

Retail shrinkage occurs as a result of poor or non-existent loss prevention policies and procedures. Therefore, it is imperative that any retail organisation that wishes to remain profitable include loss prevention in its standard operational practices.

Loss prevention is the series of activities that are geared towards the reduction or elimination of all potential loss within an organisation. In the past, loss prevention has been confused with security. While security is a part of loss prevention, security is reactive, basically geared towards identifying shoplifters and employees suspected of stealing, loss prevention is centred around all the activities that are responsible for store loss. It can be known loss such as damages, returns and errors or unknown loss such as shoplifting or employee theft. Preventing shrinkage is simple if we understand the sources of the loss.  Last year, UK retail industry spent £771 million on loss prevention, despite this spending, retail shrinkage rose by 5.4%. This has remained the story of loss prevention in the UK for many years. Shrinkage reduced by a few percent one year and increase by several percent the following.

What is the reason for this, the answer lies in the way loss prevention funding is allocated. Even though the levels of funding differ from one organisation to the other, the principle remains the same: spending more for less return on investment (ROI). 

The Global Retail Theft Barometer report stated that for the 12-months ending June 2009 crime cost UK retailers £4,063 million. This is broken down as follows:

• Customer theft £1,767 million (43.5% of all shrinkage)
• Employee theft £1,479 million (36.4% of all shrinkage)
• Distribution chain theft £175 million - (4.3% of all shrinkage)
• Administrative error - £642 million - (15.8% of all shrinkage)
• Total Shrinkage - £4,063 million - (100.0% of all shrinkage)

Total loss prevention spending for the same period was £771 million slightly down from the previous year of £785 million.

Broken down as follows:

• Contract Security - £270,621,000.00
• In-house Security - £162,681,000.00   
• Security Equipment - £223,590,000,00
• Cash Collection - £61,680,000,00
• Other LP Spending - £52,428,000.00

However, in this same period, shrinkage as a percentage of sales rose to 1.37% a rise of 5.4% from 2008 figure of 1.30%.

This brings us to the central thesis of this article: Why is retail loss prevention measure ineffective?

The answer lies in the way funding is allocated. To produce the desired result, retailers first and foremost need to determine the source of loss and allocate funding according to the ratio of loss and the ROI.

The below table outlines this point better, it shows last year retail spending on loss prevention and their return on investment:

Measures: Spending: ROI Achieved:

Trained Employees      -     6.8%          -    50%

Security Personnel       -     56.2%        -     2%

Security Equipment     -     29%           -     45%

Signs & others             -     8%             -     3%

Customer related theft accounts for only 21% of retail shrinkage the remaining 79% can be broken down into cashier cause 32%, followed by general employee cause 24%, receiving 10% and the remaining 13% is the result of damage and error. But the interesting point that needs to be noted is that even though 79% of retail shrinkage in caused by internal activities, retailers spent more on combating customer related theft than on employee cause.

56.2% of loss prevention resources were on security personnel that produced only 2% ROI, 6.8% was spent on staff training that produced 50% ROI. It is not difficult to see why despite the huge spending on loss prevention, retailers have not been able to affect their shrinkage level. There is a direct correlation between loss prevention spending and the ROI. Until such time that retailers get the balance right, loss prevention spending will continue to produce negative result.

How to make loss prevention effective?

The following are measures when implemented can lead to massive reductions in shrinkage levels and increased profits:

Measure the Scale of the Problem

Analysis daily profit and loss report

Complete top management involvement

Create awareness of the problem

Continuous education and discipline of employees

Inspect What You Expect

Set Measurable Targets

Take Advantage Of Technology

Develop the act of flexibility in approach

Change from present paradigm

Loss prevention is a science and like any science, it requires a systematic approach. Loss prevention personnel cannot approach it with cross fingers praying for the best. Gone are the days when retail crime such as shoplifting was seen as teenage leisure activities, or conducted by drug addicts. Many incidents of shoplifting are now carried out by Organised Retail Theft rings with levels of sophistication never before seen in the retail industry. We as loss prevention experts along with law enforcement agencies have to wake up to this fact and try to build our own capabilities to respond accordingly.

Increase sale does not necessarily mean increase profit the quicker retail executives crabs this concept, the sooner they will be making sustainable profit.