Imagine operating in a hyper-competitive business environment with razor-thin margins and someone offers you US$60 billion in “free money” – an offer you promptly ignore.
An unimaginable scenario? But this is what is happening at retail in Europe and US when it comes to the issue of shrink – a US$60 billion annual loss, much of which stems from internal and external theft and the industry’s widespread failure to institute proper controls and procedures throughout the supply chain.
Industry observers note that the retail industry, with some exceptions, has done relatively little to deal with shrink and view it simply as an unfortunate cost of doing business, even though it can account for as much as two per cent of sales.
“We’ve found that retailers are pretty good at measuring shrink but not that good at preventing it,” said Howard Dearing, director of sales for Aldata in the UK. “Even though retailing is extremely competitive and driven by sales and profits, reducing shrink has not been at the top of the retailer’s list.”

Rising crime rate
The element of shrink that is receiving considerable attention from retailers is internal and external theft, which amounted to a record US$41.6 billion last year despite investments in new programmes and technology. The one bright spot is that shrink as a percentage of sales is holding fairly steady at 1.61 per cent in 2006 according to an annual study by the University of Florida for the National Retail Federation, a Washington, D.C. trade group.
“Retailers seem to be putting a dent in criminal activities, though they acknowledge there’s a lot of work left to do,” said Richard Hollinger, a criminology professor at the University of Florida and leading author of the NRF study, which found that a major portion of shrink (US$19.5 billion) was due to employee theft.
Shrink is just as pervasive in Europe where retailers are expected to lose €29 billion this year despite an estimated €8 billion that was spent on security solutions in 2006, according to the European Theft Barometer, published by the Centre for Retail Research in Nottingham. Unlike US surveys, customer theft accounts for the lion’s share of retail losses in Europe. But, the study also points out that theft by staff members rose for the second consecutive year and accounted for about 30.7 per cent of the total.
As a percentage of sales, shrink in western Europe was lowest in Switzerland and Austria at 0.92 per cent and 0.96 per cent, respectively. Sweden and Finland had the highest rates in western Europe at 1.32 per cent and 1.34 per cent, respectively. Overall, the highest rates were found in eastern and central European countries including: the Czech Republic, 1.42 per cent; Slovakia, 1.40 per cent; Hungary, 1.38 per cent; and 1.32 per cent each for Poland the Baltic States of Latvia, Estonia and Lithuania.

Gang activity
In the US, much of the discussion about shrink has focused on organised retail theft, gangs which hit an estimated 79 per cent of retail companies last year, according to NRF.
This level of activity led the Federal Bureau of Investigation to establish an organised crime task force and to partner with the NRF and the Retail Industry Leaders Association (RILA) to launch the Law Enforcement Retail Partnership Network where retailers share information on organised theft rings.
Efforts at the national level have been a catalyst for states like Alabama, Colorado, Louisiana, New Hampshire, New Jersey, Vermont and Washington State to pass laws specifically addressing organised retail crime, which is costing states about US$1 billion annually in sales tax revenue. The fires are also being stoked by reports that proceeds from organised retail theft may be filtering down to Middle East terrorist groups like Hamas and Hezbollah.
“A lot of retailers are concerned,” said Lance Weedin, director of US Sales, Alpha Security. “The gangs have gotten very good at what they do and have gained a lot of knowledge about how retailers run their stores and the types of technology they use,” he said.
However, some observers believe that organized theft is being overemphasised. “There’s very little evidence that it is a major part of the shrinkage problem in Europe,” said Adrian Beck, a lecturer on criminology at the University of Leicester in the UK and an acknowledged expert on retail shrink. “There’s a lot of noise about it in the US. But the data suggests that internal theft is a much bigger problem. There are some very famous cases. But it’s almost become urban myth and everyone talks about the same cases,” he said.

The blame game
There’s a similar situation in Europe where eastern Europeans are being fingered as the “bad guys,” said Beck. “It’s always more palatable to blame outsiders. But focusing on gypsies coming in from Romania deflects you from dealing with the real problem,” he mused. “The majority of crime is due to people who live here and the staff may be ripping us off every minute of the day.”
Beck noted that there has been a sudden and dramatic interest in data mining technologies to address internal theft. “Companies are realising how vulnerable they are at the till. Big supermarkets can have 50 checkouts with 50 people taking money and scanning goods. How well paid are these people and how committed are they to your organisation?” he asked.
“The biggest change in the last five to ten years is that loss prevention departments are getting good quality inventory data down to the SKU telling them how many Mach 3 razor blades they may have lost yesterday. Suddenly, retailers are more aware of where they should be looking and the traditional excuse that it was shoplifting is no longer valid,” he said. “The data is helping companies drill down to the real problem they face, not the ones they assumed they had,” said Beck, citing ASDA/Wal-Mart, Tesco, Sainsbury’s and Boots The Chemists as leaders in data analysis.

Mining shrink data
“I’m running a project now on return on investment for different technologies like data mining. Retailers should be using it to understand what’s happening at the register.” And not every instance of shrink has to do with theft, he added. “People make mistakes and sometimes don’t follow processes because they may not have been trained properly or the bar-coding is not working. If an item doesn’t scan and the checkout line continues to build, cashiers may give a product away because it’s a lot quicker,” he said. “Problems with barcodes and following procedures on refunds or marking down goods can potentially increase shrink, and it’s all because the staff has not been trained to deal with it properly.”
Elsewhere in the supply chain, Beck believes that distribution centres are relatively secure. Here, the problem is picking accuracy. There are some organisations like Tesco that compensate stores by one per cent for errors in the supply chain. They just assume that one per cent of shrink will be from errors,” he said.
“Basically, companies are now aware that 90 per cent of the problem is not theft, it’s about the organisation not dealing with the problem and the need to take a more cross-functional approach to shrink by working with suppliers to make items more secure.
“For example, iPhones will arrive in the UK for Christmas and we could lose ten per cent to shrink. But buyers are working with the manufacturer on packaging to make sure it will fit into how we want to use it in the store. Doing this before it gets into the supply chain will make it less prone to shrink,” he said.
On a broader scale, and one which seeks to optimise efficiency in the global supply chain, the Metro Group along with Checkpoint Systems initiated the “Tag It Easy” RFID labelling programme in order to improve logistics in shipments and increase transparency in the flow of goods from Asian suppliers to Germany.
Aldata is looking at retail surveillance closer to home. “We’ve developed a number of tools. One is G.O.L.D. Events software, an alerting system for store deliveries,” said Dearing. “For example, if an order was supposed to be ten cases and it came in as five, an alert appears on the database to check the delivery. Managers immediately get a text and go to the receiving dock to question it.” 
Of course, this could be a simple mistake. But as Dearing notes, 15 per cent of shrink is due to administrative errors. “A good invoice matching system can reduce that,” he said, adding that another Aldata initiative focuses on cashiers. “A lot of things can be done with specialised systems like cameras linked into POS systems. An operational data warehouse allows analysts to look at sales, discounts, manual keying of prices and activity by lane or by cashier. It’s all about trying to find a pattern.”