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April 20, 2011

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Working with the insider threat

Retail fraud survey: retailers fear the worst on shrinkage figures

This is one of the key findings of Retail Fraud’s first ever comprehensive survey into the use of retail loss prevention systems, processes and strategies by the UK’s leading retailers.

The survey asks more detailed questions than other shrinkage reports in order to fill some important gaps for both the retailers themselves and the loss prevention supply industry in general.

Other key findings include low investment in fraud management systems, a ‘disconnect’ between store and online shrink, increased trends in return goods fraud and a poor take-up of contactless payment technologies at the present time because of the perceived deployment costs.

Independently conducted by Martec International – and encompassing interviews with the UK’s leading 100 retailers boasting annual sales totalling GB pound 98.7 billion across over 47,000 stores – the survey highlights the scale of current fraud threats and the mitigation methods either in place or not as the case may be.

Shrinkage levels averaged 0.9% of sales (varying between 2.9% of sales for hospitality and leisure retailers to a low of 0.7% for home shopping retailers).

Shrinkage levels of major concern

With most retailers achieving pre-tax profits of 1.5%-7% of sales, shrinkage levels of 0.9% represent a significant dent in profits.

Almost 60% of loss prevention executives believe that shrinkage will get worse in the life of this Parliament, while 34% believe it will remain the same. This is due to the weak economy as people steal for ‘need rather than greed’.

The biggest area of loss is shoplifting or external stock theft (34%), followed by employee theft (26% of respondents). Internal cash theft represents 10%.

Store-based fraud prevention spend averages 0.8% of sales, which is just under average shrinkage levels, but for 20% of retailers the spend on loss prevention is higher than their shrinkage level.

For example, department stores and mass merchants/variety stores spend a far higher proportion of their sales on loss prevention than other retail sectors at 2.2%.

Online fraud prevention spending

At 0.3% of sales, online fraud prevention spending is much lower than in store, although some costs may be hidden for retailers new to online trading as these functions are carried out by other departments such as finance and e- commerce.

However, as Internet trading assumes a higher proportion of sales for most retailers (it’s currently standing at 10.9% for the leading 100 UK retailers), then it’s expected that online loss prevention spend will increase.

Introducing and maintaining a culture of loss prevention in the business was a priority for 23% of respondents, as this is seen as the most effective way of reducing shrinkage in tough economic times (followed by internal or staff fraud with 20%).

For most retailers interviewed, the head of loss prevention doesn’t have direct responsibility for online fraud. As true multi-channel retailing comes of age, loss prevention departments may need to be restructured such that all losses are managed together.

Return fraud averages 0.17% of sales, or almost 20% of total shrinkage. This includes increased trends in ‘wardrobing’ clothes for special occasions and returning for full refund, returning stolen merchandise for full price, receipt fraud and price switching.

Stock counting is predominantly carried out in-house (66%) with 28% outsourcing the function. Just over a third of respondents were happy with their current stock counting process. The biggest improvements required are better trained staff (17%) and better use of technology (13%).

Use of security systems

Alarms are used by 97% of the store-based ret used by 95%. Online, the ‘must have’ systems are online payment security (used by 91% of respondents), payer authentication (81%) and fraud screening (75%).

Use of self-checkout tills accounts for 2.3% with the remainder being manned tills. This is predicted to increase, particularly in other environments such as DIY and mass merchants.

Retailers were asked to mark out of 10 what the possibility was of them integrating contactless payment methods with current processes over the next three years. The rating was 2 out of 10, thus showing a low interest (probably because of the costs of adoption).

However, the leisure and hospitality retailers averaged 3.5 out of 10, with fast food and coffee shop companies particularly interested.

Recent statistics show that the Bank of England removes from circulation over GB pound 10 million in counterfeit notes per year, but almost 32% of retailers do not use any systems for forgery detection (maybe because of their reducing effectiveness against sophisticated copies).

The fraudulent use of coupons is on the rise, but only 10% of retailers use any sort of system to detect and prevent this practise. As this is an area that’s starting to impact on retailers’ bottom lines, it’s a trend that looks set to increase.

Benchmarking of retail security techniques

Commenting on the survey findings, Paul Bessant (managing director of Retail Knowledge, who commissioned the research) explained: “We’re very excited by this report and, as a first run of the study, the research will allow retailers to benchmark their practices against others for the first time.”

Bessant continued: “For the vendor community this report should act as a catalyst to reassess their approach to loss prevention based on actual retailer needs, especially at a time when their challenges and needs are on the increase and likely to continue upwards.”

In conclusion, he told SMT Online: “It’s our intention to make this an annual exercise in our commitment to working with the industry to showcase Best Practice and share knowledge aimed at reducing fraud across the sector.”

This year’s survey was sponsored by Volumatic, a leading manufacturer of intelligent cash handling equipment, and RGIS.

James Harris, commercial director at Volumatic, said: “There’s plenty of evidence to suggest that the current economic climate has created tough trading conditions on the High Street where retailers must balance tight budgetary constraints with the need to find ever more innovative ways of protecting and generating profits.”

Harris added: “I sincerely hope that the outputs of this survey will help the loss prevention community’s members benchmark themselves against their peers and identify opportunities to win back some of the multi-billion pound hole in profits that’s being created through shrinkage.”

Commenting on the importance of adopting Best Practice, Roger Ford of RGIS explained: “To minimise shrinkage caused by both internal and external factors, it’s critical to improve your understanding of your inventory with accurate, timely inventory counts conducted at regular intervals.”

Ford went on to state: “An initial independent count establishes a baseline for each store, stockroom or warehouse and then allows retailers to monitor loss trends over time.”

For further information on the survey access www.retailfraud.com (a dedicated link is provided on the right hand panel of this page)

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