Controlling the Risk from Within

– Peter Hughes

As the retailer grows beyond a couple of stores, his ability to maintain a watchful presence on the floor diminishes. He is less able to secure the loyalty of employees. Loss numbers begin to approach and may even surpass those of the larger retailers.

The National Retail Security Survey(1) (NRSS) estimates losses, primarily shortage, every year and reported an over-all reduction in 2004 to 1.54%, well down from a decade ago when they were 1.94%. And the average percent of shortage caused by employees was 47.0%. But these include very large retailers who have increasingly invested in loss prevention strategies. The below study looks at employee caused shortage.

	Shortage Rate	Employee Percent	Employee Shortage
Other Specialty Apparel	2.83%	46.70%	1.32%
Cards/Gifts/Novelties	2.06%	56.70%	1.17%
Toys/Hobbies	2.06%	51.00%	1.05%
Music/Video	1.76%	51.50%	0.91%
Home Centers/ Hardware/Garden	1.83%	46.10%	0.84%
Men/Women/Child Apparel	1.88%	44.80%	0.84%
Sporting Goods	1.54%	50.60%	0.78%
Discount	1.56%	45.80%	0.71%
Jewelry	1.33%	41.00%	0.55%
Average of above	1.87%		0.91%

And AMR Research(2) confirms that 50% of shortage is employee theft and found that 25%, or half, is from employee cashiering. There are some obvious ways that cashiers can cause shortage:

• Pass outs— when the cashier doesn’t ring all the item
• Skimming— when the cashier accepts cash for items and pockets the money
• Return Fraud— when the cashier accepts a return that has not been purchased

One major New England retailer reported that 7% of returns had some element of fraud, mostly counterfeit receipts, before they took action.

But shortage is only the most easily measured form of cashier caused loss. Here are some examples that may not cause “book” shortage but surely represent a loss:

• Refunds at full price when the original sale was discounted
• Refunds issued but the original sale was on a bad check or disputed account
• POS or Employee discount rates that exceed the approved amounts
• Employee unauthorized use of a customer’s credit card and you, the retailer, get charged back

The NRSS respondents reported .33% of sales for cash, bad check and disputed credit card losses, up more than double from last year. And reported refund fraud was 1.4%. All in all, it is very likely that your cashiers cost you, the retailer, .5% of sales. Employee theft terminations ran at the rate of nearly 3 employees per $10 million in sales in 2004, with the retailers having a higher percent of part-timers experiencing the highest rates.

Regrettably, most POS software was not designed to prevent these types of losses. References to original receipts are not usually captured, discounts may be taken in excess of authorized percentages and transactions can even be created with dates that will never be processed. Indeed, when discussing Point of Sale Solutions with clients, we recommend adding key information to the existing screens so that the data needed to identify problems is available.

Most (78%) of the larger retailers use video systems, and when customers notice them there is less shortage. But video is less effective with cashier problems unless the transaction can be identified and then the video can be accessed.

Larger retailers are adopting cashier monitoring systems (CMS) that examine the transactions for anomalies. AMR Research contrasted the shortage rates of retailers using CMS and found that 55% of the companies in their survey use one form or another and they reported a 1.9% shortage rate versus a 2.4% for those that do not. (NRSS reports 83% usage of exception reporting CMS for 2004.)

Although affordable CMS systems are now available to the retailer, they do require some setup and follow-through. The most effective systems can also work together with video systems. Follow-up should range from a general awareness program to discussions of specific transactions. All cashiers should know that you will take action. In fact, there is nothing more salutary than seeing another cashier taken out in handcuffs!

Cashier Monitoring Systems work because it replaces your watchful presence on the floor with a process that ensures a high likelihood that the cashier who causes a problem will be identified. Whether innocent of intent or not, these cashiers will come to know that management has ways to spot the issues. They will take greater care to follow procedure and, of course, their temptations will be curbed.

AMR’s conclusions apply to every retailer:

• “Loss Prevention software can be an effective and inclusive tool for fostering a culture of control.”
• “Retailers still not using Cashier Monitoring Systems need to do so; those currently using such a program should integrate it with closed circuit television.”

Seminars are available without charge to you, so take advantage of them to delve further into this profit opportunity.

“When they know you will know, they won’t.”

(1) 2004 National Retail Security Survey, Richard C. Hollinger, PhD, University of Florida
(2) “Reaping Profit Through Loss Prevention Technology”, Peter Abolt, Ben Ream, AMR Research