It was a very sophisticated scam that netted the criminal $100,000 in five years from one retailer. Here’s how it worked:
He seemed to be a very good customer of Staples, The Business Depot Ltd. of Canada. He’d buy a few items at a time, mostly copier toner cartridges, but often enough that the sales staff knew him. He was friendly and sometimes would bring sales associates Starbucks coffee or, on their birthdays, a cake. Because he was known as a good customer, nobody ever questioned him when he returned items.
He had a business of his own, servicing copiers, and he probably sold the original toner cartridges at a mark-up to his own customers. Nothing illegal in that. But once he had bought enough cartridges from Staples to qualify for a bulk discount from the manufacturer, he would buy a like amount from the manufacturer. Then he would slowly return to Staples stores all those cartridges that he had bought at discount using the original receipts to get refunds at retail. “He robbed us of our margin,” says Greg Switzer, director of loss prevention at Staples Canada. “He ripped us off for about $100,000 in margin.”
Because he got his refund on one of seven American Express cards and made returns to multiple stores, no checks of transactions ever flagged excessive returns to a single customer. “We would never have found that if we had not had a serious back-end POS exception system,” Switzer says.
Coordination required
Capturing the thief required coordination among five organizations. And that made the web crucial to the success of the investigation. All five entities traded data among themselves across the web. Corporate offices and the stores shared information about the thief over the web. And once the stores had the evidence, loss prevention managers presented it via the web to local police who reviewed it online before filing charges.
Staples Canada, which uses the web-based FraudWatch loss prevention system from POS vendor Triversity Inc., is only one of a growing number of retailers who are using web-based loss-prevention systems to find fraudulent transactions, pinpoint employee theft or identify where employees simply aren’t following corporate procedures. While vendors have been developing ever more sophisticated technology to fight fraud for some years, the web adds a new dimension to the battle by making available to managers throughout a retail system the fraud trends that data analysis identifies and doing it at unprecedented speed.
Shrink—the disappearance of merchandise, by theft, fraud or mismanagement—always has been and probably always will be a problem in retail. It totals about 1.7% of the retail value of inventory per year, and ranges from 2.82% in toy and hobby stores and 2.17% at liquor and convenience stores down to 0.71% at furniture and home furnishing stores and 0.62% in computer, electronics, appliance and camera stores, reports the 2000 National Retail Security Survey (the most recent available), from the University of Florida. With annual U.S. retail sales at about $2.3 trillion, shrink totals $39 billion, an amount equal to annual sales at Kmart Corp.
Shrink down, costs up
While shrink has pretty much held steady over the past 10 years, the budgets of loss prevention departments as a percent of sales has gone up, from 0.57% of sales in the 1998 National Retail Security Survey to 0.79% in the 2000 edition. For a $10 billion a year retailer, that 0.22 percentage point growth represents $22 million. Thus retailers have been looking for ways to increase the effectiveness of their loss prevention systems without spending more money.
Web-based loss prevention systems take a number of forms. They can reside at a retail location or they can be delivered as an ASP product from the manufacturer. They can operate on a rules-based system or employ data mining and relationship technology. But one thing they have in common is that they use the networking power of the web. Harnessing the web extends the reach of loss prevention departments. “Using a web-based system took our loss prevention department from one person and effectively added 22 people—our district managers—with no increase in salary,” says Kevin Holmes, vice president of operations for Bata Industries Ltd., Toronto-based shoe manufacturers and retailers, which uses Triversity’s FraudWatch system.
Harnessing the power of the web also allows quick response to exceptions. “With the web, you’re not taking action retrospectively; you’re taking action while the problem is occurring,” says Steven Bottom, franchise holder for two Sonic Drive-In restaurants in California which are equipped with a system from Apigent Solutions of Oklahoma City. Bottom can receive alerts to potential problems—multiple voids by cashiers, for instance, or discounts over a certain percentage—over the web. He can then make a quick call to ask the store manager to look into the transaction immediately. “It’s dramatically changed the way we operate,” says Bottom, whose stores are 150 miles apart from each other. “It allows me to visit my money without having to be there.”
Web = affordability
Loss prevention has come a long way since the days when floor walkers looked for shoplifters and kept an eye out for suspicious behavior by cashiers. In fact, it wasn’t even that long ago that retailers were wishing for some automated way of detecting shrink, recounts Addison Chan, vice president of loss prevention and ASP solutions at Toronto-based Triversity, vendor of POS systems and data analysis. Chan himself was a private investigator in the mid 1990s, specializing in providing mystery shoppers and security guards to retail organizations. “I kept asking my clients how I could help them in other areas,” he says. “One day, a client showed me shopping bags full of cash register tapes and receipts and said, ‘Somewhere in there is fraud. If you can help us figure out where it is, we’ll do business with you.’ ”
Chan began entering refund data into a spreadsheet to see if he could identify patterns. Once he had a large quantity of data input, he found that he didn’t have the resources to support it or to distribute it to his retail customers. Eventually, he developed the web-enabled FraudWatch system, which he sold to Triversity a year ago. Building the software in web-based protocols and delivering the product over the web so retailers do not have to install special networking systems or software are key to making data-intensive security systems work, Chan says. “This product would not exist without the web,” he says. “The web is the medium that made this affordable.”
In capturing the toner-cartridge margin thief at Staples, the web allowed local police, the private investigator, the Staples loss prevention department, store management and Triversity all to coordinate data quickly and efficiently, Chan says. “There was an enormous amount of data required and having a web-based system meant they didn’t have to ship paper,” he says. Further, he adds, the local police were able to log onto to the FraudWatch system and make their own judgment about the quality of the evidence before charging the thief. “Before the web, a chain would have had to build its own private network to be able to move data like this around and that was just not affordable,” he says.
The margin thief ended up paying Staples a percentage of what he had taken as well as the cost of the investigation. In addition, Switzer says the thief identified a few other criminals who were operating the same scam.
Apart from being an affordable solution to the question of data networking, having a web-enabled system makes the process faster and allows retailers to analyze much more data. “Everything we do is 100% web-deployed. It takes us three minutes to retrieve and process the transaction log of everything that happens in a supermarket in a day,” says Larry Miller, president of Trax Software and Consulting Co.
Into the voids
Trax licenses its data retrieval and analysis software to retailers, although it can provide it on an ASP basis if the retailer prefers. Trax’s Shrink Trax product gathers data from point of sale devices, deliveries to the store from vendors, in-store camera monitoring systems and data devices within different departments, such as meat, pharmacy or photo. Shrink Trax applies data mining techniques to the data it gathers, looking for patterns and relationships, in addition to looking for particular relationships that the retailer sets.
From the data, Shrink Trax creates reports for each store, prioritizes the results, recommends actions that store managers should take and delivers it all over the web. Part of the value of having the system web-based is the speed with which retailers can act, says Shawn McKimens, manager of shrink control at Norfolk, Va.-based Farm Fresh Supermarkets, a 36-store division of Supervalu Inc. “With Shrink Trax, we can notify the store immediately if there’s a problem,” McKimens says. “Shrink Trax gives it a sense of urgency.”
Farm Fresh has used Shrink Trax primarily to identify cashiers who were not following procedures. For instance, it helped identify cashiers who were incorrectly—either intentionally or not— selling all 12-packs of Coca Cola at a sale price when the promotion was limited to two 12-packs at the sale pirce per customer. During the promotion, after the cash register rang two 12-packs at $1.98, it would automatically ring all subsequent 12-packs at $3.98. Often a customer would complain, pointing to the $1.98 promotional price. Cashiers would then void the $3.98 and key it by hand at $1.98. “We were able to stop it within a day,” McKimens says. “Before, we would have caught it if someone had noticed the behavior going on. But even if we had been able to analyze all the numbers, we still wouldn’t have known what was happening until the end of the reporting period, and that might have been too late.”
Fast learners
Immediately identifying a loss problem is only one major benefit of using a web-enabled loss prevention system, retailers say. Another is that new users can quickly learn how to use such a system. Holmes estimates the time to learn the FraudWatch system is less than three hours. “There’s no training involved,” he says. “It’s all point and click. You’re only five clicks away from looking at any transaction in the entire company. And our only additional cost was setting up 22 Internet accounts for our district managers.”
Identifying a problem with a particular item is only a small portion of the analysis that most web-based loss prevention systems provide. Such software usually analyzes daily transaction logs from stores and looks at several dozen data elements. Among them: number of no-sales per cashier, number of customers per no-sale, sales per customer, items per customer, number of voids, voids as a percent of sales, number of store coupons and their percent of sales, same for vendor coupons and double coupons, number of refunds, number of refunds lacking customer phone numbers, number of items not scanned, sales per hour, ring time per order, tender time and more. “We could never have dreamed of going through every transaction like that before,” Holmes says.
Training on track
With hard evidence from such a range of transactions in hand, retailers then can take action. Whether the problem is fraud or simply not knowing the rules, retail managers can use the data as an opportunity to re-train cashiers. “We’ve identified a lot of training issues, people who just didn’t know what the rules were,” Holmes says. Bata averages 8,000 employees throughout the year. Many are younger, entry-level retail employees. “We then are able to put together a plan of action to address the issues,” he says.
Not only does the coaching help the cashier whose behavior the system flags, but it also communicates to all staff that their behavior could be monitored as well. “Of your cashiers, 10% would never take a thing, 10% will always take something and 80% will go either way, depending on circumstances,” says Holmes. “The store staff knows we’re monitoring their transactions. We’re saying to that 80%, ‘Don’t bother.’”
McKimens won’t reveal what payback Farm Fresh is earning on its investment in the Shrink Trax system, other than to say, “We’re pleased with the results. The company felt it was cost effective enough to put me into this position full time.” Miller says a retailer will pay $5,000 per store for Shrink Trax modules that monitor POS terminals, CCTV installations, direct-to-store deliveries, scales and devices in peripheral departments, such as delis or photo counters. Average ROI, he says, occurs in as few as 12 weeks.
To back up his ROI figure, Miller offers the example of another East Coast supermarket where a glitch in meat scales across the chain printed a price label of 10 cents after every certain number of packages. The product scanned at that price at checkout. The Shrink Trax system flagged the problem across the chain. “The savings on that alone in eight and a half weeks exceeded the price of the software,” he says.
Others as well have stories of immediate recoveries. Holmes, for instance, cites the case of a cashier who was running fraudulent refunds. Within three days of the installation of the FraudWatch system, Bata nabbed her and determined she had been responsible for $7,500 worth of false returns.
Another area that FraudWatch helped Bata identify was unauthorized markdowns. Such reductions in price accounted for 1.5% of sales chainwide. “Across 250 stores, that’s a very significant number,” Holmes says. “A major selling point to our financial people was that we would be able to decrease unauthorized markdowns. That was all I needed.”
Says Switzer of Staples Canada: “Within the first three months the frauds that came up were completely buried or were anonymous to us. Those alone exceeded the monthly fees. It was a pretty easy sell to the rest of the organization.”
kurt@verticalwebmedia.com
