December 28, 2001, 12:00 AM

How the web’s role is expanding in the fight against shrink

The Internet is the latest weapon in the fight against retail shrink.

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.’ ”

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