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Shrinkage Chills Stores’ Bottom Line

NEW YORK — Disaffected employees were the main cause of unexplained inventory loss, or shrinkage, which carved a $31.3 billion chunk out of merchandise stocks in 2001, according to the University of Florida’s latest National Retail...

NEW YORK — Disaffected employees were the main cause of unexplained inventory loss, or shrinkage, which carved a $31.3 billion chunk out of merchandise stocks in 2001, according to the University of Florida’s latest National Retail Security Survey. That’s 1.7 percent of the $1.845 trillion in sales recorded that year, or the equivalent of the entire gross domestic product of Vietnam.

While the level of shrinkage has remained fairly constant over the last decade, it was actually lower in 2001 (1.7 percent) than it was in 1991 (1.79 percent), the first year the survey was published.

Shoplifting has traditionally been the biggest cause of lost inventory, but, according to Richard Hollinger, PhD and director of the Center for Studies in Criminology and Law at the University of Florida, a more alarming trend has emerged: employee theft.

In 2001, employee theft accounted for nearly half of all shrinkage — 48 percent — compared with 32 percent for shoplifting. Other sources of inventory loss are administrative error, 15 percent, and vendor fraud, 5 percent.

“All the technology such as surveillance cameras and electronic article surveillance (EAS) tags seem to be having some effect on shoplifting,” said Hollinger. “Most loss prevention directors are concluding that there’s only one other door that this merchandise can be going out and that’s the back door.”

According to Hollinger, low salaries are to blame for the low morale and lack of loyalty among sales associates and managers, which makes them more apt to steal or look the other way when others steal. “The shift to mass merchandising, or the ‘Wal-Martization’ of retailing, means low overhead and lower wages,” he said. “The churn is remarkable. A lot of chains have over 100 percent turnover annually.”

However, Daniel Butler, vice president of retail operations for the National Retail Federation, took exception with the salary issue. “Some people go to work for a retailer with the intent of stealing,” he said. “They’re only there for the holiday season to rip off the store. If you talk to a lot of retailers, some of their highest-paid, best associates have stolen.”

Rather than examine what causes employees to steal, Hollinger looked for common characteristics among stores with low rates of employee theft.

Not surprisingly, he found high salaries chief among them.

“The Container Store pays people well over minimum wage, about $10 or $11 an hour,” he said. “They have health benefits and child care. It’s an amazing place to work.

“Their loss prevention director said she gets upset if a store has a 0.5 percent shrink rate,” Hollinger continued. “This debunks the myth that retailers can’t afford to pay these wages. The Container Store is the Zurich of the retail industry. It’s a big city where there’s virtually no crime.”

While retailers are working to keep merchandise from wandering out the back door, they’re also paying attention to what’s leaving through the front. Innovations such as off-site digital remote monitoring allow stores to check more locations more consistently and more frequently from a central site.

Computers using exception reporting programming can catch abnormalities in cash register reports that were previously reviewed by hand. For example, potentially suspicious transactions such as voids rung up later in the day or on a different register than the one where a purchase was initially made, are flagged.

Further out on the horizon, biometric technology will identify a person through his or her fingerprints, eye scans or voice. Stores will use fingerprints to verify the identity of check-writers and the credentials of prospective employees. For now, however, most biometric technology is still in the sci-fi realm.

Butler would like to see states adopt stiffer penalties as a deterrent against shoplifting. The crime recently made national news when Winona Ryder was accused and subsequently convicted of stealing $5,500 in designer merchandise from Saks Fifth Avenue, but many stores are loath to press charges.

“A lot of the larger jewelry retailers may eat the loss rather than report the claim because if they have too many claims their insurance goes up or it becomes very difficult to get insurance,” said Laurette Merusi, jeweler’s block specialist at Integrated Assurance Services. “The market has shrunk. Lloyd’s of London used to do a lot of insurance. Only a few carriers address block coverage now. A lot of the syndicates bottomed out after Sept. 11.”

While retailers have different ways of addressing shrinkage, it’s clearly a fact of life. “It’s a part of doing business and it’s budgeted for,” Butler said. “As consumers, we need to be concerned about it because we all pay for it in the price of our goods.”