Boom and Bust
How to Effectively Manage Retail Risk in an Economic Crisis
As the retail sector banishes the final ravages of winter in favour of a proverbial glass half full “Hope Springs Eternal” optimism of the lighter days ahead and a renewed confidence in its future prosperity, we begin another cycle of industry naval gazing that brings with it a certain formulaic predictability.
It has always been a dynamic industry that is ever-evolving, never allowing the dust to settle whatever the season, but by leading with the chin it is probably more prone to catching economic colds, even at the height of peak.
A disappointing festive period that saw pre-Christmas sales up was followed by a poor start to 2023, with trade down 27 per cent as shoppers stayed home rather than take part in the annual January sales. This was the largely expected result of the cost-of-living crisis that also triggered a slump in consumer confidence, according to industry analysts Springboard.
Added to this gloomy forecast is the January 31 report from the International Monetary Fund (IMF), a body representing 190 countries that works to foster global financial co-operation and stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
The report predicted that the UK economy will shrink and perform worse than other advanced economies, including Russia, as the cost-of-living crisis continues to hit households. The IMF said the economy will contract by 0.6 per cent in 2023, rather than grow slightly as previously predicted, and that its forecast reflected the UK’s high energy prices and factors such as high inflation.
Commenting on the report, IMF Chief Economist Pierre-Olivier Gourinchas said that although the UK had “one of the strongest growth numbers in Europe” last year, 2023’s forecast reflected the UK’s “high dependence on liquid natural gas” and that employment was still below pre-pandemic levels.
On a more positive note, Pierre-Olivier said the plans outlined by the Treasury in the months since the autumn statement showed that the UK was “certainly trying to carefully navigate these different challenges and we think that they are on the right track.”
Although the UK is now the only shrinking economy out of fifteen in the report, the IMF expects the UK to grow in 2024, positively revising its forecast to 0.9 per cent from 0.6 per cent.
Paul Johnson, director of the Institute for Fiscal Studies, said that although the IMF had got its forecasts wrong in the past, growth was still static as a result of factors such as high inflation and upward trends in interest rates affecting mortgage repayments for millions of households. “My best guess is that the economy will be broadly stagnant this year, and we’re not going to get much in the way of growth, but we’re not going to have a deep recession either,” he said. “That’s not great, as we should be bouncing back more strongly from COVID and particularly as we’ve not been growing terribly well for the last decade and more.”
The report came out the same day as consumer research company Kantar highlighted the extent of the price hikes fuelling the cost-of-living crisis and how they impact households. Its report suggested that 2023 could see an increase of £800 per year on the average food shop.
The Effect on Retail
These increases will be felt acutely in the non-stop world of retail, always viewed as the barometer of economic weather conditions, generating footfall and spend during the good times, both in store and online, yet the first to feel the cold wind and storm clouds of recessionary chill when purse strings are tightened.
The Consumer Price Index (CPI), the predictor of economic performance suggesting inflation, predicts consumer retail spend will be up 7.4 per cent in 2023, down from 9.1 per cent last year. It also expects much bigger falls from the middle of 2024 as we veer towards another cycle of more boom than bust.
However, the pendulum is ever likely to swing the other way as the Government’s six-month energy cap, put in place to help businesses secure some market certainty over the lighting and heating of their vast estates, ends on April 1. It is likely that the high street will see a potential doubling of energy prices, which means it is likely many retailers that began 2023 may not see it through to next year.
According to the Centre for Retail Research (CRR), six retail businesses looked for the support of administrators in January 2023 putting in peril 185 stores and impacting the jobs of more than 1,300 employees. One of the higher-profile businesses was that of the luxury stationer Paperchase, which appointed a firm of administrators on January 17 as a contingency in case they are needed.
Tesco announced at the end of January that it was purchasing the brand to have concessions in stores but not the existing 100 retail outlets, which puts approximately 800 jobs in peril.
In terms of writing on the wall, forty-nine businesses went into administration in 2022, double the number for the previous year and just shy of the figures reached in 2020 at the height of the pandemic. Overall, according to the CRR, these were the worst retail administration figures since the financial crash of 2008 when fifty-four businesses disappeared from the shopping landscape at a cost of almost 4,000 empty frontages and some 48,000 lost jobs in the sector.
The high street may have survived the long COVID effects of a pandemic, the first European war in this century, and the ongoing challenges of Brexit, but all these factors are suspects that may have triggered an existential recruitment and retention crisis and borne witness to the so-called “great resignation” that saw 83,000 quit the sector in 2022, according to the Office for National Statistics.
There is no one silver bullet aimed at the heart of retail, but perhaps the potential for death by a thousand cuts or, in Police terminology, a case of “joint enterprise” against all these extraneous circumstances. Some risk experts may controversially argue that it could be a self-inflicted wound, a cry for help, or even the attempted suicide of an industry built upon the sandy foundations of conspicuous consumption.
The Risk for Risk Departments
The figures make for uncomfortable reading, but are some of the crises impacting retail of the sector’s own making? This is a provocative question that begs a closer look under the bonnet of a market driven almost exclusively by sales figures and the cyclical habit of reducing costs when the economy dips in order to preserve margin—behaviours that may also encourage a flip-flop, boom-or-bust performance.
Albert Einstein reportedly once defined insanity as “doing the same things over and over again and expecting different results,” but risk management as championed by this publication for the last ten years, requires a forensic view of the industry’s collective behaviours that, despite prevailing economic conditions, can help break this cycle. As experts in risk, what is it that we should be doing to influence the broader agenda to look beyond the P&L spreadsheet to drive more sustainable decision-making and settle the nerves of what some suggest is a bi-polar sector?
Often viewed through the prism of “sales prevention” to the business, risk and loss prevention departments are often one of the first under scrutiny during economic turmoil, but also in fair weather times when shrink targets are met and there is a sense that the issue has been solved and their services are now unnecessary. In both situations, whole teams of often experienced investigators have been disbanded under the guise of “restructuring” only for problems to re-occur as the risk threat re-appears or morphs into a different strain of fraud, for example.
However, at this point the risk is only managed by a few lesser-qualified operatives and the business has to re-invest in recruitment—so the cycle begins again. This rather myopic and counter-intuitive approach was also the case with UK policing in 2010 during the Government’s so-called “austerity” programme of cutting public-sector costs.
All forty-three forces across England and Wales lost an average of 20 per cent of the frontline budgets, leading to thousands of more experienced officers taking early retirement or generous redundancy packages on top of full pension entitlements. Today’s news coverage still recounts the pledge of the latest Home Office initiative to recruit more than 20,000 officers as though this was an additional resource, rather than a thinly veiled attempt to fix the skills gap created by the cull of thirteen years ago.
Arguably, at a time of economic uncertainty and lower levels of footfall, profit protection through effective LP strategies, and investment in data analytics and experienced investigators could not only save money but add value to a retail business in terms of margin protection as opposed to its erosion, allowing the business to sell more and lose less.
Technology’s Double-Edged Sword
Many retailers have put their faith in new technology to push sales and convenience. The introduction of self-checkout (SCO) programmes, for example, may have enhanced the customer journey, but critics have cited it as a major loss generator while at the same time transforming law-abiding shoppers into opportunistic thieves looking at new ways to beat the tills. The expected losses incurred, anecdotally running into millions of pounds, may have been baked into a cost equation that allowed for a certain tolerance level, but that opaque figure is probably dwarfed by savings in employing additional checkout staff.
However, the reality is that businesses have now had to re-invest in security enhancements at the SCOs, such as public display monitors overhead as well as tightening up training of customer service supervisors.
The so-called silver bullet of technological solutions to reduce losses can also lead to other regulatory and brand reputational barriers. The desire by many retailers to introduce facial recognition solutions is already running the gauntlet of risk in terms of the potential for mistaken identity, GDPR compliance, and, in a wider geo-political setting, the sourcing of such technology may run contrary to national security strategies.
Increase in Internal Theft
The challenging recruitment landscape and the loss of senior investigators because of “restructuring” has also opened the door to greater instances of internal theft and fraud. With fewer and inexperienced profit protection professionals on the floor and in the field, there is an argument that there is less scrutiny and a greater opportunity for staff to steal with impunity. Consequently, it is no secret that incidents have soared because of the cost-of-living crisis, despite employer offers of financial support, low or no-interest loans, and other forms of aid.
Fewer LP professional “boots on the ground” have also highlighted training gaps and process compliance issues that, although not malicious per se, add to what is already a growing unknown-loss problem. Again, additional training and resources had to be re-invested into businesses to address this issue.
Arguably, there has never been a stronger case for more experienced investigators and training to uncover the true extent of internal theft, which remains to this day a taboo subject for many retailers because of employer-employee trust and the cost of wider vetting implications in what is effectively a low-pay, high-churn sector.
Anecdotally, internal dishonesty could amount to almost half of a retail business’s malicious losses, but according to the Global Theft Barometer only 7 per cent was recorded, with many employees leaving their business under investigation but without a criminal record. This has been particularly noticeable in the DCs where there is evidence of organised criminality in a sector that is at the frontline of servicing insatiable online demand.
Here, COVID-19 meant the elimination of random searches, involving physical checks, in favour of scanning technology that has effectively unearthed millions of pounds worth of organised theft.
One retailer is now focused upon “exit interview” evidence after a soon-to-be-dismissed colleague has provided a confession of internal theft. In its research, the business discovered that 50 per cent of people who had undergone formal Wicklander-Zulawski non-confrontational interviews had taken on the roles offered knowing in advance that the income provided was going to be lower than their household outgoings.
This revelation has flagged the potential for a “culture of dishonesty” to meet the income shortfall from the get-go of their employment. Consequently, these interviews have proved invaluable in informing the business as to its future recruitment approach.
Emerging Complex Online Fraud
The post-pandemic move to online sales and the harnessing of social media engagement by retailers has created new opportunities for many high street high-fliers and e-tailers, but the insatiable customer demand for almost instant fulfilment has in many cases outstripped the ability to quickly identify emerging complex frauds.
Refund fraud became the bête noire of retailers during 2022, particularly the Fraud as a Service (FaaS) returns package manipulation scam where fraudsters exploited the less-than-transparent relationships between retailers, payment providers, and courier businesses to receive full reimbursement even though the goods “returned” to them never arrived.
This is often once again linked to embryonic and porous processes and less-than-complete training programmes for customer service teams that can be easily exploited by FaaS fraudsters who openly advertise their “how-to defraud” guides on social media platforms. Their customers don’t necessarily recognise their actions as fraud; rather, in a world seemingly out of kilter, they see it more as an economic re-balance where it is the retailer’s fault for having loopholes in their protocols.
While risk managers have become savvy to a myriad of scams, influencing investment up the food chain can prove to be a barrier as many LP practitioners have no seat on the board or a reporting line into the so-called C-suite.
Even when there is investment clearance, they must also take their chances with the byzantine labyrinth of the procurement team whose raison d’être is to negotiate hard on price, even after long and often free proof-of-concept trials. This protracted process can sometimes undermine the effectiveness of the solution being provided in terms of what is eventually delivered, not to mention compromise the basis of the relationship with the vendor, making future, more collaborative contracts potentially more difficult to land.
The profit protection team touches every department in the business, so it makes sense to have a stronger partnership approach to managing existing and emerging risks. This may present a challenge for more traditional retailers, but it is an opportunity for more entrepreneurial businesses where there are more less formal structures.
The Theo Paphitis Retail Group (TPRG) founded by entrepreneur and former Dragon’s Den investor Theo Paphitis, that represents the disparate and eclectic high street estate of Ryman the stationer, lingerie brand Boux Avenue, and multi-merchandise retailer Robert Dyas, is one such enterprise.
With 330 stores across the UK employing 4,000 colleagues and collective sales of some £360 million, the brands may differ on product offering and demographic served, but they share the same day-to-day risks, all of which are managed by group director of risk and customer care, Mark Crowley.
Mark, a seasoned retail risk practitioner who has previously worked for brands including John Lewis and Burberry, has, during his three years with TPRG, juggled priorities across the eclectic estate. Yet, true to the ethos of the company, he has been empowered to deliver via a wide field team of risk practitioners and is also responsible for the ultimate arbiters of the business performance—the customers and their experience when entering any of the stores. In fact, the customer service remit provides him with a commercial and operational view of the business.
Interviewed for the Winter 2022 edition of Loss Prevention Magazine Europe, Mark said, “There is more of a symbiosis than people would think because I have full transparency of the spectrum of risks—from trips, slips, and falls to late parcels. This is invaluable as I can wear two hats when I report to the board.
“It sits well with risk and uses the same sorts of skills and can help me to understand the whole picture, and I can apply commercial acumen on which to make better decisions. It could give me intelligence about defensive merchandising, such as tagging, that may be causing some customers frustration, for example.
“It’s my early warning system as it helps me to better understand the broader risks of brand reputational issues such as late or non-delivery of an item, for example, and respond accordingly by making necessary changes based on that intelligence,” he added.
There are no easy answers to the economic head winds impacting the retail space, but a more inclusive approach influencing the narrative around risk management may steady the ship and hold the key to solving the sector’s long-term relationship with boom-or-bust economics. Businesses need to be aware of exactly where risk sits and how to break the almost endless cycle of hire and fire that has fuelled the debate around recruiting and retaining quality loss professionals. This forms part of a more holistic approach that includes workable technology operating in tandem with profit protection practitioners whose experience is embraced rather than rebuffed.