Predicting the Future of Loss Prevention
There are few upsides for those predicting the future, as it is a certainty that any wrong prediction will live forever. Just ask Bill Gates about his prediction that 640 KB of memory ought to be enough.
Despite this risk, there is no shortage of leaders, industry experts, consultancies, and research groups publishing their thoughts on where the future lies, especially in regards to how we will shop and to the nature of retailing in general.
This article will not attempt to repeat or even summarise the predictions of retail futurologists, for what we know is certain is that retail will change. To quote Doug Stephens, founder of industry website Retail Prophet, "There will be more disruption in the next ten years of retail than we had in the previous one thousand."
To discuss what lies ahead in terms of the future management of retail loss prevention, the ECR Shrinkage and On-shelf Availability (OSA) Community organised a one-day round-table discussion in February 2016, with representatives from sixteen retailers and four product manufacturers joining academics and industry experts. The event started with a presentation from Capgemini on its future value chain report, Rethinking the Value Chain: New Realities in Collaborative Business, which was produced in conjunction with the Consumer Goods Forum. With this presentation acting as a stimulus, the group went on to identify the developments in retailing that were most relevant to loss prevention, focussing particularly on the new risks that are likely to directly impact on shrink and OSA. The group then debated the future direction of loss prevention before concluding with a list of twelve new research topics and an action plan to commission two new research projects. Detailed below is a summary of this round table.
New Developments and Associated Risks
Three broad themes emerged on new retail developments relevant to the loss prevention community.
New Business Models, New Complexities.
Retailing used to be so simple, you build a store, consumers flock to that store, you exceed the sales target, you find more selling space in the store, and then you build some more stores and eventually a distribution centre and many hubs to get the goods to the stores faster and cheaper. Happy days!
But the days where success can be built using this traditional, relatively simple retail business model are perhaps going away, being replaced by new and increasingly disruptive business models. There is no more striking an example than Amazon. Established in 1994, in July 2015 Amazon, for a short while became the largest retailer in the world when measured by market capitalisation, valued at $261 billion compared to its nearest rival, Walmart, at $233 billion.
But Amazon is just one example of how traditional retail business models are being challenged. Consider the example of a small jewellery store in Stockholm, which in September 2014 took part in an experiment where Uber taxis picked up orders placed online and delivered them to customers in the city within one hour of the order being placed. The store saw sales grow by 500 per cent in this twenty-four-hour trial. So with no capital investment required to build a fulfilment centre or operating expenses to pay for pickers, trucks, and a distribution centre, this small retailer was able to offer a one-hour delivery service to the shopper at what could be a significantly lower cost to both the shopper and the retailer than the traditional business model.
Retailers will have to find new ways to respond. For example, they could look to lower their current operating costs by reviewing staffing models, automating certain tasks such as replenishment, making better use of data for decision making, working with vendors to lower the cost of goods, reducing supply chain costs by sharing facilities, outsourcing certain activities such as shelf filling, and so forth. They will also need to look to new ways to generate income, for example, selling under-utilised sales floor capacity to other retailers or generating extra sales for their private-label items through new distribution relationships with retailers in other markets.
The point here is not about exhaustively laying out all the answers to the current challenges traditional retailers face in terms of competing with new business models, but about highlighting that the context in which the loss prevention function currently operates is rapidly changing.
It is for the loss prevention team to now consider how they evolve, adapt, and effectively support the business to manage the new risks associated with the changing retail environment. For example, the loss prevention team will need to identify new ways to control theft from stores where there may be significantly fewer members of staff present. Similarly, responding to risks associated with theft and fraud where their business begins to operate in the same location as other businesses, sharing electronic point of sale (EPoS) terminals and security systems such as video technologies. Now more than ever before, the business requires the support of a proactive loss prevention team to help ensure the success, or not, of these new business models.
New Ways of Shopping, New Risks.
There was a time when the only way to buy items such as groceries was to physically visit a store, ask a member of staff to fetch the item you wanted off the shelf, and pay for that item with cash.
Today's shoppers browse and compare prices online before and during the shopping visit. They want the items to be available, even reserved for them, before they visit the store. And they want to pay for them without queuing, using self-scan checkouts or even their own devices to scan, and pay by cash or card, using new contactless technologies. And if they don't like what they have bought, they want to be able to return it with the least amount of effort possible. And the change is constant, in 2016, Amazon filed a patent to allow customers to pay for items with a card transaction authorised by a selfie.
While these changes can be great for the shopper, especially Millennials whose expectations of 'good' service have been set by the likes of Uber, for those responsible for reducing fraud and minimising the loss of cash and products, these new ways of shopping create new risks and challenges. For example, when consumers use their own devices to scan the items they want to buy, there will likely be more errors made, leading to a positive and negative impact on inventory, as well as potentially increasing the temptation to steal by not scanning. Further, with the trend to issue fewer physical receipts, the potential for returns fraud could grow as retailers will be increasingly obliged to give refunds to ever-more consumers who may have never been given physical receipts by which they can confirm their original purchases. For the loss prevention team, there will be a growing demand from the business to be on top of and respond to these emerging threats and the growing risks to cash loss, theft, and fraud.
But their involvement is often last minute or indeed after the event, new systems have often already been designed, bought, and installed and the customer expectations already set before questions about potential risks are raised. The loss prevention function needs to get a seat at the table when these new ways of shopping are first being discussed, designed, and deployed so that potential risks of loss can be recognised and, hopefully, minimised through the introduction of appropriate monitoring tools, controls, and interventions.
Data Security: The Increasing Criticality of Consumer Trust.
Today, when you visit Internet retailers such as Amazon, they know who you are, who your friends are, where you live, where you visited before you came to their site, and based on your clicks and purchases, when, how often, and what you buy and did not buy. Physical retailers are fast catching up, building upon data they already have on shoppers, typically harvested from loyalty cards, and supplementing this with information increasingly captured from smart phones, beacons, and Wi-Fi, indicating shopping habits such as when they enter the store, where they go within it, and what they did and did not buy. These are new times for retailing; ever-increasing data and location analytic technologies are allowing ever-more-targeted approaches to win and hold on to shoppers, with the retail winners of the future being determined by those who can best leverage these new possibilities to grow sales and profits.
However, the flip side is that if the retailer does not securely manage this data and personal details of individual shoppers are lost to or stolen by criminals, customers will be unforgiving. Retailers' reputations and the trust built up over decades could plummet and be lost, probably faster than the time it took the hackers to steal the data. Therefore, retailers will need to build expertise, knowledge, and defences to protect their customers' data and the loss prevention function will be key to doing this.
It also follows that the risk priorities and investment choices of retailers will change, investments to protect consumer data will inevitably be seen as a more important priority than protecting, for example, razor blades from being stolen from a store, especially in retailers where the online business is an increasingly large proportion of current and future sales growth. When the investment leads to a reduction in traditional loss prevention budgets, loss prevention teams will need to look to proactively communicate, with data, the consequences of a change in priority while at the same time finding new ways to manage the current risks, possibly at less cost.
Future Direction of Loss Prevention
Three key themes emerged from the discussion on the implications for the loss prevention team of the future.
The Loss Prevention Team Will Need to 'Flow' to the New Work.
The rapid pace of change in retailing demands that the loss prevention team must be very close to the many changes in the business, seeking to find ways to help the organisation to anticipate and respond to emerging risks, with a view to preventing losses before they happen.
Practically, it means that the loss prevention team will need to become a critical team member of the project and management teams accountable for the implementation of new business models, new ways of shopping, and the security of any associated data. The specific role of the loss prevention function will be to use their experience and expertise to identify the vulnerabilities in the proposed designs and deployment plans that could lead to losses.
For some project teams working on retail innovations, there may be a reluctance to invite the loss prevention team to the table, perceiving them to be the 'sales prevention' team and a function that will only slow down the project and not offer any unique insights. It follows therefore that the loss prevention team must bring valued expertise, including benchmark data on how other retailers are handling similar risks.
The loss prevention team, therefore, needs to flow to the work to remain relevant to their organisation, anticipating and proactively seeking out opportunities where they can add unique value. In turn, this will assist their business to quickly deliver the innovations they need to achieve their business objectives, with loss prevention providing clear visibility to the risks and the support for the appropriate monitoring of losses and the implementation of risk management measures.
The Loss Prevention Team Will Need to be 'Masters' of Business Operations Data.
The loss prevention team, through the nature of their work, are often uniquely placed to source, collate, and turn into insights possibly the widest array of data on the operations of the business. Data sources include the inventory, such as physical stock counts; records on known inventory losses in stores and the supply chain, such as waste and damages; payment cards; loyalty cards and coupons; personnel records on store managers and associates, for example, staff tenure; sales, voids, and returns; burglaries; shelf out of stocks; returns and claims; and much more.
Bringing all this data together into one place into one system can add huge value to the organisation because it will enable relationships between the different metrics to be better understood; a broader range of losses to be made more visible; encourage identification of the critical few drivers of change; and facilitate the development of prescriptive instructions for others to act upon. In order to do this, the loss prevention team will need to build a persuasive and coherent business case for the organisation to invest in data systems and analytics.
The Loss Prevention Team Will Need to Grow and Expand Their Skill Set.
The Shrinkage and OSA Group thought the loss prevention team of the future will need to develop (in addition to their current capabilities) skills in three key areas:
- Data Analysis: A critical skill set for now and the future, for every member of the loss prevention team, will be the ability to manipulate, analyse, and turn data into prescriptive actions. Those functions and individuals served by the loss prevention team, such as store managers or buyers, often do not have the time to sift through the data. They want to simply know the two to three actions they should take to improve performance on managing their losses.
- Change Leaders: More than a project manager, the role of the change leader is about managing a diverse set of busy stakeholders towards a common goal. It requires skills in working with others, often where there is no reporting relationship, with an ability to manage a change-management process. The role requires a good understanding of finance and how to build a business case and the skills to manage collaborative relationships well.
- Coaching: In the past, store managers and buyers may have seen the management of loss as someone else's job, for example the security guard or the loss prevention team. The research on low shrink retailers by Professor Adrian Beck and case study presentations at ECR meetings demonstrate that to deliver low levels of shrink, it needs to be viewed as everyone's job and not just a problem that you can 'outsource' to others. An increasingly important role of the loss prevention team will be to encourage others, through coaching, to contribute to the better management of loss through the decisions and choices they make every day.
Finally, more than ever as the scope, number of stakeholders, and skill sets grow, loss prevention teams will need leaders who are charismatic, very well connected, and outstanding communicators. To many in a typical retail organisation, the problem of shrink and loss will not be viewed as a 'sexy' function or indeed seen as critical to the achievement of corporate goals. For the loss prevention team to continue to make a positive contribution to the business, they will need a passionate 'cheerleader' and an individual who can promote the relevance of their team to all stakeholders and the benefits that their capability can deliver to the organisation.
Finally, the group discussed the research questions they believed would help them to better respond to future challenges and at the same time provide them with new insights to share with other retail functions. This was thought important in helping to secure a seat at the table where decisions on policy, change, and new projects are under discussion. The twelve research areas identified were:
- Benchmarking loss - what do retailers believe to be an 'acceptable' rate of loss?
- Cross-border crime - what does effective collaboration look like between Government agencies and retailers?
- The nudge theory how could the science of cognitive behaviour be applied to help reduce retail crime?
- Online out-of-stocks - what is the scale and nature of the problem of out-of-stocks in the online retailing context?
- Forecasting waste - what is the role of forecasting in reducing food waste?
- RFID in retail - what are the lessons so far on the value of this technology in retail, and where is it heading beyond the apparel sector?
- Total retail loss - how can the broader definition of retail loss drive greater collaboration across functional silos and between different organisations?
- Shrink - how can new research techniques help deliver a deeper understanding of the extent of the problem caused by internal reasons relative to external reasons?
- Predictive model - what is the statistical relationship between the rate of inventory accuracy, inventory levels, out-of-stocks, and unknown loss, and how can the knowledge of these relationships be leveraged to help predict shrink?
- Measurement - what is best practice on the generation of reliable data on shrink and on-shelf availability?
- Reverse logistics - what is the scale of and threat posed by risks of error, damage, and theft associated with the return of items purchased online but then returned to the retailer by the shopper?
- Understanding the impact of shrink - what is the relationship between the physical size of the store, the number of employees, the technology installed in the store, the sales of that store, and shrink?
The breadth of the research interests from the group revealed more than ever the broad nature of the loss problem and the desire for new insights on emerging risks and the development of best practices on new ways of measuring and tackling loss.
The group voted on and agreed to commission two new research projects - the first looking to explore the scale and nature of omni-channel online returns and the second seeking to better understand the statistical relationship between inventory accuracy, stock loss, out-of-stocks, and inventory turns.
In closing, what this article surely needs to end with is a wild and bold prediction on the future of loss prevention, and at the risk of being remembered like Bill Gates for what will probably end up being hopelessly wrong, here is my prediction: In ten years time, there will be no business cards describing the holder as being the head, vice president, or director of loss prevention or asset protection. Instead, the business cards will describe a responsibility and a role along the lines of total retail loss, total retail loss control, or profit improvement. Over the next ten years, what we will see is the gradual evolution of the loss prevention team to this new scope of work and role. I believe this evolution will be enabled by the willingness and desire of the loss prevention team to flow to the new work, by the team's ability to leverage the operational data that they have a unique level of access to, and finally by the changing nature of their skill sets. I see the loss prevention team of the future becoming an indispensable partner to the business, helping to deliver the profound changes being experienced throughout retailing.
As with the other articles in this series, I hope more than anything that the ideas put forward start to answer some of the big questions keeping you awake at night, that the insights get you thinking more about some important themes and potentially act as a catalyst for a team or organisation-wide discussion at future meetings.
If you would like to participate in either of the two research projects outlined above, learn more about the current total retail loss research, or simply attend one of our team events, typically hosted by a member, write to me at firstname.lastname@example.org or visit our website at ecr-shrink-group.com.
COLIN PEACOCK is a visiting fellow at the University of Leicester and is the strategic coordinator for both the ECR Community Shrinkage and On-shelf Availability Group and the Retail Industry Leaders AssociationÕs Asset Protection Leaders Council in the US. Prior to these appointments, Peacock had a thirty-year career at Gillette and Procter & Gamble. In his last fifteen years he was responsible for the global leadership of their on-shelf availability, brand protection, and shrink prevention capability. In this role he was responsible for delivering new thief, counterfeiter, shopper, and store manager insights; an innovation pipeline of new solutions, including RFID; and the oversight and delivery of successful collaborative projects with customers and distributors around the world.
Peacock has published articles on loss in the Harvard Business Review, LP Magazine, and other industry publications. With Professor Adrian Beck, he co-authored New Loss Prevention: Redefining Shrinkage Management, published by Palgrave Macmillan in 2009. He is a regular speaker at conferences around the world. Peacock can be contacted at email@example.com.