Stealing retailer's thunder: PwC estimates Canadian retailers are losing over $10 million a day to shrinkage

From employee to customer theft, counting mistakes and organized crime, at almost $4 billion a year retail shrink has a bottom line impact that must be minimized wherever possible

TORONTO, Oct. 31, 2012 /CNW/ - Canadian retailers are losing about $4 billion a year to shrink, which equates to an average estimated loss of $10.8 million per shopping day, according to PwC's 2012 Canadian Retail Security Survey, completed in conjunction with the Retail Council of Canada (RCC). Respondents to the survey reported shrink rates of between 0.4% in the low range and 2.19% at the high range of their net sales in 2011, with an average shrink rate of 1.04% of net sales for all respondents.

Retail shrinkage is the loss of inventory caused by different sources such as theft by employees, customers or organized crime, inventory counting errors, accounting errors, fraud and damaged product loss. In the U.S., the reported average shrink rate is 1.42%ⁱ.

Paul Beaumont, Director of PwC's Canadian Retail Consulting Services practice says, "To put retail shrink in perspective, total dollars lost to shrink is almost the same amount as the total investment made each year by the entire Canadian retail industry in their Information Technology (IT) departments and more than what retailers invested in their Finance departments. Unlike IT and Finance spending however, shrink provides no benefits to retailers and requires significant time and expense to identify, manage and prevent."

You're being watched
Although estimated shrink as a percentage of sales has remained contained since our last survey in 2008, many respondents noted a sharp increase in the use of closed circuit TV/DVR recording systems, observation mirrors and 1-800 tip lines to control losses both in-store and in-warehouse environments. In fact, more than 65% of respondents indicate that they always use these tools today, a significant increase from the reported 39% result from 2008.

Conversely, only 35% of retailers said they frequently use alarms on merchandise, a reduction from the 72% result reported in 2008. "Retailers are using more sophisticated and concealed tools to keep shrink low while at the same time trying to provide customers with a better experience interacting with their merchandise," says Stephen O'Keefe, Vice President of Operations for the Retail Council of Canada.

The most popular merchandise to steal
The top three items most likely to be stolen from retailers are alcohol, ladies apparel and cosmetics and fragrances. Each of these merchandise categories are high volume and high value making them more prone to criminal activity both from inside and outside the store.

Getting caught red-handed
Given the significant impact shrink has on the bottom line, it is no surprise that respondents indicated a propensity to prosecute the majority of both customers and employees caught stealing. Criminal prosecution, civil recovery as well as banning thieves from stores are all options retailers have at their discretion. "Given the difficult economic environment since 2008, retailers have been carefully considering all of the options available that discourage theft. Finding the most effective balance has been a key focus that Loss Prevention departments have worked hard to identify," says Beaumont.

Stealing from within
This begs the question of whether the consequences are serious enough to stop stealing from within retail operations. According to the report, estimated theft by external parties including shoplifters and organized criminals has decreased to 43% since the 2008 estimate of 65%, while during the same period estimated internal/employee theft has grown to over 33% from 19%.

"Due to the nature of its business, the retail industry tends to be at greater risk to internal crimes such as employee theft," says O'Keefe. "The focus for employers is to create a heightened sense of awareness and need for staff to be a part of the solution, which has resulted in more reporting of incidents than ever before."

Given this shift, many retailers have decided to increase their investments in managing internal theft. Beaumont says this is wise, "A dishonest employee with inside knowledge of retail operations and systems has the ability to do more harm than typical shoplifters. Retailers that respond with a severe punishment for an employee send a clear message throughout their organizations that there is zero tolerance for dishonest behaviour."

As a result, 88% of respondents charge the employee criminally and nearly all (94%) dismiss the employee with cause. O'Keefe continues, "While retailers have done a good job implementing many important loss prevention measures, the need for strict internal policies and procedures as well as performing pre-employment screening and criminal background checks before hiring new staff are important actions that mitigate risks and will help reduce losses in the future."

While three out of five retailers perform pre-employment screenings before hiring new staff, only 29% request new employees to pass a police background check. This is half as many that said they did so in 2008.

Analytics and RFID technology - a missed opportunity?
Monitoring inventory is one of the most proven methods to identify retail shrink, but the promise of Radio Frequency Identification (RFID) to better control and account for the movement of products has not been realized by Canadian retailers. None of the respondents in this year's survey indicated they were using RFID technology.

Although the cost of RFID technology has decreased over time it can still be costly to implement overall, and a supporting business case can be difficult to make, especially during challenging times. However, given the potential benefits that RFID offers retailers, it is inevitable that retail executives will re-examine investment options in the future, especially for high value items.

Retailers indicated that they employ theft prevention policies for internal and external theft, vendor / supplier fraud and pirating of intellectual property. While retailers stated that internal and external theft are their highest concerns when it comes to criminal activity, credit and debit card fraud including Pin Pad tampering, return fraud and gift card fraud are also significant security issues.

About PwC's 2012 Retail Security Survey
Overall 34 retailers participated in the survey, representing approximately 24% of 2011 retail new sales as estimated by PwC and the RCC. Participating retailers reported 2011 average net sales of $2.540 billion, with an average of 48 employees employed at each store and 14,407 across Canada, and a median of 20 and 3,587 employees respectively. Respondents to the survey included Vice Presidents, Directors and Managers within the Loss Prevention or Security functions of some of Canada's leading retail organizations. To the extent it was applicable, owners and other management staff of smaller retail operators also participated in the survey targeted at the smaller market retail segment.

For more information, please visit www.pwc.com/ca/retailsecuritysurvey. A copy of the report is also available from the media contacts.

Follow PwC on Twitter at @PwC_Canada_LLP and on Facebook at www.facebook.com/pwccanada.

About the Retail Council of Canada
Retail Council of Canada (www.retailcouncil.org) is the Voice of Retail. Founded in 1963, RCC is a not-for-profit association which represents more than 45,000 stores of all retail formats, including department, grocery, independent merchants, regional and national specialty chains, and online merchants.

About PwC Canada
PwC Canada helps organizations and individuals create the value they're looking for. More than 5,700 partners and staff in offices across the country are committed to delivering quality in assurance, tax, consulting and deals services. PwC Canada is a member of the PwC network of firms with close to 169,000 people in 158 countries. Find out more by visiting us at www.pwc.com/ca.

© 2012 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved.

PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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ⁱ Source: National Security Survey, National Retail Federation & University of Florida, 2012.

SOURCE: PwC (PricewaterhouseCoopers)

Kiran Chauhan
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Abby Yung
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