Digital commerce has granted consumers unprecedented shopping options and merchants new revenue streams. Unfortunately, it has also been a boon for retail fraud.
Indeed, the Internet has birthed a vast platform—or endless aisle—for the sale of stolen merchandise. It’s given organized retail crime (ORC) rings—which have long resold, or “fenced,” stolen products from teeth whitening strips to eyeglass frames to flea markets and pawn shops—a global sales outlet for their black-market business, says Bob Moraca, vice president of loss prevention for the National Retail Federation (NRF).
According to the NRF’s 11th annual Organized Retail Crime Survey, 59.1% of the 67 retail loss prevention executives polled said they’ve recovered stolen merchandise from an “e-fencing” location, such as a third-party website, auction site, or blog.
In 2014, organized retail crime and shoplifting accounted for 38% of shrink losses, Moraca says.
At the same time, the nation’s financial struggles have nudged the rise of internal theft, says Ernie Deyle, a spokesperson for the Global Retail Theft Barometer.
“The economy is driving it as well. People have stresses on their wallet,” he says, noting escalating gas and rent costs. So, there’s more inclination to “validate [theft] when you’re making less than minimum wage.”
EB asked industry experts to outline some practical and affordable fraud-busting tips that are used by retail outlets, from big-box stores to supermarkets and specialty chains, that independent optical retailers can implement to reduce their shrinkage.
RETAIL THEFT: North America’s $42 Billion Achilles Heel
Did You Know? Retail theft is a bigger problem for U.S. merchants than for merchants in other countries.
In North America, total retail shrinkage cost the industry $42 billion during 2013 and 2014—the highest shrinkage rate in the world “as it has the highest concentration of retail stores and significantly lower retail loss prevention spend than other regions under consideration,” according to The New Barometer study from the Global Retail Theft Barometer.
In 2013 and 2014, dishonest-employee theft was the biggest culprit for shrinkage in the U.S., responsible for $18.01 billion (by value) of shrinkage. Key reasons for employee theft include ineffective pre-employment screening, less employee supervision, and the easy sale of stolen merchandise, reports the Theft Barometer.
In 2013 and 2014, shoplifting was the second-largest source of retail shrinkage in the U.S., accounting for 37.4%, or $15.70 billion, of shrinkage.
TAKING A PAGE FROM 7-ELEVEN: COZY UP TO COMMUNITY POLICE
While cultivating a relationship with police in their communities sounds like a no-brainer, retailers often fail to do this as part of their theft-prevention measures.
Retailers would be wise to set up meet-and-greets at their stores with the local law enforcement community, says Moraca.
“Get to know them. Offer discounts to policemen and firemen,” he says. “This way, when you do call the cops for assistance when something suspicious is taking place, you’re going to know that Officer Smith is around, as opposed to just calling 911.”
Criminals will also take note that cops regularly frequent certain stores and thereby steer clear of those places.
The strategy has worked for 7-Eleven. The convenience chain has even gone as far as to build miniature Community Policing Stations in some stores that offer a desk, chair, and telephone that police can use to write reports or make telephone calls in following up on investigations, he says.
THWART THEFT LIKE BIG-BOX CHAINS
Thieves are increasingly returning stolen goods to a retailer in exchange for merchandise credit in the form of store gift cards, only to cash in those cards on legitimate resale sites.
“They want to convert whatever they steal into cash,” Moraca says. In addition, gift card kiosks are now popping up in malls, making it that much easier to do just that.
Transaction verification reports, which are easily generated by retailers’ point-of-sale (POS) inventory management systems, are one way to counter bogus product returns.
These reports, commonly used by big-box retailers like Walmart and Home Depot, are one way to track suspicious and/or excessive product returns.
By running transaction verification reports, retailers’ point-of-sale systems will track a shopper’s suspicious return patterns, such as 10 returns over a 24-hour period.
POS reports are also helpful in countering employee theft. Optical retailers can examine POS transaction data on sales-reducing activities (SRAs) such as refunds, voids and price modifications, discounts, and coupons to isolate and quantify abnormal transactional behavior patterns, Deyle says.
For example, retailers typically incur more returns following the back-to-school season, as opposed to in February. Stores should be alert to sales data that veers from normal seasonal buying patterns.
While examining transaction data on SRAs is commonplace among most retailers, optical retailers can also benefit from this practice.
Organized Retail Crime Is Flourishing
Organized retail crime (ORC) groups cost the retail industry $30 billion a year, threatening merchants large and small, according to the National Retail Federation (NRF) 11th Annual Organized Retail Crime Survey.
Nearly all (97%) retailers surveyed report that they have been a victim of ORC in the past year, up from 88.2% who said so last year.
More than half (66.7%) of respondents said criminals have returned stolen merchandise for store credit, only to then sell that merchandise credit to secondary-market buyers or sellers.
And 59.1% have tracked a rise in “e-fencing,” the sale of stolen merchandise online via third-party websites, auctions, and blogs.
Top cities for organized retail crime rings:
1. Los Angeles
2. Miami
3. Chicago
4. New York
5. Houston
6. Arlington/Dallas/Ft. Worth
7. San Francisco/Oakland
8. Baltimore
9. Orange County, CA
10. Northern New Jersey
HIGH EMPLOYEE SATISFACTION BEGETS LOW INTERNAL THEFT
Professor Richard C. Hollinger, director of the Security Research Project at the Department of Sociology and Criminology & Law at the University of Florida, says that happy, well-treated employees are also a powerful deterrent to internal theft.
That means “pay employees well, give bonuses and raises for high performance, give promotions when deserved, ensure high job satisfaction, supervise employees with respect, encourage good morale at work, and make sure employees get sufficient hours per week,” he says.
Hollinger cites The Container Store as a case study in the correlation between high retail employee satisfaction and low internal theft.
And the numbers bear out: The retailer’s inventory shrink was less than half the industry average for the most recent fiscal year, ending in February 2015, says Joan Manson, vice president of loss prevention, payroll, benefits, and legal for the 74-store organization.
According to the NRF/University of Florida National Retail Security Survey, retailers said inventory shrinkage accounted for an estimated 1.38% of retail sales, or $44 billion, in 2014.
Manson attributes The Container Store’s low shrinkage to having “great employees.” Fostering that standard starts with The Container Store’s extensive screening process. Candidates who make it through (a mere 4% of all applicants) undergo 133 hours and 266 hours of training for part-time and full-time workers, respectively.
High job satisfaction at the chain is sustained by a generous employee benefits package and a corporate culture that exceeds the retail industry standard, Manson says. The result: “Our [annual] turnover is less than 10%,” she says.
For one, “we pay employees 50% to 100% more than the retail industry,” she says, adding that the average full-time worker there makes over $50,000 a year. By contrast, the median annual wage for retail salespeople is $21,390, according to the U.S. Department of Labor’s Bureau of Labor Statistics.
“And you can have a career here. You can come here in high school and retire from here,” says Manson.
This forward-thinking retailer also offers health benefits for both part-time and full-time employees and paid time off, and “it’s fun,” says Manson. “If you’re feeling really good about the place you work, and you’re getting great benefits and working with great people, why would you steal from the place and ruin that?”