As security and loss prevention specialists, we often discuss ‘retail loss’ or ‘shrinkage’, but what exactly do we mean by these terms? Typically, they refer to theft or loss of merchandise, writes Gary Trotter, but there are many other forms of loss.
The Total Retail Loss Report authored by Professor Adrian Beck argues that traditional terms, such as shrinkage, are too narrow. It proposes a more in-depth concept: Total Retail Loss. Beck’s study, based on interviews with 100 senior retail leaders from some of the largest retailers in the US, aims to provide the retail industry with a more effective understanding of loss that’s appropriate for the modern retail environment. One that allows us to better understand the impact of current and future retail risks and respond to them effectively, enables us to make more informed decisions about the use and allocation of resources and also one that challenges loss prevention professionals to use this insight to become ‘agents of change’.
Before considering how best to evaluate loss in a retail setting, it’s important to first understand what loss is. In the Total Retail Loss Model, Beck emphasises that where there’s a clear link between an activity and the generation of retail income, then it should be classified as a cost. An event is classified as a loss when there’s no link between such activities. Therefore, an example of a potential loss could be workers’ compensation. The employer covers the medical, legal and other costs associated with an accident at work and the event impacts negatively on a retailer’s overall profitability.
Beck argues that there are three types of loss: assets, cash and margin. Assets include things like merchandise, buildings and vehicles. Examples of cash loss include payments for fraudulently returned stock, cash lost or stolen from stores, cash paid to cover any regulatory or non-compliance fines and other general liabilities. Margin loss may include credit card charge-backs, voucher scams, loyalty card abuse, customer fraud and lost profit from out of stock merchandise.
Four Centres of Retail Loss
Typically, these different types will be centred around different areas of a retail business, or as Beck describes ‘The Four Centres of Retail Loss’. These are as follows:
Store Losses that occur in the physical buildings owned or rented by a retailer where customers purchase goods. Also, e-commerce activities may occur here, for instance the shipping of inventory, customer collections and returns
Retail Supply Chain Losses that occur across the entire supply chain process (manufacture, transportation and storage)
e-Commerce Losses related to the provision of goods and services provided through the retailer’s e-commerce, Internet-based store
Corporate Losses related to the broader activities of the business
As well as understanding the type of loss, Beck argues that in order to address losses and identify a solution, it’s important to understand why the loss has occurred and whether it was intentional or unintentional. Beck’s Total Retail Loss Model begins by identifying the two types of losses incurred by retailers – the known and the unknown. Beck then classifies ‘Known Losses’ as either ‘Malicious’ or ‘Non-malicious.’
Malicious known losses are those that are carried out with the intention of depriving an organisation of goods, services, cash and, ultimately, profit. Non-malicious known losses occur within and between organisations that cause loss unintentionally.
Once all of the above is combined, the Total Retail Loss Model establishes 33 individual categories of loss. The typology is designed to enable the ‘value’ of retail losses in each of these categories to be calculated, not necessarily the number of instances. When calculating the overarching retail loss, it’s up to the individual company to decide how to best quantify this figure (for instance, as a percentage of overall turnover or as a proportion of overall profit generated).
Using the Total Retail Loss Model
The real value of Total Retail Loss is in understanding how the 33 categories of loss correlate with each other as a proportion of the total loss to the business. The overall goal is for the business to achieve a level of loss that optimises profitability.
However, in order to do this, high quality data needs to be collated and stored to provide a long-term view of both sales and losses and enhance loss prevention decision-making. Removing physical limitations on the amount of data retailers can store is therefore vita. It’s here that cloud-based surveillance solutions can help enable organisations to adopt a long-term model of analysis.
If successfully adopted, Beck believes that the Total Retail Loss Model will enable loss prevention professionals to seize new challenges and opportunities that more effectively use their established skills set. By mobilising data on losses across the business, using problem-solving and coaching and mentoring other retail functions on effective Total Retail Loss tactics, the loss prevention practitioner/team can ‘drive’ a ‘Total Retail Loss Group.’
It’s in this way that Beck predicts loss prevention professionals can remain a crucial, responsive and highly valued function in today’s dynamic retailing environment.
Gary Trotter is Co-Founder of Ocucon