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Retail Loss Exceeds Online Channel

BOSTON, MA - Great article about retail loss prevention by Adrian Beck and Colin Peacock in the November Harvard Business Review.  Since many of my candidates and clients are involved in online retailing (and this Friday is the mother of all shopping days), I thought I'd share some of the high points of the article.

Evidently, American retailers could save as much as $27 billion if they had tighter loss prevention policies and procedures.  As it stands now, inventory loss in the U.S. hovers between 1.5 and 2.0% of sales.  Tangled supply chains and vast merchandise assortments contribute to the problem.

Ben Franklin was WRONG.

When it comes to retail loss prevention, a penny saved is not a penny earned.  It's fifty cents earned!  Although this HBR article does not mention this, let me do the math for you:

$27 billion is the bottom line, after tax outflow to these retailers.  That means that if these retailers did not incur this blood loss, they would be $27 billion more profitable.  To NET $27 billion in an industry that has an average net profit after tax of 2%, these retailers would have to sell $27B / 2% -- or $1.350 trillion.

That's trillion, with a "T".

To recover a single penny of net profit requires fifty cents in sales (.01 / 2% = .50).  This calculation applies to any business.  Simply take a penny and divide it by your company's net margin percentage.

For some perspective on this, Shop.org says that the entire value of the online retailing channel this year will be ~$175 billion.  By contrast, the "sales value" of the shrinkage channel is 7.75x the size of the online channel.  Betcha didn't know that.  I didn't realize it myself until I busted a move on my HP 17B a minute ago.  If I'm wrong, somebody please chime in.

Nine keys to preventing shrink:

The article's authors studied the best practices of five companies: Target, Limited Brands, Best Buy, Gap, and CVS.  Here are their methods of limiting shrinkage:

  1. Establish senior management commitment to making shrinkage a priority, overseeing an action plan, allocating resources, and monitoring results.
  2. Ensure organizational commitment from managers throughout the company.
  3. Embed loss prevention at all levels.  Everyone must own the problem.
  4. Provide strong leadership and develop a passionate team.
  5. Use evidence-based management.  Collect data on the problem and use a hypothesis based approach to tackling the problem.
  6. Innovate and experiment.
  7. Talk shrinkage.  Get it on the agenda for meetings.
  8. Prioritize procedural control.  What gets measured gets done.
  9. Empower store workers and hold them accountable.

What surprised me about the article -- which I guess is why I bring it up -- is that most of these methods are cultural and procedural, not technological.  Shrink management ain't about better technology.  It's about vigilance.  Clearly, that starts with hiring and managing A-players at all levels.
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What an eye-opener!! This is the best explanation of why loss prevention is so important to retailers that I've seen.

Well, I don't know about "brilliant" -- but I'm glad you enjoyed the post.

Sometimes as I read an isolated number, I think about the number relative to another number. For example, "The moon is 286,000 miles away from Earth." ... How many times farther away is Mars than that? And how many more times difficult will it be to send people to Mars than the moon. Etc.

Brilliant post, Harry. I'm linking to you in today's post. I just love it when you do your calculations. It drives the point home.

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