Shrink Wrap

Loss-prevention experts offer some low-cost, easy ideas on how pet specialty retailers can reduce troublesome shrink rates.


As if the recession alone hasn’t been enough to cause pet specialty retailers angst, employees and “shoppers” with sticky fingers have added to the toll the economy has taken on pet stores’ bottom lines.

Overall, retail losses increased last year to $36.5 billion from $34.8 billion in 2007, meaning the average shrink rate is indeed on the rise, according to preliminary results from the National Retail Security Survey released this summer by the National Retail Federation (NRF) and the University of Florida. However, the experts say there is plenty that pet specialty retailers can do to reduce loss. It may cost some time and effort, but a good loss-prevention strategy doesn’t necessarily require a significant financial expense. In fact, doing nothing to reduce shrinkage can prove much more expensive in the long run for pet store owners trying to maintain a healthy bottom line.

“Shrinkage is an expense in the true sense of the word, just like rent, electricity and the cost of merchandising,” says Jerry Obarski, a retail consultant with nearly 40 years of experience in shrinkage control and store operations. “The only difference is that you don’t get an invoice or a monthly statement, like with rent or from the water company, but it is an expense. From that standpoint, it’s something that needs to be controlled.”

According to Pat Murphy, president of LPT Security Consulting, a Houston-based security consulting company, larger businesses may sometimes be better equipped to deal with the types of security problems and administrative issues that cause retail losses. “I think the difference­–good or bad–is that the accounting of inventory is more sophisticated in large retailers, and they have the resources to independently investigate trends,” he says.  “Smaller retailers may not have some very basic processes in place to monitor and trend their losses.”

Shrinkage, however, is a curse at all levels of retail, and the solutions range from the expensive and complicated to the cost-free, simple and nearly intuitive. Obviously not every store, including independent pet retailers, can afford closed-circuit television or security personnel. But one thing any retailer can have is a plan, and according to Obarski, coming up with one is the first step in dealing with shrinkage. “Be it a large store or a mom-and-pop pet store or a chain of two or three stores, you’ve got to have a store program, and it doesn’t have to be overly complicated,” he says.

Every business should set a clear goal to aim for­­–specifically, a shortage rate the retailer wants to achieve. For example, if a store or chain of stores had two-percent shrinkage in 2008–losses determined as a percentage of overall sales–maybe this year the goal will be to bring that down to 1.75 or 1.5 percent. Obarski recommends putting together a committee to tackle the goal. “You don’t have to have hours and hours worth of meetings each week, but you need some senior group within the store to provide action and direction toward that goal,” he asserts.

Knowing the Risks
Before launching into any actionable plan, however, it helps to know what you’re dealing with. Shrinkage can basically be broken down into four types. The first two, customer theft and employee theft, are often the most damaging, costly and potentially tough to thwart and detect.

Administrative errors come in third. Pricing mistakes and other accounting errors can subtly or dramatically throw off the books. “It’s generally some error involving the way you state the value of your product compared to what you actually own it for on your books,” Obarski explains.  For example, when a retailer reduces the price of a slow-moving item on the floor but neglects to note the reduction in the books, this can cause a discrepancy. 

Lastly, vendor errors and shipment issues can easily go unnoticed in a busy retail environment. “In other words, if you pay for 12 items from a vendor, but he only ships you 10, and you don’t catch it, you end up with a shortage right off the top,” Obarki notes.

But while pet specialty retailers can consider all forms of shrinkage a matter of concern deserving their attention, some are generally more prevalent and destructive than others, according to the National Retail Security Survey. Nearly half of retail shrinkage in 2008–44 percent–was due to employee theft, the survey reveals. Fourteen percent of those cases involved “collusion with outsiders.” Shoplifting accounted for 35 percent of losses, while administrative error came in at 15 percent and vendor fraud, four percent.

Shrinkage experts recommend getting employees in on the ground floor of any loss-prevention program, and since customer theft accounts for a sizable percentage of retail loss, a staff that is savvy and aware of potential shoplifting threats can make a noticeable difference in bringing down a retailer’s shrink rate.
Among the most notable and troublesome shoplifting scenarios to come out of the pet industry are the theft of animals–often expensive, in-demand puppies and other sought-after animals. An employee’s watchful eye and attentive customer service is probably the best weapon the retailer has.

“Pet stores thrive on customers playing with the dogs and cats,” Murphy says.  “You can’t make a sale without it.”

Given how valuable that puppy or kitten is­–and thus the increased likelihood that someone would want to waltz away with it–staff should keep the animals in full view at all times, especially at the height of a Saturday afternoon rush. It was during such a rush that Ryan Garson of Palm Beach Puppies in Florida says his store was a victim of puppy theft. “The store was really busy, one of the employees wasn’t looking when a girl took this tiny one-pound dog, put it in her purse and walked out the door,” he recalls.

Teacup dogs, which are a specialty of Palm Beach Puppies, are particularly vulnerable to theft. A shopper can easily tuck one away in a handbag or even a coat pocket.

Fortunately, Garson’s story had a happy ending. After a lot of local news coverage, the thief brought the nine-week-old puppy back the next day. But the experience still serves as a cautionary tale for other retailers and a harsh reminder to Garson and his staff that, even with in-store cameras, employees must always be on the alert.

Just Puppies, a pet shop in West Sacramento, Calif., had a similar experience this summer, having lost a dog to theft, just to have the puppy returned shortly after. Manager Brandy Roberts says the store has since reinforced rules that the staff was always meant to follow. “The number-one thing is that you have to be in the front of the store with the customers; you can’t be in the back,” she says. “Really, it’s about awareness, just being aware of your situation and being aware of where your customers are all the time.”

We See You
The most important thing employees can do to help prevent customer theft is also probably the simplest, most inexpensive strategy there is: provide good customer service. It starts with a greeting. If possible, an employee should say “hi” or “welcome” to every customer who walks in the door.

“Recognize the customer, acknowledge that they are in the store–it says, ‘We see you in the store,’” Obarski says. “From an associate standpoint, that’s the most important thing they can do. You can’t emphasize that enough.”

This won’t stop the career thief, he adds, but the average shoplifter or a youngster operating on a dare or a whim will think twice.

Beyond good customer service, employees are limited in what they can do to prevent shoplifters, particularly the more seasoned and sophisticated shoplifting rings. Murphy points out that theft is a constant in retail and often goes undetected until after the fact. The employee’s job is to “observe and report” and let the manager handle it.

Storeowners or managers should encourage staff to be on the lookout and give them clues as to what to look for. “Shoplifting should be on the agenda every other month or so,” Murphy says. “Talk about it­–these are the signs, this what you should look for.”

Training­–and regular retraining–can prepare employees for various situations they may face. Knowing how to handle several customers at a time, for example, will come in particularly handy when there is tag-team duo working in the salesperson’s midst. Murphy says that an employee needs to know what to do when he or she is working with one customer who is holding a puppy or other animal while another customer is intent on distracting the employee and drawing him or her away.

“You’re going to get that sense when someone is trying to pull you away,” he says. “You have to be able to say, let me finish here and I’ll be right with you.”

Just as in a jewelry store, a customer should never be left alone with such precious and highly valued merchandise. “A $1,000 dog should be treated like a $1,000 diamond ring,” Murphy says.

Sometimes the threat, however, is from within. An inside job can be a particularly unpleasant reality to face, but given how much employee theft costs retailers each year (estimated at $15.9 billion), it’s a problem that can’t be ignored. Many business owners don’t want to even consider that their own employees are stealing from them, or helping others steal, but when the books start to show an increase in shrinkage, and there is no known security problem, a storeowner would be wise to keep in mind the ugly statistics.

“Theft is a symptom of a failure in a process and is a symptom of the culture of the store created by management,” Murphy says.

That’s not to say that theft is 100-percent preventable. Employees who are determined to steal are hard to thwart, and even the best hiring practices may not protect a store from dishonest workers. “Regardless of the atmosphere, an employee who wants to steal will do so,” Murphy warns.  “It has nothing to do with the environment. They walked in the door with those dishonest behavioral tendencies. Those employees exploit weaknesses in policy and procedure.”

Murphy notes that even criminal background checks, which he considers essential, are not foolproof. Few employees are ever prosecuted in the retail setting, so there is rarely even a record to check. He adds, however, that with adequate safeguards and oversight, a retailer can minimize the risk of internal theft.

On the Defense
As with many things, the best defense is a good offense. Among the first lines of defense, according to the experts, is employee involvement. It may seem counterintuitive at first glance, but keeping employees in the loop may be one of the best ways to prevent or even expose employee theft. 

Employee involvement can start from day one for a new hire. Among the paperwork a new hire has to fill out or sign off on should be a policy that clearly states the store’s policy on theft and loss. Having the new employee sign a statement saying they understand the policy sends the message that the store may not be such an easy target. It also sets a tone and a precedent for dealing with a host of security- and loss-related issues.

You need to have a very clear policy about protecting company assets,” Murphy says. “You don’t have to outline the 100 ways someone can steal. All you have to convey is that if [the employee] causes a loss through negligence or intention, they are subject to termination for violation of company policy, and the burden of proof doesn’t have to be a slam dunk.”

Security-related policies should be set out separately, he adds. Employees should know that even slip-ups like leaving a back door open or unlocked or stopping at Dunkin Donuts on the way to the bank with a bag of cash to be deposited can get them fired.

Employee involvement, however, shouldn’t begin and end with a signature at the bottom of a piece of paper. Obarski says continued associate involvement is paramount to any loss prevention plan. Employees should know the stats, including the overall shrinkage rate for the store and, if applicable, what the rate is for their particular department.  

“You need to solicit their input on what they think needs to be done, maybe even to the point of asking them to do simple self-audits toward reducing shortage exposures within certain lines,” he says. “To the greatest extent possible and to the lowest level possible, get your associates involved in the process. Make them part of the solution.”

Keep Up the Effort
Experts say retailers can keep the subject fresh in everyone’s mind by routinely rewarding shrinkage reduction successes with small prizes and accolades. Addressing the subject at all or most staff meetings helps, as well.

“Recognize outstanding associate contributions to your shrinkage efforts at all store association meetings or morning touch-base sessions,” Obarski suggests. “That’s a great time to recognize an area of the store that had a great audit result or a great shrinkage idea from Mary Smith.”

Murphy concurs that recognizing a job well done is as important to managing shrinkage as detecting and thwarting bad deeds. “Loss prevention doesn’t have to be this bootstrap snarling dog, it’s all about identifying bad behavior and correcting that and rewarding the good behavior,” he says.

Retailers can cull a great deal of useful information by tracking and analyzing register transactions.  There is plenty of computer software available on the market that will analyze register activity for retailers, and that software ranges in complexity depending on price.

The Internet also offers a wealth of information on the subject, and to some extent, so do consultants who will often offer guidance for little to no cost. Murphy adds that with just a little background and some practice, small pet specialty retailers can work wonders on their own, using some fairly simple math to find the needed information.

“Even if you only have one register, break down the types of activity that’s on the register’s detail tape on daily basis and you’ll visually be able to see how those numbers track,” he asserts. “Expensive software does it for you, but get a Big Chief tablet and a crayon and you can do the same.”

This information may not immediately shed light on a problem. It may take time to establish a baseline for comparisons and to distill the information to discover that say, Bob averages twice as many refunds as Mary; or that Mary only averages $5 a transaction while Bob and Joe average $15 a transaction. But owners or managers can put the info to work for them fairly quickly.

“Let people know that these issues are important to you,” Murphy says. “You might say, ‘I was looking through your refunds; try to get that return sale, as well.’  Now the employee knows you’re looking at their refunds. The message can be pretty subtle at times.”

At other times, the message may not be so subtle. Murphy recommends posting stats culled from the register activity on a bulletin board near the employee time clock, thus making it obvious to everyone what the trends are and where employees stand in comparison to others. “It becomes a huge deterrent,” he adds. “Nobody wants to stick out on a bulletin board.”

Other Forms of Loss
While employee and customer theft can be quite costly, other less sinister forms of shrinkage can also be subtly eating away at a retailer’s bottom line. Vendor errors and in-store administrative mistakes may be easy to miss but can add up significantly. Actually seeing and identifying the problem can be the first move in dealing with it, say the experts.

At the Wag Pet Boutique, in Raleigh, N.C., instances of employee theft and shoplifting have been relatively rare, but other forms of loss have caused problems. Dan Headrick, co-owner, says the boutique’s biggest source of loss came from administrative follow-up on procedures such as returns on defective products and coupon redemptions, as well as a lack of initiative to sell or merchandise slow-moving stock. The solution, he says, was to establish clear, simple-to-follow procedures for employees to follow.

“Put into place clear operational systems that are not dependent on individual knowledge or experience,” Headrick says. “People come and go, but the operational system stays intact.”

He also stresses the need for retailers to pay attention to details. “This can’t be done if you spend too much time away. You must be present. This informs you but also sends the message to staff that you’re there and watching.”

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