The Many Faces of Shrink

Based on the razor-thin margins grocers are working on, any form of loss is devastating to the bottom line. While basic solutions like electronic article surveillance and CCTV help chains fight against organized retail crime, shoplifting and internal instances of theft, the industry is fighting new sources of loss that are harder to infiltrate along the supply chain, as well as poor promotion planning execution and other issues that are jeopardizing sales conversion at point-of-sale.

“In a down economy, the desire to commit fraud increases, but there are also many unmanaged areas that are causing loss as well,” says Richard Draeger, owner of Draeger’s Markets, a San Francisco-area four-store specialty grocer.

In search of more structure to manage shrink, the chain was attracted to a reporting tool from Camden, N.J.-based Agilence. What struck a chord with the grocer however, was a more affordable business model — one based on cloud computing.

This Internet-based computing model enables multiple companies to “virtually” share resources and software rather than physically “own” or host the software in-house. Retail partners can “rent” services as needed, and access business applications online.

“The web-based model makes software more affordable from both usability and scalability perspectives,” Draeger reports.

Cloud computing also creates financial benefits. For a smaller retailer to purchase hardware or software, “all implementation costs are on our own dime,” he says. “In the past, analytics tools were often out of the financial reach of smaller companies.”

Usability, too, has been an issue for retailers of all sizes. Historically, companies have tried their best to network store-level POS systems with CCTV and analytics, but the real work surfaces when using exception reporting to research previous incidents of loss or identify patterns.
Since these tools are often not completely integrated, identification is slow and ineffective. Further, traditional exception reports only recognize patterns after the activity has occurred.

Agilence is changing the landscape by helping chains identify inefficiencies through real-time synchronization of the POS with video. Each store integrates a server that accesses software that synchronizes item-level detail, including open rings, voids and price checks.

A central server is also added at the corporate office. Connected via the network, the software aggregates the data from the stores, enabling executives to analyze data across the organization.

Agilence executives use the query tools to identify and investigate potential fraud, operational inefficiencies and policy violations. Incidents are documented and sent to Draeger’s, along with the embedded video highlighting the violation.

On the right track
Since adding the solution more than a year ago, the specialty retailer is saving vast amounts of time and labor by automating the incident evaluation process — something that could take individuals hours, if not days, to accomplish. The company has also made significant changes to in-house operations and policies.

“The system revealed a number of policy lapses, meaning places where there should have been tighter or defined policies and there weren’t any,” Draeger says. “This contributed to shrink levels as well.”

Price lookup was one pain point. Between items not on file and those that were incorrectly entered into the pricing database, Draeger’s was subject to inconsistent information. The biggest change, however, could be how the company now views its gross margins. Typically, gross margins are monitored as targeted vs. achieved — larger retailers often follow the latter, while smaller operations often act on cost.

“Having better insight into our losses and margins pushed us to look at the gap between targeted and achieved margins,” Draeger says. “We realized that unless we could manage this gap between the two, we would continue leaving money on the table.”

The technology has been such a boon for Draeger that the company is applying the software’s powerful query and reporting components to different departments within its organization. At press time, the retailer was expanding the solution to a just-in-time inventory management program across its perishable departments.

“Agilence is helping us highlight shrink issues within our perishables and allowing us to quickly address them,” Draeger says.

The solution is uncovering issues like the metrics that may be causing the chain to over-produce some fresh merchandise, as well as identifying items that are being thrown away, and why. “A major finding is that we have not been creating fresh merchandise that is on par with demand,” he says. “We are now redeveloping our internal systems to order the appropriate amounts of raw materials based on demand.”

The solution is already monitoring its deli operation, and the bakery department is next to launch. Floral department is on deck for the second quarter.