ACADEMIC VIEWPOINT

2012 NRSS Executive Summary

If you are a regular reader of our report, you already know that there are always more similarities in the National Retail Security Survey (NRSS) findings from year to year than differences. This is to be expected in a stable, mature industry that does not fluctuate dramatically in its loss prevention practices and asset protection procedures. However, there are some notable differences this year from the previous year’s results.

Despite the fact that we are still mired in sluggish economic times, this year we can report that 93 retail corporations sent in questionnaires. Not all surveys were fully completed, which caused some missing data problems. This response level is down from the number of firms that participated last year, which is a disturbing trend.

Despite the turbulent retail environment, many loss prevention executives, directors, and managers believe in the importance of this research effort and support it annually. For this we are quite appreciative. While the data are reported anonymously, we can assure the reader that corporations that have responded to our survey represent the vast majority of the top 100 major retailers in the country.

Overall Shrink Rate

This year the overall inventory shrinkage rate of 1.47 percent was somewhat higher than reported in last year’s survey. Despite this slight increase over last year, the reader should note that over the past few years, inventory shrinkage continues to remain at the very lowest levels observed in the nearly two-decade history of this survey. We believe that this is remarkably good news and demonstrates clear and consistent progress in the war on reducing retail losses in spite of the present economic slump and the threat of organized retail crime (ORC).

The news is not all good, however. Although the shrinkage percentages are at significantly lower levels than observed during the very early years of the survey, the dollar value that this loss represents continues to remain at record levels due largely to an increase in U.S. gross retail sales. In other words, this huge $44 billion dollar loss is more likely the result of moderate growth in the retail economy, not the result of significant increases in inventory shrinkage percentages.

by Richard C. Hollinger, Ph.D.

Dr. Hollinger is professor and chair of the Department of Sociology and Criminology & Law at the University of Florida, Gainesville. He is also director of the Security Research Project, which annually conducts the National Retail Security Survey. Dr. Hollinger can be reached at rhollin@ufl.edu or 352-294-7175. © 2014 Richard C. Hollinger

High-Shrink Segments. Five retail segments reported significantly higher than average shrinkage levels: ■ Crafts and hobbies ■ Supermarket and grocery ■ Children’s apparel ■ Men’s and women’s apparel ■ Women’s apparel

This result is largely due to the especially high desirability of items sold in these particular chains, making theft much more attractive to ORC gangs, amateur shoplifters, and employees.

Low-Shrink Segments. Alternatively, the lowest shrinkage stores generally have the most sophisticated security systems and more often require customers to pay for merchandise before they are allowed to physically acquire purchases: ■ Discount stores ■ Department stores ■ Sporting good and recreational products ■ Drug store and pharmacy ■ Specialty accessories ■ Liquor, wine, beer, or tobacco products ■ Shoes ■ Jewelry and watches ■ Books, magazines, and music ■ Electronics, computers, and appliances

Shrink by Location. Stores that are typically located in enclosed malls had a below-average shrink rate of 1.09 percent. Those located primarily in standalone stores reported an above average shrink rate of 1.56 percent as did those located in strip centers or strip malls, who reported 1.73 percent.

Sources of Loss

Stability was seen once again in the respondent’s assessment where they attributed the source of their retail inventory losses. In fact, both employee theft (41%) and shoplifting (33%) reported similar proportions to those in last year’s survey.

Employee theft was the highest in the following segments: ■ Liquor, wine, beer, or tobacco products ■ Discount stores ■ Department stores ■ Women’s apparel ■ Drug store and pharmacy ■ Children’s apparel ■ Men and women’s apparel

Shoplifting was the highest in the segments below where the number of sales associates available to deter this crime is often the lowest: ■ Specialty accessories ■ Sporting goods and recreational products ■ Electronics, computers, and appliances ■ Women’s apparel ■ Men and women’s apparel ■ Children’s apparel ■ Crafts and hobbies

Every year retailers incur staggering monetary losses as a result of employee theft, shoplifting, administrative error, vendor fraud, and cash, check, and credit card chargebacks. Last year was no exception, with $44.247 billion of lost profits forfeited to inventory shrinkage alone. The two largest problems continue to remain employee theft at $18.1 billion and shoplifting at $14.6 billion.

Response to Theft. When we looked at the most likely causes of inventory shrinkage, both sales associate turnover and heavy reliance on a part-time workforce are again the two most obvious correlates. As in past years’ research, the NRSS examined the formal response to those detected for internal dishonesty and external crime.

Termination is the most common response to employee theft. While prosecution is threatened in most every firm, this year actual criminal prosecutions decreased. More rapid detection of dishonest employees seems to be keeping the reported dollar loss totals down from last year.

As for shoplifting, apprehensions and civil recovery are still the most common responses reported.

Gift Cards. This year, we again tried to collect baseline data on gift card losses with marginal success. Missing and incomplete information continues to be a serious problem. Although the dollar losses were higher than in past years, there is still a lot of fluctuation and missing data. Therefore, we will continue to track the changes and wait for additional annual data to get more stable comparison numbers before we can suggest any trends.

Burglary and robbery are still major concerns and very dangerous sources of financial loss. Burglary cases result in more average dollar loss to retailers each year and outnumber robbery cases (0.79 burglaries versus 0.50 robberies per $100 million in sales), though this year marks a decrease in incidents reported on the NRSS.

LP Budgets

Fortunately, this year we can report a slight increase in LP budgets as a percent of total sales. Specifically, we found that 0.38 percent of retail sales were earmarked to fight the battle against loss, with most of this money going to fixed payroll expenses. With limited LP budgets and even less money for high-tech countermeasures, more of the day-to-day responsibility for loss prevention is being shifted to overworked store managers, untrained sales associates, and inexperienced LP personnel.

Diversity. The diversity of LP personnel this year appears to be decreasing, most notably among women and African-Americans. However, diversity among Latinos and Asian-Pacific managers is increasing. The percentages of women, racial, and ethnic minorities are still well below national averages across the entire retail LP industry.

Budget Allocation. Efforts are still being committed to pre-employment screening of applicants. During the coming year the “hottest” screening countermeasure is expected to be criminal history checks, followed by multiple interviews, honesty testing, and computer-assisted interviews.

Employee loss prevention awareness is also receiving increased attention using the latest media and technology. Use of web-based communications with associates, and CD-ROM or Internet loss prevention training strategies are expected to be the hottest awareness programs this year.

Technology-based asset control measures remain an integral part of all loss prevention programs. POS exception reporting and refund control are the hottest two techniques planned for increased use in the coming year. As was the case last year, the newest countermeasures technique against loss is the implementation of sophisticated computerized exception-reporting software systems, many linked to high-speed broadband IP-monitored CCTV cameras.

The hottest new LP technology to be utilized in 2013 is IP analytics. Among the various LP technologies available, the switch to digital CCTV cameras and recorders is all but complete. Remote IP-based CCTV video and POS exception-based CCTV interface systems are also hot technology slated to see increased usage in 2013.

Read the Full Report

In summary, the financial losses inflicted on the retail industry remain even more significant in their size and scope. One only can speculate how much more profitable this industry could be if these many sources of inventory shrinkage and other forms of financial loss could be significantly reduced.

Given the declining percentages of annual retail sales dedicated by senior management to fight this war on retail crime, the professionals in loss prevention and asset protection have a daunting task as they continually try to leverage technology and deal with reduced staffing. Clearly this report demonstrates conclusively that companies that commit more resources to pre-employment screening, staff awareness programs, asset controls, and loss prevention systems will be those who have the best chance to win the growing war against retail crime.

For those who wish to read the full report, the link to the 2012 National Retail Security Survey Final Report is soccrim.clas.ufl.edu/files/nrssfinalreport2012.pdf. Use the password nrss2012.

INTERVIEW

ALIGNING LOSS PREVENTION WITH THE CUSTOMER EXPERIENCE

THE ORGANIZATIONAL RESTRUCTURING AT LOWE’S

Lowe’s LP and Safety Leadership Team

Art Barraza, LPC

Divisional Director, South

John Doggette, LPC

Director of LP Merchandising/Vendor Shrink Solutions and Analytics

Scott Draher, LPC

Director of LP Process and Strategy

Sandy Hinson, LPC

Director of LP Operations

Hank Jones, LPC

Director of Safety and HazMat

Curtis Leininger, LPC

Divisional Director, West

Dave Roberts, LPC

Director of Investigations

Terry Sullivan, LPC

Divisional Director, North

EDITOR’S NOTE: Claude R. Verville, LPC, is vice president of loss prevention, safety, and hazmat at Lowe’s Companies, Inc. He joined Lowe’s in 1993 and was promoted to his current position in 1998. Verville started his LP career in California at Robinson-May, a subsidiary of The May Company, where he worked thirteen years, leaving as director of investigations. Verville is a leading voice in the LP industry as a member of the Loss Prevention Foundation board of directors, LP Magazine editorial board, and Retail Industry Leaders Association steering committee.

EDITOR: Believe it or not, it was 2003 when we last interviewed you for the magazine. Obviously, a lot has gone on in the past decade. Tell us about some of the more significant changes at Lowe’s.

VERVILLE: Probably the most significant change has occurred over the past three years. Lowe’s underwent a major reorganization that established two chief officer positions—the chief customer officer and chief operations officer. This reorganization was meant to ensure that strategically everything we do is designed around the customer experience. To reach that goal, we had to establish a completely new decision model as well as break down barriers that prevented collaboration internally. The result is that the majority of the final decision on new programs resides with the chief customer officer. Operations has to execute what they propose. Everyone has to align with the strategy, so the reorganization ensures that everyone has a voice in the process.

EDITOR: How does that process work?

VERVILLE: The chief customer officer has various teams who innovate, design, and ultimately optimize an omni-channel sales platform to meet a strategic objective. As part of the operations team, we ask questions like, is it executable without giving up controls? Is it cost prohibitive? What changes are necessary at the store level to deliver and execute effectively?

EDITOR: Can you provide a concrete example of what you’re talking about?

VERVILLE: Let’s take mobile POS, which obviously is a hot topic right now. That’s one of the few recommendations from the customer experience team that we’ve had to say, we’re not ready for just yet. Here’s why. Our stores have four exits. It’s not uncommon for people to boldly walk out carrying power tools, Dyson vacuums, or other expensive merchandise. Our front-end team is trained to watch for that and ask to verify the receipt. That happens hundreds of times a day for us and represents tens of millions of dollars in preventions per year. If you add mobile POS to that environment, you would impose significant challenges to the front-end teams. Plus, it would negatively impact the customer experience for the vast majority of our legitimate customers if we’re questioning their purchase. So, we have to make some operational changes before we’re ready for mobile POS.

EDITOR: So loss prevention is part of the operations team?

VERVILLE: Since I took over the department, I have reported to various people, including the chief administrative officer, the chief financial officer, and the chief risk officer. Today, I report to Rick Damron, our chief operating officer. Rick has been an operator for over thirty years with background in merchandising, logistics, and operations. He is really in tune with the role of loss prevention and safety in the corporation. He fully understands and supports the investments we make to reduce accidents and prevent shrink. He just gets it, which gives me an unbelievable seat in the house. Incidentally, Rick will be the keynote speaker this year at the RILA asset protection conference in April, so the conference attendees will get a chance to hear his views on the role LP plays in today’s corporate structure. [See page 25 for more information about the RILA conference.]

EDITOR: How has this new structure changed what LP is doing today that you might not have done five or ten years ago?

VERVILLE: Like many retailers, our sales on dot-com have been going vertical the past several years. Customers place their order online and either have it sent to their home or pick it up at their local store. For us, the vast majority of customers chose to pick up at the store, which obviously is the customer experience they want. But it also creates some challenges.

EDITOR: How so?

VERVILLE: When the customer buys something online, our system says we have it. Let’s say you bought five widgets. The system showed we had five in inventory. At the same time, someone could be standing in line to purchase two of the widgets. So, when you arrive at the store, there are only three. You’re not going to be happy. The accuracy of what is on the shelf has never been more important than it is today because of dot-com. Loss prevention has always played a significant role in ensuring inventory integrity for investigative purposes, and now it is even more critical in preserving the customer experience. What that means is we have to leverage technology and align our initiatives to improve the accuracy rate of our inventory.

EDITOR: How will you do that?

VERVILLE: Today at the stores, employees basically have a clipboard and are asked to count specific assortments within their departments. They enter their top-selling items, the second-tier sellers, and the items that may only sell every three or four weeks. One of our new technology initiatives replaces that paper-and-pen program so that now employees will not only be prompted to look at the various top-sales items, but also the top shrink items, because they may be the reason your stock level is not accurate. We’ll also add the promotional items that need to be in the pipeline as well as the top-selling dot-com SKUs. All this will allow us to ensure that our in-stock is extremely accurate; meaning what we

Probably the most significant change has occurred over the past three years. Lowe’s underwent a major reorganization that established two chief officer positions— the chief customer officer and chief operations officer. This reorganization was meant to ensure that strategically everything we do is designed around the customer experience.

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say we have in our system at any one point is actually on the shelf.

EDITOR: Has the reorganization changed the structure of your LP organization?

VERVILLE: Absolutely. A few years ago, the company downsized from five operating divisions to three and from twenty-one regions to fourteen. That meant that I had to displace two divisional directors and seven regionals. It was a very difficult time. But a lot of good things came out of the restructuring. For example, because the company was getting more and more strategic, I was involved in lots of internal meetings; more than I could attend. So I sent whoever wasn’t traveling to sit in for me in a lot of those meetings. Or we just weren’t represented in a meeting. I’m talking twenty to thirty meetings a week. It wasn’t the ideal operating model.

One of LP and safety department’s greatest supporters, Dennis Knowles, EVP of operations, was in a lot of those meetings and always covered our back. If we weren’t in the meeting, he would tell them to be sure to review the initiatives and the impact to our controls and operating procedures by our team. He pulled me aside one day and told me I had to figure out how to ensure consistent representation in these strategic meetings. Thanks to his prodding, I created a new position, director of strategic planning and strategy for LP, and put one of the divisionals who was displaced by the reorg in that position; a young man named Scott Draher. His role is to effectively engage with all these design and planning meetings to ensure that we align with the strategy. It’s one of the smartest things I ever did, thanks to Dennis. The result is we are more integrated today than ever before.

EDITOR: How else has your organization changed?

VERVILLE: If you go back to the last time you interviewed me, only two of the eight direct reports I had back then are still with me. Many have moved on to run their own organizations, like Jeff Fulmer, Cornell Catuna, Leo Anguiano, Jon Grander, and Jesse Stanley. Others have crossed over into store operations. The two remaining are Art Barraza and Dave Roberts. Art is a divisional director, and Dave is director of investigations. Jill Evans retired, and Sandy Hinson is now the director of LP operations. Hank Jones is now my director of safety. John Doggette, who was the other divisional displaced in the restructuring, in now director of LP merchandising/vendor shrink solutions and analytics.

EDITOR: Who are your three divisional directors?

VERVILLE: Art Barraza has the south division. Terry Sullivan, who

The accuracy of what is on the shelf has never been more important than it is today because of dot-com. Loss prevention has always played a significant role in ensuring inventory integrity for investigative purpose, and now it is even more critical in preserving the customer experience. What that means is we have to leverage technology and align our initiatives to improve the accuracy rate of our inventory.

is actually in his twelfth year, has the north division. And Curtis Leininger has the west.

EDITOR: That’s a lot of changes over the years.

VERVILLE: It is. Nobody, other than Terry, has had the same role over the last five, seven, ten years. I have intentionally cross-trained all my direct reports multiple times; moving them and interchanging them frequently.

EDITOR: Why did you do that?

VERVILLE: It’s meant to broaden their horizons, to grow their knowledge base, to give them greater value as part of our succession plan, and to promote collaboration. Let me explain why I’ve done this. Our divisional directors were flying around in the corporate jet with the senior VP of operations as their primary partner. They walk through stores to validate the execution of our programs. The divisional directors manage the district managers of LP, who manages the LPs in the stores. So division directors are generalists and didn’t always understand or appreciate the other roles on the team.

When they come back from their travels and attend my staff meeting on Monday, they hear my director of safety and hazmat talk for five minutes about the twenty-six meetings he went to that week.

Our director of investigations talks about all the dot-com fraud, the credit card fraud, the important investigations, and all the ORC investigations in five minutes.

The director of merchandising shrink controls talks about the countless meetings this time of the year with the nursery vendors. Why? Because nursery shrinkage, which is a perishable, is the number one shrinkage category. Not tools. Not fashion plumbing. Not outdoor power equipment.

Sandy Hinson, who manages all of our budgets, talks about all

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continued from page 30 of the company initiatives. For example, we’re currently upgrading all 1,700 stores with Verint video management software.

Scott Draher talks about the innovations and strategic teams he’s involved with. There’s all kinds of technology getting ready to roll out, like H3 Lite; FaceFirst, which we’re going to test; exception-based reporting. Five minutes in our staff meeting can’t do it all justice.

In order to continue to develop the entire team and ensure a high-level of collaboration, I felt it necessary to continually rotate individuals through various positions from generalist to specialist and specialist to generalist in order to provide them with a different LP or safety perspective, to broaden their horizons, and to give them an enterprise focus. The end result has been to bring the team closer together personally and professionally with an increased appreciation for the various roles each team member plays.

EDITOR: That’s a great management lesson.

VERVILLE: It’s another example of some of the changes over the past several years. It’s called servant leadership. Every executive in Lowe’s has been challenged and trained to provide servant leadership for their teams; meaning it’s not about us, it’s not about me. It’s about all those individuals who make us successful day in, day out. It’s about their development; their level of engagement. It’s about their future. As servant leaders we’re supposed to work selflessly to provide the recognition, the rewards, the encouragement, and the motivation to make others successful. As managers, we’re just the benefactors of everything that others are doing. So when you get your bonus check, you should thank your regionals, your area managers, and the people in the stores because they’re doing the hard work. The servant leadership model is something that is now part of the culture at Lowe’s.

Here’s our message— safety is where nothing happens. Personal safety is our highest priority. When nothing happens, you get to go home and attend your child’s soccer game or recital. You get to go home and enjoy the reasons why you work. When your employees believe you truly mean that, their engagement is better; their morale is better; they’ll follow you anywhere.

EDITOR: Despite all the changes and downsizing, I suspect the overall objectives of your department are very similar to what they were ten years ago.

VERVILLE: Our four key business objectives today are the same as they were years ago in this order—safety, hazmat, and environmental compliance controls; shrink controls; zero liability as a result of our LP programs; and expense control/ROI.

EDITOR: Why do you put safety as your first objective?

VERVILLE: My epiphany about safety came in my first year at Lowe’s. I got a call from a regional out of South Carolina. An employee was deployed on a forklift up on the top shelf pulling an appliance, and for whatever reason he untethered himself and fell to his death. That day I realized that I was no longer at May Company anymore; this was not soft lines. Then about a week later a forklift operator wasn’t using an escort, meaning there was no employee walking in front of it, and ran over a women’s leg. When I became the VP, I was adamant that we would be recognized as having a best-in-class safety program. Now, everything begins with safety—every conference call, every business discussion, every metric that we measure, and every store visit.

EDITOR: How did you achieve that objective?

VERVILLE: We do a daily safety and hazmat review of our stores that gives us the analytics by department to allow us to know where we should focus in each department. Back in the day, we had the opening store manager walk the entire building with a clipboard and a checklist. The problem was we were depending on one person to check the entire store. Plus, we were excluding hazmat as well as non-selling areas, such as receiving, delivery, parking lot, and it wasn’t department-specific. Today, every person who manages a department is accountable to complete the reviews daily. This gives us timely, department-specific data on the exposures we need to focus on by store, by market, by division, and company-wide.

EDITOR: Give us an example of how you use the department-specific information.

VERVILLE: As you might imagine, the exposures in paint are far different than exposures in lawn and garden, which in turn is different from lumber or flooring. Now, based on the daily audit, using analytics we know the three things that drive claims in each department. Take lawn and garden, for example. We require that all palletized bag goods shipped to us must be shrink-wrapped. We examine those shipments to ensure that the shrink wrap is intact and properly securing the product. If we identify a problem, our corporate

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continued from page 32 safety team will get involved with our merchant and vendor to ensure that future shipments are corrected. Our daily electronic reporting allows us to be proactive in preventing incidents.

EDITOR: Where does that information go on a daily basis?

VERVILLE: It goes into our store managers’ case management database. It’s our portal for our entire book of business. I recall when we first rolled this out after doing a test in one region, I made a presentation to our VPs and market directors of operations. I called on one VP to stand up and said, “Bill, do you know what the compliance levels are in all 100-plus stores in your region, and what they have done as far as the safety review? It’s 11:00; it should be good by 9:00 a.m.” He looked puzzled and asked, “How would I know?” So, I asked the same question of the VP from the test region. He stood up and said, “Yes, I have it right here.” He pulls out his iPad and says, “At this point my stores are 80 percent compliant. The top three departments are bam, bam, bam.” That’s the new world we all live in. Information is available at all times. We’ve taken the technology LP has traditionally used for shrink, but leveraged it towards safety as well.

EDITOR: What have been the results of this focus on safety?

VERVILLE: Over the last decade we’ve reduced our injury rate by over 50 percent. The most important part of our focus on safety is we’re communicating to our employees that we care about them. It’s about our employees. If our employees can keep each other accountable, if our employees care enough about each other as human beings, the customers will be safe by default. Here’s our message—safety is where nothing happens. Personal safety is our highest priority. When nothing happens, you get to go home and attend your child’s soccer game or recital. You get to go home and enjoy the reasons why you work. When your employees believe you truly mean that, their engagement is better; their morale is better; they’ll follow you anywhere.

EDITOR: Your second objective is shrinkage. Talk about what you’re doing in that area?

VERVILLE: The challenge today is we are delivering more product than ever before. We have the second largest delivery fleet in the country. Dot-com has changed the landscape with customers ordering online for store pick up. Even with those changes we are still very focused on the operational basics. As far as shrink goes, I believe that 40-plus percent of our losses are front-end shrinkage, with the vast majority of that, contrary to popular belief, simply inadvertent mis-scanning

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issues by cashiers, rather than intentional internal theft.

EDITOR: That’s different than what industry surveys state. What makes you believe that?

VERVILLE: Here’s how I quantify that. We did a LaneHawk test a couple of years ago in several of our stores. As you know LaneHawk uses cameras and software that integrates with your POS to monitor items that are in the cart that are not scanned. After the transaction is complete, it gets reconciled electronically and produces a report. For our test, we determined a percentage error rate of X percent and, from that, a ratio of transactions to errors. We took the average dollar value of those errors times the 80 million transactions we do per year chain-wide. The resulting number was exactly 40 percent of our shrinkage at the time.

For various reasons, we did not rollout LaneHawk. So today, we do cart testing. Every month, every store loads up a cart with items hidden inside other boxes, items with barcodes switched, things like that. They put the register in test mode, and the cashier scans everything. The cashier knows it’s a test, but they still make errors. Right now, we lose about $16 a cart. If I go back to the LaneHawk error rate, that equals about 40 percent of my shrinkage today. Front-end loss is my focus and cashier training is constant.

EDITOR: What about shoplifting?

VERVILLE: We average only one-and-a-half shoplifter detentions per store per year.

But we average over 120 recoveries without detentions (RWDs) per store per year, which by the way are not done by our LP personnel. They are done primarily by our front-end cashiers. We don’t allow our LP staff to stop customers who blow past the front end unless they have seen the person come in without the product, take the product, and leave without paying; basically the industry’s required five elements for apprehensions. But the cashiers can stop them for the purpose of executing a receipt validation, which all retailers do. So, those 120 RWDs more than make up for the one-and-a-half shoplifters per year completed by our in-store LP/safety personnel. Our learning organizational effectiveness department has done a terrific job putting together training curriculum for our front-end personnel.

EDITOR: What other shrink issues are you seeing?

VERVILLE: There is nothing more complicated than do-it-yourself. That’s not just me saying it. Ask Mike Lamb. There are all types of operational complexities—returns, repairs, special orders, installations, delivery, lumber, lawn and garden. Like I said earlier, our number one shrinkage category is nursery plants. It’s not theft. It’s failure to scan plants and it’s perishables; dead plants that we have to write off because

we don’t manage inventory levels appropriately. All these complexities are part of shrinkage. Our shrink program is an operational-based program that’s resulted in a 50 percent reduction in our shrinkage rate over the past decade.

EDITOR: The third objective you mentioned was zero liability. What do you mean by that?

VERVILLE: Liability exposure from apprehensions at Lowe’s is no different than it is at Walmart or anywhere else. Yet execution-wise it can be very different. We have always had very specific detention guidelines and measurements to ensure compliance to those guidelines. The measurements help us identify when we have cowboys in our organization who have difficulty with our guidelines.

We measure infinitely and analyze the root cause. One of our core metrics is the number of altercations as a ratio to shoplifter apprehensions. How many apprehensions have some form of altercation? How many injuries have occurred as a result of shoplifter apprehensions? If you have a high propensity of those metrics, you are likely going to get false arrests. We measure that. And the last thing we measure is the number of questionable detentions reported as a percent of total apprehensions.

Everyone throughout the LP organization from top to bottom all know how we measure these things and are all on the same playbook. At last year’s RILA conference I co-presented with Jesse Stanley on a new program called “Addressing Disruptive Behaviors,” which provided a tool or verbal methodology for our in-store LP personnel to utilize in quickly recognizing potential violent behaviors or tendencies when conducting a detention of a shoplifter. We went from basically a reasonable-force guideline to a full-disengagement guideline that reduced our number of altercations by more than 50 percent and the number of injuries by 66 percent. Although the team was a bit apprehensive initially, we reminded them that historically at Lowe’s only a small percentage of the shoplifter’s become combative while the vast majority cooperate. We were not backing away from shoplifting in general, we were merely providing them a training tool to better equip them to identify potentially behaviors before they escalated and injuries occurred. Because what are we all about at Lowe’s? It’s about safety. Safety includes our LP and safety personnel, other Lowe’s personnel, the customers in the area, as well as the subject who shoplifted.

Every executive in Lowe’s has been challenged and trained to provide servant leadership for their teams; meaning it’s not about us, it’s not about me. It’s about all those individuals who make us successful day in, day out. It’s about their development; their level of engagement. It’s about their future. As servant leaders we’re supposed to work selflessly to provide the recognition, the rewards, the encouragement, and the motivation to make others successful.

EDITOR: The fourth objective was expense control.

VERVILLE: Every year, we have kickoff meetings in February where we cascade the message over what the wins were in the past year, and what the expectations are for the next year. We review all these metrics and our successes, and what we did well, and what the opportunities are. I show them our total operating expenses as a department—general operating expenses, store operating expenses, all store equipment repairs, background checks, salaries, and capital. Based on all this we can quantify that as a department we pay for ourselves on almost a one-to-one ratio of total cost versus what we prevent and bring to the bottom line. Only world-class organizations can say that. Still, I emphasize to our team that they cannot forget that we are a sales support group. We have to continually find ways to evolve and add value to the organization. And we do.

EDITOR: You’ve been an industry leader in establishing certification in loss prevention. Now you are pushing certification through your organization.

VERVILLE: Correct. We are funding the cost to LPC certify fifty people a year. As of the start of 2014, all my direct reports have completed their LPC. All fourteen of our regional LP and safety directors are LPC certified. And a large percentage of our 118 area LP and safety managers are certified. Ultimately, the vision is to have all the remaining area managers certified as well as all the corporate management staff. In addition, we pay for certification coursework as incentives to our top store-level LP and safety personnel each year. It’s an important career-development program for our department.

Stopping a Multi-million Dollar ORC Family

From time to time we like to share the results

of the collaborative partnership that eBay and our retailers partners have worked toward over the last five years. We have made tremendous progress in identifying and preventing bad actors from getting on our platform to try to sell stolen goods. We utilize the tried-and-true concept of exception reporting. The case below began with one of our first retail partners, Barnes & Noble.

The recent arrests of a suburban Chicago family accused of stealing millions in merchandise from retailers across the county over the past decade made national news. The story brings into focus the damage professional shoplifters inflict upon retailers. The father and alleged ringleader of this alleged ORC team is reported to be an illegal Yugoslavian immigrant. Together with his wife and daughter, the Bogdanov family routinely traveled on multistate shoplifting runs that afforded them a lavish lifestyle. Their $1.3 million home and twelve vehicles, undoubtedly the proceeds of their nefarious activities, have many retailers asking, “Did they steal from our stores?”

A more important question is, why did it take ten years to uncover their activity? As retailers look to improve profitability, a controllable expense such as shrink should be part of the equation. Focusing on store awareness is an important step. Associate awareness and communication can be a game changer when dealing with professional shoplifting teams. Though they may not be caught at the time, the report of the activity may play an integral part leading to the eventuality.

When first contacted by Barnes & Noble’s investigative team, they had assembled a compelling case. Stores hundreds of miles apart had experienced massive losses of the same product, American Girl mini dolls. Pivotal to the case, Glenn Justus, a senior Barnes & Noble investigator searched online selling platforms and identified five eBay accounts based out of the Chicago area listing American Girl mini dolls and other high-theft items. Four of the accounts in question were linked directly to the Bogdanov family. Justus worked with field LP directors to build the case and gather additional evidence, including similar incidents reported via incident management with related CCTV images.

This effort paid off with identification of the three individuals later determined to be the Bogdanov family. The activity displayed by this group in stores, coupled with selling account history and product mix, further suggested the work of an ORC group targeting several retailers. Barnes & Noble reviewed the facts and assumptions of the case with our PROACT investigators. Our experienced investigators worked directly with them and were able to link accounts and identify significant merchandise listings confirming their activity. Using linking software and platform tools, it became evident that this was a significant case.

Paul Jones, LPC is Senior Director, Global Asset Protection. Contact him at pajones@ebay.com. Barnes & Noble collaborated with eBay, which led to further collaboration with other retailers. This case stands as an example of how PROACT and retailers can effectively work together to bring closure to a professional shoplifter ring.

The PROACT team coordinated a conference call with other retailers likely targeted by the Bogdanov family based on product line and branded items. Together the retailers and eBay decided how best to resolve the case. It was turned over to the U.S. Secret Service in Chicago who closed the case within several months.

Over the years we have forged excellent working relationships with many of today’s top retail brands. Barnes & Noble collaborated with eBay, which led to further collaboration with other retailers. This case stands as an example of how PROACT and retailers can effectively work together to bring closure to a professional shoplifter ring.

Be sure to check us out on our LinkedIn page—eBay Partners with Loss Prevention Professionals. Email us at PROACT@ebay.com for more information.

Every so often, a simple idea catches the imagination, fervor, and engagement of a group of people and is developed into a successful practice that revolutionizes a business. Electronic article surveillance (EAS) source tagging is definitely one of those.

In Part 1 of this two-part article in the January-February edition, we looked back at the beginning of this story in 1994 when The Home Depot executed the first contracts for EAS labels affixed directly by manufacturers in their packaging, rather than by in-store labor.

At that time there were three companies jockeying for control of this segment—Knogo, Sensormatic, and Checkpoint. Each marketed different technologies, which motivated retailers to push for a single industry standard, which is where the second half of this story begins.

Attempts at a Standard

In those early days, none of the EAS manufacturers wished to cede its technology to an open standard; even if theirs had been selected. Each wanted to control its own destiny, maximize the value of its advantages, and capture the entire market. But there were attempts by various retail trade groups to obtain a consensus on a single standard within specific merchandise categories.

National Association of Recording Merchandisers. The first of these efforts was organized by the National Association my twelve-year odyssey and participation in working to achieve the source tagging of prerecorded entertainment products.” Excerpt from “How EAS Source Tagging Rewrote Shrinkage History in the Music and Video Sector” by O. Keith Wanke in the May-June 2002 edition of LossPrevention magazine.

“Their product wasn’t picked, so now they’re doing a lot to try to sabotage our effort.” Quote by Michael E. Pardue, former chief operating officer at Sensormatic in a New York Times article titled “Putting the Tag on Shoplifters” published in May 1993.

In the late 1980s music retailers were major users of anti-theft devices. Their merchandise was desirable, easily concealed and the customer base included shoplifters. Much of pre-EAS security involved cardboard “longbox” packaging. Facing pressure from ecologists, the industry agreed to eliminate them by April 1993. A move toward source tagging was a logical solution.

In preparation for the longbox conversion, NARM tested EAS systems with the intention of establishing a standard. Of the four participants in the testing—Checkpoint, Sensormatic, 3M, and Knogo—only Checkpoint was wedded to a single technology—RF. The others, especially Sensormatic, could more easily adjust if NARM ruled out AM or EM in favor of RF. Thus the stakes for Checkpoint were extremely high, even though it was likely that the winner would license its technology to the other companies.

As 1992 ended, NARM’s decision was imminent, but its announcement delayed. Checkpoint released a full-page ad in the January 9, 1993, issue of Billboard magazine claiming that certain magnetic deactivation systems could distort the audio quality of audio and videotapes. While Sensormatic was not named in the ad, the AM technology it criticized was proprietary to Sensormatic, and based on NARM’s published selection criteria was the only logical alternative to RF. Sensormatic immediately filed suit against Checkpoint for false and misleading advertising, seeking $35 million in damages.

“In the market where it was tagged and accessible, the sales rate was much greater and the shortage was virtually nonexistent. It certainly proved our point to the manufacturer that source tagging will both increase sales and reduce shoplifting.”

King Rogers, then vice president of asset protection for Target as quoted in a 1993 New York Times article after a four-month store test.

of Recording Merchandisers (NARM). A couple of direct quotes will give a sense of the tension level of the times.

“In 1987 the original NARM source-tagging committee was poised to recommend electromagnetic (EM) technology as the standard. Before this recommendation was adopted, the committee was made aware that the maximum width between pedestals using EM technology was 34 inches, and that most mall landlords would prohibit the installation of multiple pedestals at a store front. This near faux pas caused NARM to form a new loss prevention committee…whose charter was to evaluate the feasibility of selecting a single EAS technology. It was at this point that I began

In February 1993 rumors that the NARM subcommittee had recommended the Sensormatic system sent Checkpoint stock tumbling, losing a third of its value in two days. Then, in March NARM announced its decision to go with Sensormatic’s AM, only to discover through further testing that the system’s deactivation process did, indeed, cause deterioration in the sound quality of some lower quality “Type 1” cassettes.

The news sent Sensormatic’s stock down, while Checkpoint’s rebounded. While Sensormatic rushed out new deactivation devices that it maintained corrected the issue, Checkpoint again trumpeted the studies that led to the original suit, as it tried to pressure NARM to reopen its selection process. But the decision stood.

NARM’s selection of AM established the technology as the standard for the entire record industry and by implication for the mass merchants, discounters, drugstores, and other retailers what sold cassette tapes, compact disks, and related products. The stakes were high indeed.

On June 26, 1993, Sensormatic agreed to drop its suit against Checkpoint, when the companies agreed not to criticize one another in advertisements. As part of the settlement, however, Sensormatic discontinued its agreement to sell Checkpoint products in Europe. The next month, to forestall a loss in European sales, Checkpoint acquired Dutch makers of security products and services, ID Systems International B.V. and ID Systems Europe B.V.

The NARM controversy continued to fester in the marketplace. Checkpoint and Target Stores, an RF EAS user and high-volume seller of music products, filed an anti-trust lawsuit against NARM. In 1996 when PolyGram Group Distribution began to source tag according to NARM recommendation, Checkpoint and Target sued them as well.

In August of 1996 a court dismissed several of those lawsuits in exchange for PolyGram’s voluntary suspension of its source-tagging operation, with the duration of the suspension to be determined solely by PolyGram. PolyGram’s President James Caparro said at the time, “We are confident our method of analyzing and choosing the available technology was well-executed and clearly within the law. While we are still convinced about the merits of source tagging and committed to EAS implementation, we are adopting this temporary suspension in light of the confusion and friction which followed our announcement.” Caparro noted that PolyGram retained the ability to adopt any program it deemed in the best interest of the company.

The settlement of the lawsuit did not change NARM’s recommendation of the AM technology. The music distribution companies still needed to embrace source tagging immediately and work with other NARM members who were not AM users to facilitate source tagging with the technology of their choice.

Consumer Products Manufacturers Association. Toward the end of the 1990s, there was another organized attempt to establish a global standard under the auspices of the Consumer Products Manufacturers Association (CPMA), founded in 1999 by Eastman Kodak, Johnson and

Johnson, The Gillette Company, and Procter & Gamble. The stated purpose of the association was to provide focus to the evolving needs of products and product packaging in three areas—electronic article surveillance, product authentication, and identification.

The membership believed that global standards were critical to establishing an efficient response to incorporating new technology in the market place. Hindsight proves that a standard would have been beneficial. Unfortunately, by this time the competing EAS technologies had successfully grown well beyond critical mass, and the EAS vendors were still unwilling to relinquish the control they had amassed.

In the late 1990s, the CPMA proposed that the consumer packaged goods (CPG) industry consider both a “tag-centric” and a “tower-centric” approach to developing a global consensus for product security in retail. The adoption of a single standard would simplify the source-tagging and inventory-management exercise for manufacturers, reduce costs, and result in more manufacturers’ cooperation with source-tagging initiatives.

“We organized many meetings, including the RF source-tagging conferences with retailers, manufacturers, and packagers. It took some ‘arm twisting’ by the retailers for manufacturers to appreciate their opportunity because they made money on reorders generated from theft.”

Dave Shoemaker, former group vice president responsible for source tagging with Checkpoint.

The first idea was to develop some performance-based standards around the tag. Besides the EAS component, this tag would contain anti-counterfeiting properties, such as a hologram, and would accommodate the future inclusion of RFID. For CPG manufacturers and packagers, tag-centrism would be ideal because it would supply all security needs with a single style of tag, rather than having to supply the appropriate EAS technology on a customer-by-customer basis. But, retailers would not be free to choose the type of EAS pedestal technology that best suited their needs. Tag-centric meant selecting one of the three current EAS technologies as a standard. As discussed in Part 1, retailers choose a particular EAS technology because of the unique benefits provided by a technology. So, this idea quickly turned into a “dud.”

In August 1999 the CPMA changed tactics and proposed the industry take a “tower-centric” approach to the problem. A tower is the CPMA’s jargon for an EAS pedestal. Tower-centrism means one EAS system detects all tags, irrespective of technological base. While, the CPMA acknowledged that each of the EAS tag technologies can demonstrate superiority in combination with certain types of packaging, they suggest, by an extension of logic, that a single EAS system containing multiple technologies would allow merchandise manufacturers and packagers the opportunity to insert the best, most cost-efficient EAS tag into the item. This idea was completely unfeasible—worse than the first—and also died a quick death.

“Dual technologies made progress difficult. It gave the consumer-product manufacturers an excuse not to engage at the beginning,” said Kevin Dowd, former president and CEO of Checkpoint.

Many people in the EAS industry agreed with Dowd, and thought that the CPMA was organized as a tactic to delay participation in source tagging as long as possible. Once the industry figured out how to identify and measure the benefits for all constituencies, and realized that a single standard was already too late, everyone just got to work.

Early Adopters and Landmark Customers

In the beginning there were willing, even anxious early adopters among EAS vendors and retailers. Intrepid, enlightened merchandise manufacturers took risks in exchange for more visibility, including Black & Decker, Texas Instruments, Victorinox Swiss Army, PolyGram Group, Rayovac, Phizer, and Estwing Manufacturing to name a few. Here is a sample of the early action.

Checkpoint. In the late eighties Checkpoint announced formal efforts to develop and promote source tagging. It took several years, but under Ted Wolf’s vision, leadership, and focus, the marketing team stimulated two small-scale tests. One situation evaluated a new product idea, while the other blossomed into a landmark chain-wide rollout for the Checkpoint source-tagging program.

dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat do jeh xiè xie grazie hvala deh-ku-yih tak dank u wel dankon tänan akpé takk fyri vinaka kiitos merci dankewol gracie gracias danke ef-har-rih-stowe aguyjé aabhar mèsi mahalo toda dhanyavad köszönöm takk terima kasih go raibh maith agat grazie arigatô tanemirt dhanyavadagalu murakoze kamsah hamnida sobodi tenki spas khob chai gratias ago paldies choukrane aciu bedankt merci blagodaram misaotra terima kasih nanni nirringrazzjak aabhari aahe bayarlalaa tahk grandmercé danki motashakkeram dziękuję obrigado najis tuke mulţumesc spah-see-boh faafetai lava gratzias tapadh leat hvala marahaba waita meharbani stuutiyi dakujem hvala gracias asante tahkk salamat po mauruuru nandri rahmat kop khun kha yekeniele tesekkur ederim tau diakuiu shukriya merci gråces diolch mèsi djiere dieuf a dank o sheun ngiyabonga siyabonga ngiyabonga kakhulu dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat do jeh xiè xie grazie hvala deh-ku-yih tak dank u wel dankon tänan akpé takk fyri vinaka kiitos merci dankewol gracie gracias danke ef-har-rih-stowe aguyjé aabhar mèsi mahalo toda dhanyavad köszönöm takk terima kasih go raibh maith agat grazie arigatô tanemirt dhanyavadagalu murakoze kamsah hamnida sobodi tenki spas khob chai gratias ago paldies choukrane aciu bedankt merci blagodaram misaotra terima kasih nanni nirringrazzjak aabhari aahe bayarlalaa tahk grandmercé danki motashakkeram dziękuję obrigado najis tuke mulţumesc spah-see-boh faafetai lava gratzias tapadh leat hvala marahaba waita meharbani stuutiyi dakujem hvala gracias asante tahkk salamat po mauruuru nandri rahmat kop khun kha yekeniele tesekkur ederim tau diakuiu shukriya merci gråces diolch mèsi djiere dieuf a dank o sheun ngiyabonga siyabonga ngiyabonga kakhulu dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat do jeh xiè xie grazie hvala deh-ku-yih tak dank u wel dankon tänan akpé takk fyri vinaka kiitos merci dankewol gracie gracias danke ef-har-rih-stowe aguyjé aabhar mèsi mahalo toda dhanyavad köszönöm takk terima kasih go raibh maith agat grazie arigatô tanemirt dhanyavadagalu murakoze kamsah hamnida sobodi tenki spas khob chai gratias ago paldies choukrane aciu bedankt merci blagodaram misaotra terima kasih nanni nirringrazzjak aabhari aahe bayarlalaa tahk grandmercé danki motashakkeram dziękuję obrigado najis tuke mulţumesc spah-see-boh faafetai lava gratzias tapadh leat hvala marahaba waita meharbani stuutiyi dakujem hvala gracias asante tahkk salamat po mauruuru nandri rahmat kop khun kha yekeniele tesekkur ederim tau diakuiu shukriya merci gråces diolch mèsi djiere dieuf a dank o sheun ngiyabonga siyabonga ngiyabonga kakhulu dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat do jeh xiè xie grazie hvala deh-ku-yih tak dank u wel dankon tänan akpé takk fyri vinaka kiitos merci dankewol gracie gracias danke ef-har-rih-stowe aguyjé aabhar mèsi mahalo toda dhanyavad köszönöm takk terima kasih go raibh maith agat grazie arigatô tanemirt dhanyavadagalu murakoze kamsah hamnida sobodi tenki spas khob chai gratias ago paldies choukrane aciu bedankt merci blagodaram misaotra terima kasih nanni nirringrazzjak aabhari aahe bayarlalaa tahk grandmercé danki motashakkeram dziękuję obrigado najis tuke mulţumesc spah-see-boh faafetai lava gratzias tapadh leat hvala marahaba waita meharbani stuutiyi dakujem hvala gracias asante tahkk salamat po mauruuru nandri rahmat kop khun kha yekeniele tesekkur ederim tau diakuiu shukriya merci gråces diolch mèsi djiere dieuf a dank o sheun ngiyabonga siyabonga ngiyabonga kakhulu dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat do jeh xiè xie grazie hvala deh-ku-yih tak dank u wel dankon tänan akpé takk fyri vinaka kiitos merci dankewol gracie gracias danke ef-har-rih-stowe aguyjé aabhar mèsi mahalo toda dhanyavad köszönöm takk terima kasih go raibh maith agat grazie arigatô tanemirt dhanyavadagalu murakoze kamsah hamnida sobodi tenki spas khob chai gratias ago paldies choukrane aciu bedankt merci blagodaram misaotra terima kasih nanni nirringrazzjak aabhari aahe bayarlalaa tahk grandmercé danki motashakkeram dziękuję obrigado najis tuke mulţumesc spah-see-boh faafetai lava gratzias tapadh leat hvala marahaba waita meharbani stuutiyi dakujem hvala gracias asante tahkk salamat po mauruuru nandri rahmat kop khun kha yekeniele tesekkur ederim tau diakuiu shukriya merci gråces diolch mèsi djiere dieuf a dank o sheun ngiyabonga siyabonga ngiyabonga kakhulu dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat do jeh xiè xie grazie hvala deh-ku-yih tak dank u wel dankon tänan akpé takk fyri vinaka kiitos merci dankewol gracie gracias danke ef-har-rih-stowe aguyjé aabhar mèsi mahalo toda dhanyavad köszönöm takk terima kasih go raibh maith agat grazie arigatô tanemirt dhanyavadagalu murakoze kamsah hamnida sobodi tenki spas khob chai gratias ago paldies choukrane aciu bedankt merci blagodaram misaotra terima kasih nanni nirringrazzjak aabhari aahe bayarlalaa tahk grandmercé danki motashakkeram dziękuję obrigado najis tuke mulţumesc spah-see-boh faafetai lava gratzias tapadh leat hvala marahaba waita meharbani stuutiyi dakujem hvala gracias asante tahkk salamat po mauruuru nandri rahmat kop khun kha yekeniele tesekkur ederim tau diakuiu shukriya merci gråces diolch mèsi djiere dieuf a dank o sheun ngiyabonga siyabonga ngiyabonga kakhulu dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat do jeh xiè xie grazie hvala deh-ku-yih tak dank u wel dankon tänan akpé takk fyri vinaka kiitos merci dankewol gracie gracias danke ef-har-rih-stowe aguyjé aabhar mèsi mahalo toda dhanyavad köszönöm takk terima kasih go raibh maith agat grazie arigatô tanemirt dhanyavadagalu murakoze kamsah hamnida sobodi tenki spas khob chai gratias ago paldies choukrane aciu bedankt merci blagodaram misaotra terima kasih nanni nirringrazzjak aabhari aahe bayarlalaa tahk grandmercé danki motashakkeram dziękuję obrigado najis tuke mulţumesc spah-see-boh faafetai lava gratzias tapadh leat hvala marahaba waita meharbani stuutiyi dakujem hvala gracias asante tahkk salamat po mauruuru nandri rahmat kop khun kha yekeniele tesekkur ederim tau diakuiu shukriya merci gråces diolch mèsi djiere dieuf a dank o sheun ngiyabonga siyabonga ngiyabonga kakhulu dankie faleminderit merci shukran Barak Allahu fiik chnorakaloutioun ta çox sag olun a ni kié eskerrik asko dhanyabaad a ni kié hvala trugéré merci kyay tzu tin pa te gràcies salamat

Billion Reasons to Say Thank You

Thank you for trusting Sensormatic� to protect your business. By working together, our source tagging program has safeguarded over 50 billion items from theft worldwide — and this is just the beginning. With customers like you on our side, we can’t wait to see what we can accomplish next.

For more information on our source tagging program, visit www.tycoretailsolutions.com

continued from page 42

Tools Plus, a Waterbury, Connecticut, hardware store, tested Checkpoint’s “activatable” label in 1991 in collaboration with Black & Decker. At that stage Checkpoint had yet to perfect the RF label roll formatting that would withstand the rigors of a high-speed source application process. “Tagging killed 70 percent of the labels,” recalls Checkpoint’s Seth Strauser. “So we disabled the label during the application process and provided an activator to turn it back on once it arrived in the store.” This concept proved workable for some retailers, but large-scale demand for this type of product never materialized in the marketplace.

The landmark deal incubated during the same year with a test in a 60-plus store, Detroit-area hardware chain called ACO Home & Garden Hardware. Bill Aiken, the CEO, immediately grasped Checkpoint’s vision and was convinced that source tagging would be a “game changer” for his organization. He solicited Victorinox Swiss Army to collaborate on a test that featured tagging in ACO’s distribution center. On the strength of the results, ACO gladly took a very big risk and agreed to an immediate EAS rollout

in all stores, with the intention to source tag further back in the manufacturing process. After years of work honing the sales pitch and developing the program, Checkpoint had found the formula. More success followed quickly.

Target Stores, under the capable guidance of King Rogers, then vice president of asset protection, conducted a landmark test in 1992 that included a small, randomized control trial with a formal analysis of the economic benefits of source tagging. Target and Texas Instruments (TI) wanted to find the best way to secure hand-held calculators without resorting to locked fixtures that would inhibit sales. They collaborated on a three-store test in which TI inserted RF EAS labels into the packaging of two types of calculators to be displayed on open peg hooks in a Detroit store. An Indianapolis store was the control, where calculators were hung on peg hooks without EAS tags. A Minneapolis-area store was set up with untagged calculators under glass and lock and key.

The test ran four months. When interviewed in 1993 by the New York Times, Rogers said, “In the market where it was tagged and accessible, the sales rate was much greater and the shortage was virtually nonexistent. It certainly proved our point to the manufacturer that source tagging will both increase sales and reduce shoplifting.”

Academics might opine that the Target test sample was statistically insignificant, but the methodology has become extremely important to the retail loss prevention industry in the big picture. Just look at the groundbreaking work that the Loss Prevention Research Council and others have done over the past few years.

Checkpoint considers The Wiz to be its first full-fledged source-tagging rollout. This New York-based electronics chain reached its peak of 94 stores and about $1.3 billion in annual sales. The deal was consummated in 1995. There were two key drivers in this effort. The first was efforts by Wiz management to push CD and DVD replicators to affix labels. More importantly to the Wiz, however, was a requirement that Checkpoint figure out a way to integrate scanning and deactivation, which they did.

Over the next couple of years, Checkpoint announced other chain-wide rollout deals with Eckerd Drug Stores, Rite Aid, Walgreens, Thrift Drug, and Big V Drugstores, covering high-risk products manufactured by the “who’s who” of consumer-products manufacturing. Source tagging with RF EAS had more than reached critical mass.

The Eckerd Drug Store case introduced new innovations in the way source tagging could be managed. Eckerd’s LP department was the first to assign an executive to establish strong working relationships with buyers and the manufacturers from whom they procured merchandise. “The goals were to get everyone to understand the benefits of source tagging,” recalls Elliot Rosenblatt, Eckerd’s original holder of the position, “and to make certain that the manufacturers understood it was a very high priority of Eckerd’s. We had the authority to insist on source tagging, or the product was going behind the counter.”

“The initial high-risk, source-tagging targets were cameras, film, consumer electronics, and recorded media. Shrink reductions were so positive in electronics that management said ‘let’s accelerate the rollout to twenty-four months,’ which we did with the help of second-tier suppliers who grabbed an opportunity to secure more shelf space.”

Jeff Powers, former global account manager responsible for Walmart at Sensormatic.

Rosenblatt also used POS exception reporting to help identify the high-loss items to be included in the program. The other innovation was called “fractional tagging,” whereby only every second or third item was source tagged. Labels at this point were mainly concealed on the inside of packaging, so skipping some labels to save cost was worth the risk. Thieves couldn’t tell which items were tagged.

Sensormatic. The first rollouts by Sensormatic also emanated from successful tests. In 1992 Edward A. Wolfe, Home Depot’s vice president of loss prevention, organized a three-store test of AM EAS in tool corrals, where the shortage was “double digit.” After six months, the shortage in the tagged categories dropped by about 80 percent, but losses “migrated” outside of the corrals. Wolfe wanted to expand to exit coverage, but he had some issues to contend with. A couple of them were technology related, but the bigger issue was financial.

Wolfe’s boss wouldn’t allocate a single penny for tagging labor. The potential savings were compelling enough that the boss suggested that Wolfe lobby buyers of high-loss merchandise for support for source tagging. Wolfe knew that the buyers had never collected a bonus based upon their shortage performance. So, he asked for a meeting to offer them a proposition—the promise of a bonus in exchange for support for the program and direct assistance engaging merchandise manufacturers in the tagging process.

“Based on the test results, I was pretty certain that the shortage would drop low enough to earn the bonus,” Wolfe recalled. “But they agreed.” And his boss did, too. So Wolfe formulated a plan to source-tag 1,500 SKUs. Sensormatic solved the technological issues, Home Depot signed a contract, and the buyers earned their first bonuses.

Around 1994 convincing manufacturers to source tag presented other problems for Home Depot. The inventory shortage in batteries was astronomical, to the point where the category gross margin had to have been breakeven at best. The major brands didn’t see the wisdom in tagging at first. But after an enterprising second-tier brand volunteered, and shelf space allocations were altered in their favor—drastically in a couple of cases—the major brands got the picture. “The battery story certainly underscored the tension as well as the opportunity,” mused Wolfe.

Walmart signed its first contract with in-store tagging with Sensormatic for AM EAS around April 1991, before the introduction of proximity deactivation. In the summer of 1998, Walmart signed a chain-wide rollout agreement with about 500 installations per year for five years. A key ingredient in the sale was the improvements Sensormatic made to its AM label size and performance, and the introduction of improved deactivators called “Rapid Pads.”

“The initial high-risk, source-tagging targets were cameras, film, consumer electronics, and recorded media,” said Jeff Powers, Sensormatic’s global account manager responsible for Walmart at the time. “Shrink reductions were so positive in electronics that management said ‘let’s accelerate the rollout to twenty-four months,’ which

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we did with the help of second-tier suppliers who grabbed an opportunity to secure more shelf space.”

Kmart signed its first agreement for AM EAS with Sensormatic in 1993. In 1995 the agreement was expanded to include more stores, and the inclusion of Rapid Pad II proximity deactivation to facilitate a future move toward source tagging. In late 1996 Kmart and Sensormatic agreed to another expansion covering over 1,000 remaining locations.

CVS, a Sensormatic user since 1987, announced a chain-wide installation of AM and an upgrade to proximity deactivation in early 1996. At that time merchandise manufacturers were source tagging about 500 SKUs for CVS. Plans called for an aggressive expansion of the program. Years later, CVS converted from AM to Checkpoint-supplied RF technology.

As source tagging grew in size and scope, entrepreneurial valued-added resellers fashioned profitable opportunities in support roles. Jobbers, distributors, replicators, and packaging companies affixed labels. Purveyors of retail trim products, such Paxar Corp., Avery Dennison, B&G Plastics, and A&H Company invented disposable products that helped secure source-tagged merchandise. Other entrepreneurial people introduced solutions to specific high-loss situations as they arose.

Knogo. In mid-June 1993, Knogo planned to announce that Sonopress, the manufacturing division of the Bertelsmann Music Group of Germany, had selected two Knogo theft-detection products that would be embedded directly into recorded materials like cassette tapes and compact disks, according to people familiar with Knogo’s plans. One product was the previously mentioned Superstrip, a thin strip that can either be embedded into a product or applied to packaging. The other was a round version specially designed by Knogo for Bertelsmann to fit the center of a compact disk.

The controversy over NARM’s selection of a preferred EAS technology completely overshadowed Knogo’s efforts. Knogo’s non-North American operations were acquired by Sensormatic the next year. The remaining entity, Knogo North America, kept promoting the Superstrip and battled to participate in the source-tagging market for a few more years.

Convincing the Doubters

Consumer-Products Manufacturers. In the beginning the consumer-products manufacturers, in general, saw little vested interest in accommodating source tagging. All the financial metrics were negative for them. The major issues facing them revolved around the money that would have to be invested to design, build, and manage the new tagging processes.

It wasn’t as simple as changing the artwork on the outside of packaging. There were legitimate concerns that the endeavor would have a negative impact upon

Source Tagging Milestones

All-Tag Americas Inc.

■ Over 4 billion RF EAS labels sold in support of source tagging. ■ Second largest supplier of RF EAS labels in the world. ■ Continuous support of global source tagging initiatives since 1995.

Checkpoint

■ 1994—First orders for source tagging in over-the-counter drug remedies for Eckerd Drug Stores and Rite Aid. ■ 1995—Source-Tagging Evaluation Laboratory opens to all vendors. ■ 1997—Introduces EAS integrated jewelry card. ■ 2001—Perfects PSG label format technology that matches speeds of production and packaging lines. ■ 2003—Launches “sewn in” security for apparel. ■ 2005—FDA-compliant products for tagging food and microwave operation. ■ 2006—Introduces “postage stamp” size label. ■ 2008—Introduces reverse-logistics program called Hard

Tag @Source to recycle reusable EAS tags for apparel. ■ 2012—Emphasizes “visible tagging” to improve deterrent quality with a lock symbol indicating security. ■ 2014—To date over 25 billion products have been source tagged from all sources.

Sensormatic

■ 1994—70 million AM labels sold for source tagging. ■ 1994—Some of the earliest name-brand manufacturers to begin tagging included Stanley

Tools, BernzOmatic, and Estwing for DIY; Schering

Plough (Maybelline), Pfizer (Advil), Rayovac, Ever

Ready, Magnivision, Kodak, and McNeil (Tylenol). ■ 1997—Over 1,000 consumer-products manufacturers and packagers provide source-tagged merchandise. ■ 1999—Label unit volume reaches 1 billion per year due to Walmart’s source-tagging ramp up. ■ 2000—The focus of merchandise manufacturing shifts to

Asia. Source-tagging customers procure and tag in Asia, but ship tagged merchandise to the developed world. ■ 2005—The explosion in the sales of DVDs and multimedia merchandise helps drive label unit volume to 4.5 billion per year. ■ 2014—To date, over 50 billion products have been source tagged with disposable labels and “sewn in” disposable or reusable visible source tags (VST) on apparel. Over 5,300 manufacturers, packagers, and value-added resellers (VARS) are actively tagging. VST annual unit volume is expected to reach 1 billion. ■ Future in apparel source tagging fueled by Auto-ID/RFID applications.

Wallace Computer Services

■ 1998—Licensed by Sensormatic to build and sell AM labels for high-speed, automatic applications at a rate of over 1 billion per year. ■ 2014—Cumulative label unit volume surpasses 3 billion.

continued from page 46 reorder rates. The perceived benefits stream—less theft—was largely hypothetical, unmeasured, hence unproven. The specter of locking up merchandise or losing shelf space was a big decision driver. A positive return on investment (ROI) was little more than an illusion. The list of issues faced by the consumer-products manufacturers was daunting: ■ Costs—The costs to manufacturers went well beyond just the cost of acquiring the security labels. Affixation costs included investment in design, manufacturing process changes, automated equipment, and labor. Finished goods inventory management and carrying costs included distributing the appropriately tagged merchandise to the retail stores. Given there were four possible stocking permutations for each high-risk SKU—un-tagged, AM,

RF, or EM—inventory management was challenging.

Could some or all of these costs be successfully passed onto the wholesale cost of the merchandise? ■ Benefits—The benefits accruing to the manufacturers were hard to measure. In theory less theft means a better

“sell through.” A reorder triggered by a sale is “more beneficial” than one triggered by a theft. Providing products with a value add strengthens the partnership between retailer and supplier. A major inducement was the promise of additional shelf space with its immediate impact on sales. Open merchandising opportunities would be either lost or gained. Simply stated, source-tagged items would be open merchandised, while non-tagged products were locked up or threatened with removal.

“We organized many meetings, including the RF source-tagging conferences with retailers, manufacturers, and packagers. It took some ‘arm twisting’ by the retailers for manufacturers to appreciate their opportunity because they made money on reorders generated from theft,” said Dave Shoemaker, former group vice president responsible for source tagging with Checkpoint.

Rebalancing the ROI. For retailers at the time, EAS was far from a unanimous choice as an anti-shoplifting countermeasure. Source tagging demanded a chain-wide rollout, while loss prevention executives were investing their capital in high-risk locations. Microprocessor-controlled CCTV systems were the rage, and a number of retail vertical markets, such as supermarkets, preferred video solutions over EAS.

Source tagging would have failed without net positive economic benefits for all participants. Retailers were losing money without it. Manufacturers were faced with high “buy-in” costs to participate. The economic seesaw needed to be rebalanced. The scenario can be explained this way—Retailers tried to execute their sales plans. They went into the market and bought merchandise, applied an initial mark up, put the goods out for sale, sold some at regular price, marked most of it down, had some stolen, and liquidated what was left.

“The key was in proving the business models and rebalancing the profit sharing for all the partners,” said Joe Ryan, Jr., former vice president of global source tagging for Sensormatic.

Two things ruined the gross margin for the retailer. First was the replenishment costs added to the inventory by the reorders made because items had been stolen rather than sold. Second was the gross margin hit from the shrinkage reconciled and booked at fiscal year-end. The retailer paid the price, and the consumer-products manufacturers weren’t economically affected.

As retail merchandise statistics got more detailed and reported much closer to real time, the CFO got a better handle on the depth, breadth, and scope of these drains on item-level profitability. The merchants saw this in the form of low gross margin and promptly started negotiating “allowances” to offset shrinkage losses.

Why would the manufacturers agree to forsake the replenishment gravy train and take on a process that had the potential to add significant costs and disruption to production and control of finished goods inventory? As time passed and the data included all the relevant statistics to the SKU level, gross margins were so bad for certain high-risk items that something had to be done. Allowances were rarely sufficient.

Frustrated retailers began to tell their brand partners, “I’m getting killed here. We can’t afford to stock your product anymore. You either source tag, or I’m going to allocate your shelf space to someone who will.” This scenario happened several times in a variety of markets and is a major factor in the ultimate success of source tagging.

The early source-tagging adopters benefitted almost immediately. Far less inventory was stolen and more of the residual inventory was sold without “help” from reorders. Gross-margin statistics improved dramatically. Merchandise was preserved from theft and ultimately sold, relieving the inventory and generating a reorder. The profitable partnership between retailer and supplier was rebalancing. It took the better part of two decades to get this all figured out.

The real beneficiary of this journey is the Auto-ID industry and the retailers pursuing RFID as an inventory-control strategy. They recognized from the outset that RFID required a proven, measureable return on investment for all constituents.

“EAS will be here longer than people anticipate. Source tagging’s history is the roadmap for RFID,” said Powers.

ROBERT DiLONARDO is a wellknown authority on the electronic article surveillance business, the cost justification of security products and services, and retail accounting. He is the principal of Retail Consulting Partners, LLC (retailconsultingllc.com), a firm that provides strategic and tactical guidance in retail security equipment procurement. DiLonardo can be reached at 727-709-6961 or by email at rdilonar@tampabay.rr.com.