by Adam Bender | July 28, 2022
In recent years, retailers have been dealing with an unprecedented level of shrink. Since the beginning of the COVID-19 pandemic, shoplifting and organized retail crime has substantially increased. Social pressures like inflation, job losses and supply uncertainty mean crime has become more attractive, and it opened a void for organized criminals to exploit. The percentage of sales eaten by fraud, theft and other kinds of loss has continued to increase year by year, and with the recent surge in cybercrime, retailers might feel overwhelmed trying to safeguard themselves against loss.
The good news is that retail security strategy and technologies have been keeping pace, and there are myriad established and emerging loss prevention methods that can help guard retailers from shrinkage.
Given how complex retail operations tend to be, it’s no surprise that there are so many ways people commit fraud or otherwise cause loss. But the most common issue retailers will run into is shoplifting. The National Association for Shoplifting Prevention estimates that shoplifting alone accounts for US$45 million in losses every single day.
Thankfully, retailers have many ways of getting around external theft. Burglar alarms, mirrors, and CCTV systems have long been effective deterrents to would-be shoplifters, and with the addition of RFID tagging, merchandise can be tracked more easily than ever.
A perhaps unexpected result of the pandemic was the meteoric rise of organized retail crime. The NRF found that for every US$1 billion in sales, organized crime cost retailers US$719,548, and the incidence of organized crime is only going to increase as inflation strikes.
In lieu of strong federal laws against organized retail crime, businesses must develop a contingency plan in case criminals strike. Weak law enforcement and the ease of evading prosecution means there is little external disincentive for these criminals. Thus, retailers must develop their own disincentives and countermeasures.
Second only to shoplifting is employee theft. While everyone wishes their employees were 100% trustworthy, the unfortunate reality is that they often aren’t. The NRF found in their 2018 report that for each dishonest employee, an average of US$1551.66 was lost. This makes internal theft a substantial risk, especially as economic pressures and uncertainties increase.
For example, employees will often engage in “sweethearting,” which is where merchandise is given away for a discount, or entirely for free to friends and family. If this is allowed to continue over a long period of time, even small “friend discounts” will add up to a substantial loss.
Return fraud is another extremely common type of loss. Often, customers will return used or stolen items with forged counterfeit receipts. This can be minimized with strong return policies that set deadlines, require ID or mandate the tags be left on, to name a few examples.
Gift Card Fraud
This is quite a bit less common than the other types of shrink listed so far, but it is still a concern retailers must pay attention to. Gift card fraud can be accomplished in two ways: paying for/charging the gift card fraudulently, or searching for and activating valid card numbers.
In the first method, fraudsters will steal someone’s credit card and use it to purchase a gift card. This lets the criminals cover their tracks for subsequent purchases, which allows them to better evade chargebacks and the card being locked. It is also possible for criminals to buy products with a stolen card, return the item, and have the funds returned in gift card format. Both of these methods are a form of money laundering.
The second method of gift card fraud (generating/fraudulent valid numbers) is almost exclusively performed via cyberattacks. Brute-force attacks can strike vulnerable web infrastructure by generating hundreds of thousands of potential codes and trying each one. Rate limiting and captchas are important for preventing this. A more critical vulnerability may lead to direct access to a retailer’s card-generation software, which could allow attackers to generate an arbitrary number of fraudulent cards.
Just like customers and employees, outside suppliers will attempt to defraud retailers, especially on-demand businesses like rideshare applications or couriers. For example, suppliers may take advantage of advance payments and then cancel orders, keeping the cash without delivering any products. Or they may take advantage of cheap orders; delivery drivers may order inexpensive items like drinks that cost slightly less than their delivery fee, pocketing money in the long run by running the scam over and over.
Fraud from suppliers should be treated just as seriously as employee theft. Suppliers should be thoroughly vetted, supplier receipts and data should be tracked, and irregularities should be examined regularly.
Cyberattacks and Ransomware
Finally, we have the newest form of fraud, and perhaps the one retailers are the most unprepared to deal with: cyberattacks. Specifically, there has been a dramatic surge in ransomware attacks in the past few years, and their costs are substantial. The infamous Colonial Pipeline attack cost the company almost US$5 million in (ineffectual) attempts to unlock the systems that were attacked by the ransomware, and an untold amount more in lost profits.
When a retailer is caught by a ransomware attack, they are put in an unwinnable situation. With their systems compromised, their entire company could be effectively frozen in place. Often ransomware is put in place with nigh-uncrackable encryption, so recovery is extremely challenging. This prompts targets to give in to demands and pay the ransom. But being in such a position of power, criminals will rarely let control go even if the target pays the agreed upon amount. Further threats and demands follow until the ransomware can be cleaned out.
Given all the methods fraudsters use to cheat and steal from retailers, loss prevention can often seem like a losing battle. But thankfully, there are plenty of methods retailers can use to fight loss. There are the classics, of course: burglar alarms, CCTV, observation mirrors, electronic article surveillance and the like. But in the modern era, more and more integrated software tools have been introduced into the loss prevention game.
Data Mining, Analytics & Pattern Matching
Many kinds of loss can be caught with the help of big data. Retailers generate a large volume of transaction data to sift through, and abnormalities in that dataset can help catch instances of fraud. For example, finding a spike in the number of returns or finding oddities in voided transactions.
Systems that process transaction data like this are increasing in popularity, but processing data from the other side of things has been growing as well. Employee thefts or administrative errors that lead to losses can be caught by feeding inventory information, vendor information, revenues and other data streams into a software system that can pick out abnormalities from the chaos.
Real-Time Inventory Management
Another data-centric loss prevention method is inventory management. By tracking inventory by SKU, at-risk items can be targeted for further examination and thefts/losses can be spotted. If a certain SKU keeps winding up with sales and inventory mismatches, an inventory management system will catch it and a flag can be raised to prompt further investigation.
If made even more granular, inventory management systems can track individual pieces of merchandise (using RFID tags or emerging tech like camera vision), allowing retailers to spot thefts/loss on the individual level and analyze their business operations with a fine-toothed comb.
Cybersecurity is often neglected by businesses, and this is a critical mistake. All aspects of the retail business are now innervated with software that handles important data, and all software is vulnerable until actively hardened. It is vital that retailers take on good security practices such as two-factor authentication, tight access controls and/or frequent mandatory password changes to lessen the risk of being compromised by a hacker.
Conducting internal audits on transaction data is also a good method of catching loss. By comparing data between the Point of Sale (POS) systems and Merchandising systems, inconsistencies will stand out and loss or fraud can be easily identified. For example, if fraudulent transactions were being generated at the store level without inventory being moved, sales auditing would spot the discrepancy. Jesta’s Sales Audit module integrates with the rest of the Vision Suite and allows any kind of retailer to get on top of their sales data with ease.
Perhaps a surprising thing to wind up in the loss prevention toolbox is business automation. This especially helps for shrink arising from carelessness or human error; it is quite difficult for a machine to make those kinds of mistakes, and the less humans in the loop in some processes, the better.
In addition, automation can be used to fight against outside threats. Automated data analysis systems can catch anomalies without any human intervention and raise flags for manual review. This combines the best of both: the speed and intelligence of a machine, combined with the judgement and nuance of a human moderator. And with the rapid improvement of computer vision technologies, automated CCTV monitoring may soon become a commonplace technology to spot theft or suspicious activity at the point of sale.
As you can see, loss prevention is a complex task. In order to succeed, a retailer needs to connect a variety of technologies, turn employees into collaborators, and stay ever vigilant against new and different threats.
The best loss prevention strategy is a unified one, and that’s what Jesta’s Loss Prevention module offers. Even if not connected to the rest of the Vision Suite, this module can help sift through mounds of data and automatically spot exceptions. When joined with the rest of the Suite however, it becomes one arm of an omnichannel toolkit that empowers retailers to take full control of their business. Contact us to learn more.
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