Visit with the Shrink

Touching base with loss analysis can help make shrink predictable

• By Steven K. Aurand, Jon D. Groussman
• Mar 02, 2007

TO a significant extent, shrink can be predicted and tamed with targeted security resources, institutional awareness and effective, operationally feasible countermeasures.

In statistical analysis, the goal is to explain variation and to determine what part of that variation is systematic and predictable. CAP Index Inc. has conducted numerous studies of shrink for a variety of retailers. Significant portions of shrink variation—often a majority—can be explained by CAP Index scores and other demographic variables that characterize neighborhoods in which stores are located.

There is no need to throw the kitchen sink at the problem or to use one-size-fits-all solutions.

The strong relationship between shrink and demographics stems from the criminological theory of social disorganization. Higher levels of social chaos lead to higher levels of shrink, crime and other types of loss. Socially disorganized neighborhoods are characterized by higher rates of unemployment, lower incomes, lower educational attainment, broken homes and transience.

While social disorganization and its demographic indicators are measured in neighborhoods surrounding a given store, the factors clearly do not stay outside the store. For example, some employees may be hired from socially disorganized neighborhoods, resulting in higher levels of internal theft. Alternatively, some store visitors may stem from high-risk neighborhoods, resulting in higher levels of shoplifting and other external crimes.

Retail Protection
But retailers shouldn’t avoid markets where such challenging conditions exist. In fact, a particular market or a potential location may be a profitable and desirable location to serve the consumer. The key point is corporate real estate departments, construction and asset protection professionals should engage in dialogue and create a methodology within the organization to be proactive about asset protection. Proper planning and effective security resource allocation can save significant time and money, compared to the costly alternative of future retrofitting of physical security measures.

Because such a large portion of shrink is predictable, it is possible for asset protection professionals to allocate security resources systematically, where it can have the greatest impact on reducing potential loss and ultimately impacting company profitability. There is no need to throw the kitchen sink at the problem or to use one-size-fits-all solutions.

Rather, the answer is quite clear. Higher-risk locations need higher levels of security. Asset protection should be viewed as a profit center and not a necessary evil draining the bottom line. Retailers and partner vendors must examine the ROI for all physical security equipment and security staffing. With so many security countermeasure options available on the market today, including alarms, CCTV, RFID technology, barriers, security officers, EAS, POS and case management software, it is imperative diligent and ongoing analysis be undertaken to determine the optimal combination of loss reduction measures—both now and in the future.

Further benefit can be obtained by comparing actual and predicted levels of shrink. Usually, the numbers will agree. However, large discrepancies—the outliers—should be scrutinized.

Cases where actual shrink is much lower than predicted may represent success stories that can be emulated elsewhere. Perhaps store management and store security are particularly effective at those locations. Despite predicted losses, a strong management team, effective employee awareness training and deployment of human and physical loss prevention measures can reduce shrink significantly. Alternatively, there may be accounting problems causing store shrink to be under reported, or there may be easier targets nearby drawing crime away.

Cases where actual shrink is much higher than predicted are problem sites that need extra attention. Maybe store management and store security are less effective than they should be. Perhaps organized retail theft is targeting the location. Maybe an “attractive nuisance” is drawing crime into the area. Perhaps accounting problems are inflating the true level of shrink.

Asking the Right Questions
In any event, data-driven analysis can help an asset protection manager ask the right questions about each location in order to optimize security allocation. Shrink prediction also can be extremely beneficial for new locations that have no shrink history. Retailers can start out at the sites with appropriate security countermeasures for the anticipated level of shrink.

Shrink is not the only type of loss that can be predicted using CAP Index scores and other demographic data. Parking lot incidents, robbery, vandalism, workplace violence, fraudulent workers compensation and general liability claims, bad checks, credit card fraud and related losses have all proven to be highly related to social disorganization in research studies. Predictive analysis can help with resource allocation to counter the loss types.

A data-driven approach to shrink and other related loss is a business necessity that should be embraced by proactive asset protection professionals. Professionals must view themselves and the departments as a critical business unit impacting the financial well-being of the company. It is no longer acceptable to treat shrink as the status quo and accept such losses simply as an inevitable cost of doing business. Shrink is predictable. The systematic allocation of security resources, guided by statistical analysis, is a proven, effective way to tame the savage beast.