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Strategies to Mitigate Shrink in a

Boundary-less Retail World


Shrink is a constant, multi-faceted challenge that retailers
must overcome to grow and prosper amid continuous
omni-channel expansion.

Cognizant 20-20 Insights


Executive Summary
In the U.S. retail industry, where average net
margins are just 3%, nearly $50 billion annually
is estimated to be lost to shrink or nearly 1%
of the industrys $5 trillion in annual sales. Theft,
fraud and inefcient operations are all signicant
problems that erode the margins that retailers
work so hard to increase or, at the very least,
preserve. Combine unrelenting margin pressures
with ongoing consumer price consciousness, and
the ability to control shrink can make or break a
retailers bottom line.
Over the last 50 years, the evolution of loss
prevention (LP) has been quite extraordinary.
As the retail landscape has changed, so has
the problem of shrink. During the 1960s, when
retailing comprised mostly independent small
stores, shrink was not a signicant concern.
The reason: simple store formats, supply chains,
limited assortments and smaller staffs. With the
advent of regional and national chains, it is now
difcult to scrutinize all corners of the larger
store formats. Furthermore, the need for a larger
workforce and complex supply chains has opened
new doors to shrink (see Figure 1, next page).
Retailers have responded to these challenges by
creating an organized LP department that works
with divisions across the enterprise to slow the
growth of shrink from both internal and external
sources.
Amid todays growing movement toward omni-
channel retailing, retailers face more complex
challenges than ever before. Margins are under
attack on many fronts: losses attributed to
shoplifting and internal theft are compounded
by online fraud, organized crime and sophisti-
cated supply chains (i.e., geographical sourcing,
multiple touchpoints, access to products by
outside resources and availability of products at
multiple nodes).
We believe that retail LP departments are at
a tipping point once again; the tools that had
worked incredibly well in the past are not enough.
To remain ahead of the curve, LP teams must
shift their focus from traditional strategies, such
as policing and basic reporting, to IP videos and
predictive analytics.
This whitepaper describes how the LP function
has evolved over time, the new challenges
retailers face in controlling it and, from our point
of view, ways to overcome these challenges.
cognizant 20-20 insights | july 2014
2 cognizant 20-20 insights
Loss Prevention: A Constant Struggle
to Protect Prots
The history of LP strategies is as follows:

Pre-20th century: Shrink has grown, along
with the evolution of the retail industry. Policing
and detection units by retailers to prevent
shoplifting date back to 18th century London,
when the city pioneered the use of a dedicated
police division, The Bow Street Runners, for
swift investigation at crime scenes.

Emergence of dedicated LP departments:
Retailers continued to use rudimentary LP
methods until the 1960s, when the rst formal
departments were formed. Most of these were
staffed by former law enforcement ofcers who
did not have retail experience. These LP depart-
ments were managed at the individual store
level and had very little or no communication
with upper management. Stores utilized tactics
such as plainclothes detectives, shoplifting
focus towers and basic daily till reconciliation.

Retail growth begets additional shrink, new
tactics: As retailers grew larger in size and
revenue, dollars lost to shrink also increased,
and retailers began to invest in more sophisti-
cated tools and effective strategies. EAS, CCTV
and interdepartmental collaboration replaced
ceiling mirrors and shoplifting watchtowers
within stores. Laws were enacted in the U.S. in
the 1970s that allowed merchants to recover
penalties from shoplifters that fueled the
expansion of LP departments.
One of the main themes that reshaped LP depart-
ments in the late 1980s and 1990s was their orga-
nizational structure and propensity to collaborate
with other departments to reduce shrink. Driven
by the need to support a positive ROI, LP shared
many goals with other departments and divisions
and took the new form of asset protection (AP),
which extended the scope of responsibility
outside the four walls of the store and into the
warehouse. This led to the introduction of distri-
bution center (DC) audits, truck seal programs,
vendor compliance audits and increased focus on
production planning and overall retail operations
(see Figure 2, next page).
By the start of the 21st century, most AP depart-
ments had embraced technology to uncover
wrongdoing within the organization. Through
the emergence of exception-based reporting,
U.S. Shrink Could Reach $80 Billion
The omni-channel era will spur a growth in shrink.

$3B
$4B
$6B
$9B
$15B
$22B
$30B
1.8%
$29B
$36B
$44B
$46B
1.4%
$63B
$78B
0
1,000
2,000
3,000
4,000
5,000
6,000
1960 1970 1980 1990 2000 2010 2020 2030
U
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.

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e
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(
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n

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o
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S
D
)
*
*
Year
Regional and National Chains Era Omni-channel Retailing Era
Shrink in billions, shrink percent*
While shrink as a percent of sales
has remained relatively consistent
over the past decade, shrink dollars
are predicted to grow at an
explosive rate unless a multi-faceted
strategy is devised and implemented
across the retail value chain.
Shrink dollars began to grow
with the onset of big box retailing,
complex supply chains, a large
workforce, organized retail crime
and lack of retailers ability to take
bold steps.
Shrink dollars were
small, with simple
store formats.
Independent
Stores Era
Source: *Shrinkage percent from National Retail Security Survey conducted by University of Florida, November 2012.
**Retail sales data from U.S. Census Bureau.
Figure 1
cognizant 20-20 insights 3
enterprise shrink reporting and rened case
management software, productivity increased
dramatically.
With the evolution of LP techniques such as
exception-based reporting and EAS tags, retailers
have been able to reduce shrink as a percent of
sales; however, the actual dollar loss due to shrink
continues to grow.
Challenges and Opportunities
Growing shrink concerns have placed LP ini-
tiatives high on the agenda of many retailers.
Companies are keen to invest in effective and
proven LP methods, as well as collaborate with
technology companies and specialists to nd loss
management solutions that diminish continuing
shrink problems. We believe forward-looking
retailers will differentiate themselves by exploring
new methods to control shrink. Figure 3 (next
page) illustrates ve key themes that we contend
will shape the future of shrink management.
Loss Prevention Beyond Boundaries
Seven in 10 retailers report shoplifters
stealing merchandise and returning it for
store credit.
1

Over the last decade, thanks to the Internet,
organized retail crime (ORC) has achieved new
heights. Online forums and social media platforms
provide an easy means of exposing loopholes in
retailers systems or to sell stolen merchandise.
In order to stem the tide against ORC, retailers
found an unlikely accomplice their competitors.
Retailers created local collaborations and started
sharing intelligence with their competitors, as
well as with law enforcement ofcials.
Today, most interactions are ad hoc and occur
via phone calls and e-mails. While the spirit of
cooperation provides a reasonable starting point,
retailers need to nd ways to make collaboration
easier, more timely and more effective. Reduction
of ORC benets the entire community; as such,
retailers and law enforcement agencies need to
work together to create a common communication
platform on which mutual alerts are dispatched
and best practices are devised and shared.
Data Convergence and Advanced Analytics
Over the next year, 43% of retailers
plan to implement real-time theft analysis
capabilities.
2
Limited resources and tools to mine enormous
amounts of structured and unstructured data
continue to undermine the effectiveness of
LP teams. Retailers must consider investing in
technologies that collate data from applications
across the enterprise to assemble a complete
picture of shrink.
Advanced data analytics and predictive modeling
introduce an enormous change to the way LP
organizations operate. Retailers have histori-
cally focused on known and veriable past shrink
to plan for the future; however, the next decade
A Coordinated Response to the Shrink Challenge
Collaboration is a key theme to shaping LP
Cross-functional/
Inter-departmental
Collaboration
Collaborating with other departments
within the organization
Product placement strategy
LP case management software
Collaborating with law officers
Source tagging
Direct store delivery (DSD)
Scan-based trade (SBT)
Retailer and Vendor/
Supplier Collaboration
Retailer/Technology
Collaboration
POS transaction monitoring
Digital recording
EAS (electronic article surveillance)
Figure 2
cognizant 20-20 insights 4
will usher in a new era in which retailers will be
able to analyze real-time data and predict shrink.
Imagine waiting a couple of weeks rather than
months to verify whether your shrink strategies
are working. Analytics has the potential to be a
game-changer in shrink management.
With increasing numbers of consumers active on
social networks and online forums, retailers can
apply big data analytics to better understand
behavior patterns and develop
short- and long-term LP
strategies. Criminals who
frequent these forums are
actively seeking and providing
aid to help shoplifters. Big
data reports can point out
products that are being stolen,
mechanisms used to steal
them and, in some cases, the
individual who allegedly per-
petrated the crime. Instead of
looking at each source inde-
pendently, retailers should
start analyzing a variety of feeds as one large,
interconnected pool to generate actionable
insights. For example, retailers can start by
analyzing transaction logs, videos and stills from
CCTV and workforce management applications in
tandem to identify employee fraud.
Video Analytics
Within the next two years, 23% of retailers
plan to use CCTV video surveillance integrated
with video intelligence software.
3

Video surveillance has incrementally improved
over the better part of the last two decades,
moving from analog, to compressed analog, to
digital, to a distributed digital version. Video
analytics can help with effective monitoring of
shrink-prone areas of the store. By monitoring
activities such as cash movement, retailers can
use video analytics to reduce shrink resulting
from employee collusion.
Advancements in visual analytics have enabled
automated tagging of certain events, such as
returns processing with no customer present.
These features accelerate the discovery of
relevant events that allow shrink management
teams to be more targeted in their investiga-
tions, saving hours spent reviewing random video
footage.
Facial recognition systems have existed since the
turn of the century, but until recently, they have
not been widely deployed. Government agencies
were early adopters, targeting fugitives, terrorists
and spies. Retailers have had their eyes on the
technology for some time, but the price point
was simply too high to justify. Now that detection
algorithms have been rened to improve identi-
Exploring Thematic Intersections
Keys to the
Future
Omni-channel
Data
Analytics
Video
Analytics
LP Beyond
Boundaries
RFID
Figure 3
By monitoring
activities such as
cash movement,
retailers can use
video analytics
to reduce shrink
resulting from
employee collusion.
cognizant 20-20 insights 5
cation accuracy, and solutions have declined in
price, facial recognition technologies are more
appealing to certain retail segments.
The big advantage of CCTV, IP cameras and
video analytics is cross-departmental use. Video
analytics and improved video resolution will
allow departments such as store operations, risk
management, HR, legal and marketing to make
decisions based on a whole new set of data that
was previously unavailable. They will have insight
into demographics, customer service, training,
foot trafc, abandonment, conversion, dwell time,
line queueing and merchandising. With remote
capabilities built into these solutions, associates
in all departments can easily access the analytics
data. With increasing reliability and advancement,
retailers will soon be able to start using video
analytics in some capacity in their ght against
shrink.
Omni-channel and Mobility Focus
31% of retailers IT budgets by 2016 will be
spent on omni-channel capabilities.
4
While technology has provided various new tools
to ght shrink, it has also opened new avenues
for potential loss. Omni-channel strategies create
criss-crossing touchpoints by providing features
such as buy online/return in store, buy online/pick
up at store and ability to source, fulll and return
products anywhere in the chain. Furthermore,
the mobile platform is changing the landscape
of retail, presenting its own set of challenges.
With these features fast becoming common, LP
departments will continue to see new challenges
that they have never faced before.
Because of factors like stretched supply chains and
a virtual world in which location is immaterial, LP
teams need to adapt and improve their defenses
in order to secure the digital fortress that is
omni-channel retail. For example, what if mobile
POS devices are stolen or tampered with? What
happens after a customer makes her purchase in
a tting room? Do they simply leave the store?
How is the security tag removed or deactivat-
ed? Touchless payments are becoming more
important to improving a customers shopping
experience. But with these touchless payments,
cashiers have no physical card to examine and no
signature to match, making it difcult to distin-
guish an authorized user.
Online fraud is easier to commit but more daunting
to detect compared with traditional methods of
theft that occur within the four walls of a store.
Given the omni-channel nature of retail, these
types of fraud will increase in frequency and
impact. In one recent example, a retailer viewed
a markdown loophole on its Web site that was
exploited by a single individual for thousands of
dollars across the chain.
RFID Tagging
American Apparel has reduced shrink by an
average of 55% at RFID-enabled stores. Some
locations curtailed shrink by as much as 75%.
5
RFID technology has promised improved product
tracking for some time, but store adoption of RFID
has been hampered by high front-end costs. In
the near future, RFID is expected to make a major
impact in two key ways: as
a replacement for EAS tags
and as a means to secure
supply chains.
RFID usage is limited to
high-value products, and we
expect this trend to continue.
However, the threshold of
high value will begin to
decline as the adoption and
availability of RFID tags increase and manu-
facturing costs are reduced (see Figure 4, next
page). Today, EAS is still the most prevalent
theft deterrent tag used in retail; however, with
a reduction in costs, RFID tags are set to replace
EAS tags as a more effective way to secure both
merchandise and the supply chain.
Retailers have contended with porous supply
chains and limited access to accurate data for
a long time. Most of the analytics that can help
retailers ght shrink require clean, consistent
and accurate data; RFID solves that problem by
automatically logging all the required data from
systems of record, which can then be mined in
real-time for analytical insights. According to a
study conducted by VILRI, item-level RFID tagging
is proving to deliver product inventory data that
is up to 99.5% accurate.
6
Item-level RFID
tagging is proving
to deliver product
inventory data that
is up to 99.5%
accurate.
cognizant 20-20 insights 6
Source: Item-Level RFID, Accenture and VILRI, 2014
Figure 4
RFID Costs Decline
35%
30%
25%
20%
15%
10%
5%
0%
2008 2009
6.7%
21.4%
4.5%
2.5%
26.7%
30%
33.3%
2010 2011 2012
T
a
g

P
r
i
c
e

R
e
d
u
c
t
i
o
n
Year
Annual decrease
Cumulative
While RFID will not prevent internal and external
theft, it will provide valuable, actionable insights
regarding a stores physical inventory. This will
enable merchants and planners to take corrective
steps to ensure sales are not lost.
Looking Ahead
Shrink is a multi-dimensional threat for retailers
across the globe. As long as retailing exists, losses
associated with shrink will continue to impact
retailings nancial performance. Digital trans-
formation and the emergence of omni-channel
strategies will stretch LP teams and their ability to
control shrinkage throughout the enterprise. While
new technologies continue to evolve to combat
shrink, there is no one-size-ts-all solution.
Based on our experience, we believe the following
recommendations can help retailers improve
their loss prevention programs:

Develop a holistic loss prevention strategy that
complements enterprise initiatives.

Assess the existing loss prevention infrastruc-
ture and conduct cost-benet analyses of
outdated technologies, such as EAS tags and
analog CCTV.

Expand LP responsibilities beyond the four
walls of the store to include online, mobile and
other selling channels.

Create a community forum for retailers to col-
laborate and counter ORC.

Use big data and predictive analytics to provide
near-real-time actionable insights.
cognizant 20-20 insights 7
Footnotes
1
Organized Retail Crime Survey, NRF, 2013, https://nrf.com/sites/default/les/Documents/2013_ORC_
Report_FINAL_3.pdf.
2
Loss Prevention Analytics: Gaining a New View of Retail Shrink, Aberdeen Group, July 2013,
http://v1.aberdeen.com/launch/report/benchmark/8560-RA-loss-prevention-analytics.asp?lan=US.
3
Loss Prevention Technology: A View of LP in Tomorrows Store, Aberdeen Group, April 2013,
http://v1.aberdeen.com/launch/report/perspective/8447-AI-retail-loss-prevention.asp?lan=US.
4
2013 Cross-Channel Tech Trends Study: Understanding the Retail Singularity, RIS News, Oct. 8, 2013,
http://risnews.edgl.com/retail-research/2013-Cross-Channel-Tech-Trends-Study--Understanding-the-
Retail-Singularity88778.
5
Claire Swedberg, American Apparel Adopting RFID at Every Store, RFID Journal, Feb. 8, 2012,
http://www.rdjournal.com/articles/view?9202.
6
Item Level RFID: A Competitive Differentiator, Accenture and VILRI, 2012,
http://www.vilri.org/docs/Accenture_VILRI_Item-level-RFID.PDF.
References

2012 National Retail Security Survey Has Been Released, University of Florida, Feb. 20, 2014,
http://soccrim.clas.u.edu/2014/02/20/2012-national-retail-security-survey-has-been-released.

Estimated Annual Sales of U.S. Retail and Food Services Firms by Kind of Business: 1992 through
2012, U.S. Census Bureau, http://www2.census.gov/retail/releases/current/arts/sales.xls.

Global Retail Theft Barometer: 2012 and 2013, http://globalretailtheftbarometer.com/.

RFID24-7 Web site, www.rd24-7.com.
About the Authors
Robert Weldon is a Senior Manager in Cognizants Business Consulting Products & Resources Division
and is the Shrink Management Practice Leader within the Store Operations line of business. The team
is responsible for helping clients assess the maturity of their LP strategies, policies and procedures;
identify sources of shrink across the retail value chain; and develop a roadmap to improve performance.
Robert has more than 28 years of experience in retail store operations, real estate development and
business consulting. He can be reached at Robert.Weldon@Cognizant.com.
Jigar Shah is a Consulting Manager within Cognizants Business Consulting Products & Resources
Division and is the Point of Sale Practice Leader within the Store Operations line of business. He is
responsible for driving the units thought leadership and business development efforts in the POS
space. Jigars areas of expertise include point of sale, store operations, omni-channel, LP and business
consulting. He has more than 12 years of experience with leading retailers in North America. Jigar can
be reached at Jigar.Shah4@cognizant.com.
Vinay Kumar Nayak is a Senior Consultant within Cognizants Business Consulting Products & Resources
Division. He is the North American Lead Consultant in Cognizants Shrink Management Practice and is
responsible for driving thought leadership and business development efforts. Vinays areas of expertise
include exible fulllment, store operations and LP. He has more than seven years of experience working
with large retailers in North America. Vinay can be reached at VinayKumar.Nayak@cognizant.com.
About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 75
development and delivery centers worldwide and approximately 178,600 employees as of March 31, 2014, Cognizant
is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among
the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on
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