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An Anti-Shrinkage Strategy

Getting shrinkage down to one percentage point below the average rate would be worth $30 million a year.

May 29, 2004
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Related Topics: Behavioral Training, Recruitment, Staffing Management
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The family-friendly grocery clerks that Trader Joe’s tries to cultivate may be more than company ambassadors of goodwill. They may also be antidotes to employee theft. Shoplifting, employee theft and other losses, what is called "shrinkage" in retailspeak, are a constant problem for shopkeepers. But it’s a particularly vexing issue in the low-margin grocery industry. Analysts, consultants and some corporations say that spending extra money on hiring the right employees and then treating and rewarding them well pays off because loyal and satisfied employees tend to rip off the company less and stick around longer.

    The National Supermarket Research Group reports that theft and loss is 2.32 percent of supermarket sales, and 57 percent of that is estimated to come from employee theft. What’s more, a 2000 study on supermarket retention rates conducted for the Retailing Research Council found that job turnover costs the average supermarket nearly $190,000 a year in expenses related to lost business and the hiring and training of new workers.

    At Trader Joe’s, getting shrinkage down to one percentage point below the average rate would be worth $30 million a year, based on the company’s annual revenue of $3 billion. Improving retention 50 percent over average rates would be worth $19 million a year spread over Trader Joe’s approximately 200 stores.

    While Trader Joe’s won’t talk about its shrinkage or retention rates, another company that prides itself on similar workplace practices, The Container Store, reports that it consistently beats average shrinkage and retention rates. The Container Store cultivates loyal employees with higher-than-average salaries and benefits, extensive training and feedback, and room for advancement.

    "We spend more on our employees, but we get the reward and the return," says Joan Manson, the Dallas-based company’s director of loss prevention. Manson says that average shrinkage in the retail sector runs about 1.7 percent of sales. The Container Store’s rate: 0.7 percent.

    Adam Mertz, grocery market manager for Unicru Inc. in Beaverton, Oregon, agrees that rewarding employees to build loyalty can help reduce shrinkage and increase retention, but says that poor hiring practices can undermine the system. Unicru promotes a hiring system that weeds out slackers and potential thieves with a combination of background checks and subtle interview techniques that can shed light on a prospective employee’s character. Unicru recently applied those techniques for a division of a national grocery chain. The result: a 21 percent drop in shrinkage rates over the first seven months. "Get the right people, first and foremost," Mertz says.

    While hiring the right workers is key, keeping them happy is where retailers receive long-term benefits, says Richard Hollinger, a professor of criminology and sociology at the University of Florida. Hollinger conducts research on retail theft. "Retailers work in a world where pre-employment screening is the most important thing to do," he says. "What you have is a pool of people who are generally pretty honest when they start, but slowly they become disenchanted, disenfranchised, and they begin to seek equity in the only way they know: work less or steal."

    How companies deal with employees after they’re hired is much debated in the retail industry. John Case of John Case & Associates, a security consultant in Del Mar, California, and author of the book Employee Theft: The Profit Killer, says that spending extra money in the hope of building employee loyalty isn’t a very effective theft deterrent. Loyal employees also steal, and sometimes get away with more precisely because they’re trusted, he says.

    To stop employee theft, a company should carefully and constantly monitor its workers and mete out swift punishment to those caught pilfering. "The whole thing is accountability, and the perception of getting caught and the knowledge of what would happen," Case says.

    Too many companies subscribe to the big-stick method of keeping employees in line rather than the carrot method of rewarding performance and cultivating loyalty, Hollinger says. "If you talk to retailers, they will say that you can’t pay people decent wages, you can’t give them health insurance, certainly you can’t give them child care and still make a profit. Most retailers treat employees like migrant workers."

    Hollinger says companies that spend more on employees tend to be highly profitable and have fewer labor problems. If you want to see the relationship between good employment practices and profits, just glance at Fortune magazine’s annual list of Best Companies to Work For, he says. The companies on the list, including the perennially high-ranking Container Store, tend to offer high wages, good benefits and extensive development programs, and they also generally have low turnover rates and strong profits.

    "It is not an accident," Hollinger says.

Workforce Management, September 2004, p. 53 -- Subscribe Now!

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