For Chico’s, you might say it was the best of times and the worst of times. Sales were at pre-recession highs, but shrink — particularly fraudulent returns — was escalating and something had to be done.
“Chico’s leadership brought me on because we were having a great time from a sales standpoint, but shrink was something of an unobserved expense. No one thought about it,” says Leo Doran, vice president of loss prevention. From his tenure at chains like The Limited Too, the 30-year LP veteran knew how to attack this profit-killing issue.
The severity of the problem to the entire industry was underscored in NRF’s 2010 Return Fraud Survey, which found that it cost retailers an estimated $13.95 billion last year. Not surprisingly, the report concluded that retailers need to look more closely at their policies and procedures on returns, and perhaps adopt appropriate technology to help reduce it.
“As a percentage of sales, total shrink was more than 3 percent and headed to 4 percent,” says Doran. “Since then, we’ve gotten it down to about 1.8 percent across the entire chain.” He notes that fraudulent returns continue to decline thanks to a major commitment by top management and a highly effective exception reporting software solution from Boston-based MICROS-Retail.
“When I got here in 2008, I immediately noticed the shrink driven by fraudulent returns, and as comp sales declined a bit and shrink numbers grew, management realized the need to attack it,” Doran says. “I was convinced we had to get into some type of exception reporting.”
“In the loss prevention realm, retailers are constantly challenged to detect exceptions, understand their causes and provide access to comprehensive analytical reports,” says Jeremy Grunzweig, executive vice president of store systems for MICROS-Retail.
“XBR’s rich functionality helps our clients reduce shrink and realize ROI — in most cases within the first three months of using the system,” he says. “It has helped many retailers to quickly detect fraud and improve efficiencies, thereby increasing the bottom line. Chico’s in particular has enjoyed great results by implementing the software in every store and training all staff to use it, increasing its effectiveness across the enterprise.”
The return on investment for Chico’s showed up immediately, according to Doran. At the time, many of the cases involved employees. Some of these were in the $50,000 plus range, he says, noting that these were quickly identified using the new exception reporting platform.
“In most cases, the credits were going back to their own credit or debit cards since they used the same cards in conjunction with employee purchase transactions,” Doran says. “Once we got the Micros product up and running, we terminated more than 250 dishonest employees in the first 12 months.
“The average in these cases was north of $3,000: That’s three-quarters of a million dollars we were able to identify just among those that were flying above the radar. Who knows how much was under the radar?
“Additionally, the number of dishonest employee cases went down to 150 after one year and the average case went down to about $700,” he says. “So we’re not only seeing fewer cases but catching them sooner.”
The key for the stores was Micros’ XBR net negative credit and debit card reporting. “It takes all the credit and debit card transactions and gives us a net total of what they should be,” Doran says. “When we see that there are more credits than purchases, that’s when we drill down and make our employee cases.”
The 1 percent goal
The Micros solution worked so well for the stores, the chain decided to integrate it into its direct-to-consumer channel. “We found [some] dishonest employees, but also customers who buy at highly discounted rates online, then bring it back to the store without a receipt and claim they paid full retail price,” Doran says. “We culled out a lot of dishonest customers that were beating us up on margin.”
Fraudulent online transactions also came to a head when Chico’s credit card company, USAA, experienced a data breach and stolen card numbers began showing up for online purchases.
“We didn’t have the credit card numbers, but we had the BINs [bank identification numbers],” Doran says. Using Micros’ XBR, Chico’s was able to “write a query asking for all the previous day’s online sales transactions with these BINs. We were able to get our e-commerce fraud team involved and cancelled thousands of dollars in fraudulent charges.”
What strategies lie ahead for reducing shrink? “My CEO asked me that question the other day,” Doran says. “I think the magic number is about 1 percent for women’s specialty retailing. That’s an initiative my team and I have to deliver within the next three years.”
Improvements to the current system are a real possibility because Micros provides “continual training,” he says. “For example, someone from Boston recently came down to do an XBR boot camp for us. Not only does it address the intermediate XBR users, but the rookies just coming on board. We also have the company look at how we are using the system and come up with recommendations for doing things better.”
Chico’s continues to “look at addressing external shrink issues with technology like CCTV,” Doran says, “but we’re really talking up back office. The more our associates know we’re using XBR, the more successful we’ll be in our awareness campaign. If we can convince someone not to do something before they do it, that’s half the battle.
Chico’s has built that approach into the e-learning course all employees are required to take. “It shows what a net negative report is,” Doran says. “We pay commissions to associates for monthly sales goals and individual sales, and we use XBR to detect when associates are claiming an inappropriate bonus or commission. If I’m close to making my sales goal at the end of the month, it’s easy for me to ring up $1,000 in sales and return it the following week.”
Chico’s is also using the system for what Doran calls paid-outs. “We had paid-outs for everything from overnight shipping to customer parties and we are using the program to detect them and reduce expenses,” he says. “More and more, our district managers are going to a profit-based [vs. sales-based] bonus program.
“They now realize that shrink is part of their P&L and hitting them in the pocket,” Doran says. “That’s giving us a captive audience.”