Leading by Example
Paul Raines oversees a company purported to have one of the best shrink rates in all of retail.
“We don’t disclose figures,” Raines says, “but it’s the lowest shrink rate I’ve ever been associated with.”
That’s all the more remarkable when you realize that GameStop, ranked 262 on the Fortune 500 annual listing of public companies, is the world’s largest video game and entertainment software retailer.
GameStop operates 6,670 retail stores in 18 countries, hosts digital e-commerce and gaming sites including GameStop.com and Kongregate.com, and publishes Game Informer magazine.
Raines recently spoke with STORES contributor Liz Parks about the strategic importance of integrating loss prevention into all aspects of a retail business and how he manages that at GameStop.
How did you become so deeply involved with LP?
Well, when you are a regional vice president [at The Home Depot] and you go through six hurricanes in two years, you learn a lot about shrink.
What are some of the things you learned?
Good LP procedures, policies and disciplines are very important. I always say LP is a process, not an event. So it’s not about the one day where you take an inventory count. It’s about the rest of the year that creates that one day.
In what ways is LP integrated with the business side of GameStop?
To begin with, Tina [Sellers, head of LP for GameStop] is a member of the management team and is involved in all team meetings and discussions. Our company is heavily engaged not just in LP, but in what Tina calls “profit protection.”
How do you mean that?
Well, today we are a hybrid company involved in selling digital products as well as traditional physical products like video game systems and accessories. The LP team is right in the middle of helping us find how digital products can be measured and sold in stores. That’s an example of how the LP leadership team in the field is very tightly integrated with the sales team.
Do you use exception reports to identify issues that may be negatively impacting profits by increasing shrink?
Yes, we have an extraordinary homegrown exception reporting system called Sherlock. … GameStop has a lot of internally developed applications and technology. Our POS, for example, was internally developed. So were a lot of our store processes.
How long have you had Sherlock and why did you decide to develop it yourself rather than buying an exception reporting system off the shelf as many retailers do?
Eight years ago, when we developed Sherlock in-house, it was because off-the-shelf exception reporting systems couldn’t recognize trade activities. So just like retailers have fraudulent refunds, we also had a fair amount of fraudulent trades
Can you describe how Sherlock helps you identify potential loss problems across all your sales and trade activities?
Sherlock is an exception reporting system on steroids. The fact that we take trades in our stores adds a wrinkle to LP. We need to be able to monitor trade activity as well as sales activity. Sherlock lets us monitor trades as well as sales by geography and by individuals.
We also have a customer rewards program called PowerUp Rewards with more than 8 million members. That’s also integrated into Sherlock, which feeds us more data.
So we have this massive amount of data and our team is very effective at identifying anomalies, trends, so forth.
What other teams have you developed to assist in profit protection?
We also have a cyber investigation team that works pretty closely with Internet auction sites where we have very strong partnerships.
You also have digital businesses such as GameStop.com and EBgames.com, which are probably also very complicated to manage.
Our digital business, as we grow, is amazing. GameStop.com grew over 100 percent last year in volume. We have also added an online game platform called Kongregate.com and Spawn Labs, a streaming technology company. In addition, we have entered into an agreement to purchase Impulse, Inc., a leader in digital distribution.
Once the Spawn Labs integration and testing on a new consumer interface is complete, users will have immediate access to a wide selection of high-definition video games on demand on any Internet-enabled device.
All of those businesses will have some impact on LP and our team will be right in the middle of helping to manage all that.
When you sell digital products in real time, there is less time to check on the validity of the credit cards you accept. Is that one of your new challenges for LP?
Credit card fraud, of course, is going to be a factor in anything on the Internet … We’re not clear yet on what the business model will be for our streaming business, but we might stream only those games that someone bought from us. We might sell through subscriptions.
We’re seeing a lot of “hybrid consumers,” as we call them: People who buy physical goods in the store, but who also buy digital merchandise. And all of those customers may become candidates for the streaming business. LP’s role in that, I think, will revolve around payment terms [and monitoring for] fraudulent activities on their accounts.
GameStop recently became the first multichannel gaming company to launch a storefront on Facebook. That gives GameStop the opportunity to provide social commerce to more than 2 million Facebook fans at apps.facebook.com/gamestopshop/. What role will LP play in this new venture?
LP will maintain a strategy to support this distribution platform using social investigation and cyber investigation.
How does your loyalty program, PowerUp Rewards, which you launched last fall (2010), tie into your cyber or social network investigations?
PowerUp Rewards has had amazing growth. There are now more than 8 million consumers enrolled and they shop us with three times the frequency of non-members. PowerUp Reward accounts are tied up into people’s trading and sales activities, so all of our efforts will be tied into one overarching LP strategy.
From a LP prospect, is there anything you can share that could help other retailers with stores in similar markets that are vulnerable to shrink?
It comes back, always, to the partnerships between store operations, LP and inventory control. It truly has to become an integrated effort.
Some retailers tend to regard LP as more of a “cops and robbers” type business, and because of that, they don’t always integrate LP into all the other aspects of their business. How much different is GameStop’s approach?
We operate with publically disclosed operating margins of seven percent, so that roughly means that to make up for a dollar in shrink, we have to have $15 in sales. That’s kind of tough. So if we can have less shrink, it’s a good thing and it’s good for profitability so we’re clear on what happens when you have bad shrink. Profitability is important to preserve and that’s one of the things that makes LP important.
Also because of the nature of our business, we spend about 25 to 30 percent of our task hours in the stores processing the buy/sell trade model which means that other LP related tasks have to be very well-managed and efficient. We believe we have to include LP in all of our thinking because they are a big piece of driving sales and freeing up task hours for us.
You have 75 LP people in the field and that number has remained fairly constant over the last few years. How have you been able to keep shrink at your targeted low levels without adding to your LP staff?
Everybody has to be in the LP business. It can’t just be Tina [Sellers] by herself trying to run LP. You’ve got to have thousands of store managers and associates, along with district managers and regional directors and so forth, all working with one common mandate.
How are you able to pull everyone together so that LP is as integrated as it is and low shrink is an integral part of the company’s culture?
We have a cascading meeting process: Senior team meetings flow into national operations calls and then into conference calls with regional directors. Everyone is on the same page and has the same priorities.
You know, there is no substitute for old-fashioned communication and individuals who are committed to each other in a way that moves GameStop forward.
What, to you, are some of the biggest challenges facing LP today?
Technology is now coming at us at such a fast pace, we have to find ways to make ourselves ready for it. And key for us, right now, is networking. Making sure we are working with other LP departments to stay abreast of what is most current. The NRF and its conferences and LP Council are one of our top ways of doing that.
At the end of the day, everything in a business is about people having individual leadership and accountability. Tina [Sellers] and her team have created a culture around LP that, as she says, does not tolerate shrink. It’s a way of life. It’s built into our business plan to have low shrink. Just as we can’t afford to miss the launch of a hot new gaming item, we can’t afford to go backwards on shrink.
I think alignment, everyone being on one team … is possibly the single toughest challenge that you face. Everyone has good intentions but everyone wants to pull their own way so I think leadership to encourage alignment … is critical. Then shrink control becomes something that works, something that is a natural by-product of that alignment.