With annual Black Friday sales events set to take place across the country this week, the holiday shopping season is already in full swing for retailers. Many stores are heavily reliant on their fourth quarter sales, which have historically helped them to make up for revenue shortfalls that are commonly seen throughout the rest of the year. However, a recently published report reveals that the downsides of the holiday shopping period, which includes increased shrink, will have a significant impact on retailers’ ability to see a healthy profit margin during the final quarter.
According to the 2016 Retail Holiday Season Global Forecast, which examined 13 different markets in North America, Europe and Asia, retailers are expected to experience both their heaviest sales volumes and their weakest performances as it relates to margin rate during Q4, due primarily to increased shrink and theft from both internal (employee theft and fraud) and external (shoplifting, organized retail crime) sources. The report, which was sponsored by Checkpoint Systems, surveyed approximately 450 retailers globally, including about 40 in the U.S., across three different retail verticals – department stores, apparel/fashion and grocery/supermarket.
In the U.S., the report found that the holiday season contributes roughly 34 percent of a retailer’s annual sales base but also incurred 37 percent of its annual shrink loss. Overall, U.S. retailers reported that shrink during the fourth quarter is about 15 percent higher than the rest of the year.
The report also found that while 32 percent of all margin dollars for the year are booked during the holiday season, the actual rate of margin for the quarter decreases to 29 percent from 31 percent for the rest of the year. This is due to increased shrink as well as promotional events and markdowns.
Additionally, the retail cost loss burden for retailers surveyed in the U.S. for 2016 is expected to be $132 per person, of which $50 – about twice as much as in other quarters – is expected to be incurred during the holiday shopping period.
“This time of the year there are a variety of different things impacting brick-and-mortar stores. On one side of the fence, there is the traditional mindset that people think about Black Friday, the fourth quarter and the holiday season as being robust and beneficial for retailers when it’s actually somewhat the opposite in many cases,” retail loss prevention analyst and report author Ernie Deyle says.
Another byproduct of this intensive focus to achieve greater profitability during the holidays, according to Deyle, is that retailers tend to drop their guard and not follow the same protocols and procedures that they would during the other three quarters of the year.
“From the perspective of the disciplines, processes and execution level that’s demanded from store personnel for quarters one, two and three, that tends to go by the wayside in quarter four,” Deyle says. “We have more temporary help, we do things differently around promotions and markdowns and we do things differently around product protection and security related to insulating ourselves from theft, be it internal or external. In the quest for grabbing every opportunity as far as incremental sales goes, we’ve actually let our guard down controlling risk by compromising some of the basic standard operational practices and processes in the fourth quarter.”
Deyle says one of the biggest problems retailers face during the year’s final quarter as it relates to shrink is that people tend to rationalize their criminal behavior more.
“The sense of need, desire or want increases during the fourth quarter, therefore your risk goes up as well,” he adds. “If I’m John Doe employee and I’m working at a store and I know I’ve got to buy a friend, daughter, sibling or a parent something, I might do something that I typically wouldn’t do at any other point during the year when it comes to trying to get the right gift.
“The reason for that, from an economic point of view, is that the landscape over the past year – the global economy is on the downturn, everybody has been compromised, peoples’ wages have been compromised, and retailers have been on this cost containment drive over the past two to three years really hard and basically cutting labor and cutting payroll from their roster,” Deyle continues. “If you were an employee making $180 a week and you’re working 32 hours and now, all of sudden, you’re working 26 hours because we had to scale back and your paycheck is $120, I’ve got to make ends meet somehow and sometimes those decisions come into play that involve compromising your integrity by taking something. The same thing is true on the shoplifting side of the fence.”
Despite the fact that retailers know their losses due to shrink are inevitably going to be higher during Q4, Deyle says that there is much less worry about theft than there is of underperforming sales.
“You always hear retailers talk about sales – sales today, sales this week, sales this month, sales this quarter – so they are very revenue minded,” he explains. “It’s harder to quantify on a daily, weekly or monthly basis your loss related to inventory theft, diversion, administrative errors, vendor theft or anything along those lines because typically that assessment is done once a year. There are indicators that you can look at that will be decisive to how you’re trending, but it’s typically out of sight, out of mind.”
A prime example of this can be found in the grocery sector in stores that sell liquor. According the Deyle, many of these retailers will use EAS devices to secure their high-end bottles for the majority of the year but then during the holiday period they may want to use an endcap display to sell more of particular brand as part of a promotion and thus sacrifice security to chase the sale. “Basically, you’re stepping over $10 bills to pick up a penny instead of the other way around,” he says.
Among some of the recommendations Deyle makes in the report to combat some of these issues around the holiday period include:
- Maintain operational execution standards, while being vigilant regarding financial performance expectations.
- Update planning and financials to properly account for advanced deliveries of seasonal products, since the seasonal build starts earlier now than in the past. Enhance oversight to seasonal/holiday merchandise to ensure financial goals are achieved while cost center controls are contained.
- Employ technology to stabilize inventory loss and ensure on-shelf availability while enhancing product protection countermeasures.
- And, properly train seasonal help to manage the increasing complexities of the season.
Click here to learn more about the report or download a full copy.
About the Author: Joel Griffin is the editor of SecurityInfoWatch.com and a veteran security journalist.
