Loss prevention might become retailers’ go-to department for technological innovation

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One of the best-attended and most widely discussed sessions at the recent NRF PROTECT loss prevention conference was a presentation by James Mullan, senior vice president of GDR USA, called “Retail’s Secret Innovation Lab: How LP can be the modern-day heroes that future-proof your business.” GDR USA is the American branch of London-based GDR Creative Intelligence, which helps retailers track trends and develop strategies for the consumer-facing aspects of their business. Clients include Microsoft, P&G, Waitrose, Samsung, Tesco, Macy’s, Under Armour, Hilton and a few dozen other well-known names.

Mullan began by acknowledging that loss prevention is not, traditionally, the first place one would look in a retail organization if trying to track down its center of dynamic innovation. “Generally speaking,” he said, “you think of there being a tradeoff — greater security versus a better customer experience. But that’s not necessarily the case. Today it’s possible to build a better customer experience and increase security.”

A RISK-AVERSE INDUSTRY

Before getting into exactly how to do that, Mullan spent a few minutes discussing the fact that retailers tend to do relatively little innovating. They’re risk-averse — if something’s going to cost money and might not provide a return, management tends not to sign off on it. This is perfectly understandable: Retail is a tough, highly competitive, low-margin business without a lot of forgiveness for big mistakes. Right?

Well — right, Mullan might say, but unfortunately some people seem not to see it that way. In 2017, according to a Recode article, Amazon spent almost $23 billion on research and development, which comes out to almost 13 percent of the company’s net sales. And it knows not all of it is going to provide a return, Mullan said. “Jeff Bezos said, apropos of the necessity to accept failure, ‘To invent, you need to experiment. If you know in advance that it’s going to work, then it is not
an experiment.’”

Putting it in baseball terms, Mullan characterized Bezos as the kind of player who, when the bases are loaded, will go for a home run, seeking the largest possible score. In the same situation, most retailers will tend to bunt: Take the lowest possible risk in the hopes of getting at least one run in.

That’s understandable, but in Mullan’s view, two big problems remain. One is the presence in the market of Amazon (and the Chinese; Alibaba is also swinging for the fences), forcing other players to innovate whether they want to or not. The other is that retailers are all trying to crowd into the middle after years of bunting.

THE VANISHING MIDDLE

Forty years ago, the middle was a pretty good place to be; there was a huge middle class in the United States. In 1970, according to Pew Research, 10 percent of aggregate U.S. household income was held by the lower economic sector, 62 percent by the middle and 28 percent by the upper. By 2014, it was 9 percent lower, 43 percent middle and 49 percent up-per.

The middle class is shrinking, in other words, and many of the businesses it supported are in trouble or gone. At the lower end, the dominant player is Dollar General. Bank of America has been tracking the top 33 retailers in the U.S. for a long time, Mullan said. “Since 2008, 76 percent of the new store openings among those companies have been Dollar General stores. There are now more Dollar Generals in the U.S. than there are McDonald’s.”

The other end is what’s called premium. Premium means highly differentiated — something you can’t get anywhere else. Outside the luxury market, it’s very difficult for a premium retailer to differentiate themselves on product offering; if Macy’s has it, Saks and Nordstrom probably have it too. Nor can retailers differentiate themselves on price, really, not if they want to stay in business.

Which pretty much leaves customer experience as an area for differentiation — and a dilemma. On the one hand, as Mullan says, innovation is more important than it’s ever been. On the other hand, it gets harder and harder to justify spending money on it.

“Anyone who works on a retail innovation team will tell you this is hard going,” he said. “They’re trying to make a business case for new technology at their stores, and they just can’t get over the line, because the return on investment isn’t guaranteed. As I say, retailers hate risk.”

WE NEED 
A NEW HERO

IT-originated proposals, Mullan said, go through the same grilling and encounter the same fate. “We’re obviously looking at a tech-first future, but again, for innovation teams to invest in technology is difficult. It takes a lot of time, it takes a lot of money and there’s risk involved, so what they typically do is invest in a few beta stores. Also, typically, because it’s only been tried in a few places, it doesn’t get adopted. It’s a vicious circle — people can’t be bothered to learn a new behavior when they’re shopping if they don’t think it’s going to be rolled out everywhere. Then, because it hasn’t been adopted, it doesn’t get rolled out everywhere.”

In other words, we just keep bunting; meanwhile, the looming problem, as Mullan sees it, is that Amazon is more likely to learn the bread-and-butter of retailing than retail is to learn the secrets of big tech.

“We already know they’re trying,” he said. “We see it in Amazon Books, where they’re learning retail for themselves, trying to understand what’s going on. And, of course, we see it in the acquisition of Whole Foods.”

So retail needs a new hero — someone to take the lead in innovation. Which raises a question: If the marketing/innovation or IT teams can’t get it done, who can make innovation happen? Mullan’s candidate is loss prevention.

This sounds a little improbable, but he makes a good case for it. Why LP? Because technologies known to reduce shrinkage can also be used to provide a better customer experience. The way to sell them to management is not based on innovativeness and glitz, but on the same basis as any loss prevention initiative.
“LP business cases are easy to quantify and easy to understand,” Mullan said. “And you are a trusted source. Your work, done well, typically provides a clear return on investment that keeps CEOs, CFOs and shareholders happy.”

A NEW IDENTITY FOR ASSOCIATES

One such technology Mullan cited is RFID. Macy’s is running a pilot program with women’s shoes that allows it to track every individual piece of stock in the store. This has improved display compliance by 6 percent and improved omnichannel fulfillment. In the past, the company would only OK a click-and-collect sale if the system showed at least three pair in stock. Now it can do it with one, because the RFID system is so precise. Macy’s knows exactly where that pair of shoes is: “Yes, ma’am, it will be waiting for you at counter so and so.” This makes the customer happy. It also makes it very, very hard to steal a pair of shoes.

And it makes it a lot easier for associates to enhance the customer experience. At Ralph Lauren, associates can give shoppers style advice based on the items they’ve brought into the fitting room. Customers can order different sizes or colors from the fitting room and someone will bring the products to them without shoppers having to go back out to the floor.

Another RFID example Mullan offered is that of an Israeli food store chain called Wasteless, which applies RFID chips to bags of vegetables and salad at the point of being bagged, which allows it to track the exact date and time of the bagging. As the salad gets older, the price comes down, via e-ink labels on the shelves. Customers can decide between spending a bit more for a fresher item or taking something that’s almost past its sell-by date/time. This has improved sales and provides a better customer experience. The same technology, Mullan noted, also prevents people from stealing things.

EYE IN THE SKY

Another double-threat technology is the combination of high-definition cameras and real-time analytics. The cameras, like the RFID tags, are a classic LP tool with an easily demonstrable ROI. They can spot somebody trying to sneak out with merchandise under their coat.

But they can also spot people bunching up at a point-of-sale station and alert the store manager to open another checkout line. They can be used in a big electronics store to spot an unattended customer in a high-value aisle, ping a floor manager and draw attention to someone looking at a really expensive Samsung TV.

The last technology example Mullan used, also involving cameras, is facial recognition and contactless payment, where loss prevention and customer service essentially merge. In China, this is becoming standard; the system knows customers’ faces and their credit card account numbers. It sees them come into the store, watches what they pick up and charges them for it as they leave.

OTHER CONSIDERATIONS

There are Orwellian overtones to some of this technology, Mullan said. “Along with loss prevention and customer service, I’d like to introduce a third category: privacy. Maybe we can make the store more secure and simultaneously improve the customer experience — but not at the detriment of the customer’s privacy.”

That ship may have sailed as far as the Chinese are concerned — in Hangzhou, which is the center of a metropolitan area with a population of around 21 million, Alibaba has basically gotten permission of every single citizen. (“Big data and AI,” says Alibaba’s CEO Jack Ma, “should be used in the prevention and prosecution of crime.”) In the West, partly due to the efforts of the European Union, privacy and the right to be left alone are still widely debated issues.

Returning to his main point, Mullan closed his presentation with a call for loss prevention specialists to collaborate with their colleagues in other areas to help drive badly needed retail innovation efforts. “All the lines across everything are blur-ring,” he said, “and I think that means you guys — LP — need to start bringing your expertise and experience to bear with other teams. They will value you for it.”

Peter Johnston, a freelance writer and editor 
in the New York City area, can be reached at pjohnston@foxhoundenterprises.com.

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