After over thirty-five years in specialty retail loss prevention, there is not a lot that surprises Leo Doran. The two long-running “themes” of his professional life have been fighting internal losses and organized retail crime (ORC).
Doran is vice president of loss prevention for Chico’s FAS, Inc., the Fort Myers, Florida, company with $1.7 billion in annual sales and over 1,100 boutique shops. Doran sounds a bit philosophical, but also strategic, about the battle against retail shrink and crime, particularly in specialty retail: “The vulnerabilities lay within the boutique nature of our stores. We have an extreme service regimen and focus on our customers.”
But familiarity with retail shrink and retailers’ vulnerability to crime does not mean Doran is complacent. His contempt for such behavior is stronger than ever. For example, through the technology of CCTV, in which Chico’s is investing heavily, Doran has a ringside seat at the unfolding national ORC drama.
“Recently, I viewed a CCTV recording of three big guys ripping off one of our New York City stores. It was one of the most brazen acts I’ve seen in some time,” says Doran. “One guy stood in front of our two associates on duty and dared them to act while the other two emptied our front denim tables. They came in with open bags in hand and were gone in 45 seconds. They didn’t care who was watching. My first concern is that these guys are getting more aggressive.
“Earlier in the year, we were hit in Southern California by a group that had also hit many other area retailers. My jaw hit the floor when the Los Angeles Police Department told us they had recovered over $400,000 of Chico’s merchandise. We had seen the initial grab-and-run report for the period, but it was a lower amount. So my second concern is that the bad guys are getting more sophisticated. They know the scheduling; they know when the fresh merchandise hits the stores. With the electronic age, their tactics are better than ever.”
Doran knows that there are no silver bullets to prevent such egregious incidents. He spent several decades with Merry Go Round Enterprises, Factory Card, and Limited Too (Justice, now Dress Barn, Inc.). He has seen first hand how ORC gangs’ appetite for, and success in stealing trendy fashion has steadily increased despite advances in law enforcement and loss prevention.
Doran, however, is now developing and implementing what he hopes is as an effective, ROI-driven loss prevention framework for a successful specialty retail giant like Chico’s.
Start-up Mode…with a Twist
When Doran arrived at Chico’s in 2008, he walked into an unexpected start-up situation with the loss prevention program. At the time Chico’s was enjoying a five-year stretch of double-digit sales growth of its popular casual-to-dressy clothing, intimate apparel, and accessories. However, Chico’s shrink-rate growth had started to outpace sales growth. The two-person loss prevention department at company headquarters was outgunned.
Doran says that over the years, he had built a personal reputation as a loss prevention start-up expert, which is what Chico’s was looking for. He put on the hat of risk manager looking at Chico’s shrink landscape from a fresh, start-up perspective—everything from policies and procedures for cash handling and end-of-day close downs to the back room. The company’s point-of-sale (POS) environment seemed to be a magnet for suspicious transactions, particularly full-priced retail credit card returns on stolen merchandise.
Doran says he did not encounter any big surprises or mysteries. There was a need, though, to address basic fundamentals of blocking and tackling. Policies and procedures generally needed to be tightened. An early, decidedly low-tech decision to start using an armored car pick-up and cash exchange service at all stores pretty much solved the alarming and expensive issues of armed robberies and missing deposit cases.
More problematic was the dearth of standard, let alone networked and integrated, electronic technology. There was no closed-circuit television (CCTV) or POS exception-based analytics capability and no electronic article surveillance (EAS) program in place. There was lots of Chico’s hot, in-demand merchandise that was essentially undefended.
Doran started developing a turnkey proposal for an expanded loss prevention team and technology infrastructure. However, in Chico’s disciplined financial environment, it was clear that it would be difficult, probably impossible, to get a budget for a significant loss prevention headcount boost. “The solution to what was happening in the stores with shrink was more complicated than just adding head count,” Doran says. It was not just about the good guys outnumbering the bad guys.
Doran took a fresh look at the people resources he did have and how they were aligned with stores management. “We looked at how I could best coach the district and regional sales managers to ensure that they were, in turn, coaching, training, and touring with the stores managers. We needed to build that crucial alliance and trust throughout the loss prevention and stores operations management chain. That was all about relationship building and culture change.”
Doran also says he made it a priority to partner with the human resources organization to make certain that new-hire reference checks were completed. “We also developed a process of working together with the stores to pull together employee-related cases and move them forward as efficiently as possible.”
With that human and culture “crusade” under way, Doran and his team turned to technology for solutions to attack the growing shrink. “We needed proven weapons sooner than later. We needed to make a strong impact fast.”
Doran and Chico’s information technology and stores teams looked at POS exception-based reporting systems. Drawing on his experience from prior jobs, the team evaluated the leading, best-known systems. The winner was the XBR analytics system from MICROS Systems. “We did not need to invent a new tool, but just look at what was already deployed in the industry,” Doran says.
Chico’s saw the need to take a few jumps ahead of the normal learning curve by utilizing the new systems’ extra capabilities. The new system provided Chico’s with POS exception reporting as well as robust report generation, ad hoc queries, and automatic alerts.
For example, Chico’s immediately focused on fraudulent employee returns, specifically negative balance credit card transactions and merchandise credit returns. In the first eleven months, Doran’s team worked with the stores to resolve 270 cases. “We had what you could call an ‘infestation’ of people who thought they could…and did, in fact…get away with brazen criminal behavior against the company. The initial high-value cases were enormous—$30,000 to $80,000. We cleared those out. Cases since then are dramatically fewer in number and coming down in value, some to a tenth of what they were. To say the least, this has been a high-impact investment for the company,” explains Doran.
“Tracking and analyzing the incoming data and sending out alerts is giving our field team the ability to close out investigations in a more timely and cost effective manner,” he adds. “The entire LP team…including me…has become proficient at data analysis and using our data platform as imaginatively as possible.”
Doran explains that Chico’s now has the ability to look broader and deeper at the masses of data the POS exception-based system captures and stores. “We can look for somewhat asymmetric relationships among different typesof data. We can spot unusual, usually illegal, transactions and take action,” Doran explains. For example, one of the most useful queries combined net negative balance credit card transactions with employee purchase history. This identifies individuals who make purchases using the employee discount and then return the item for a refund at full value.
Another class of illegal transactions the system uncovered was employee purchases being paid for with a merchandise credit. “There is no reason for an employee to have a merchandise credit,” Doran says. “Those are for returns to a customer without a receipt and who was not identified in the original transaction. The employee would have been identified at the time of purchase and would therefore have received the appropriate refund.”
Employee bonus fraud is an issue for many retail organizations at which the ability to monitor employee purchase and return transactions does not exist or is applied inconsistently. The Chico’s loss prevention team designed reports that spotted transactions in which managers would buy merchandise during one fiscal period and return it the next fiscal period. There is now also a report that tracks employee returns of discounted online purchases for full refund in the store.
Doran says that in 2009, its first full year of operation, the POS system helped his loss prevention team bring down shrink by about 27 percent. “This equates to a shrink reduction of $3.4 million at retail value. We reached our target return-on-investment in just ten months,” Doran says.
Deterrent—Steal, if You Dare
Chico’s rapid climb of the learning curve of POS exception-based reporting and analytics has had as much to do with internal communication as with the system’s functionality and flexibility. As the system was rolled out, Doran made it a point to meet with leaders at each banner. He explained, with vivid examples, what the system could do. He asked the managers to distribute a letter from his office to all store employees explaining how the new system worked and what it was designed to accomplish.
Chico’s also prepared a 13-minute e-learning course, complete with a question-and-answer section, that is used for orientation of new employees and in stores that are experiencing an increase in shrink. “We find that our POS system is a deterrent to fraud,” Doran says. “During the hiring process, we explain the system. We have new applicants who just walk away. They decide not to work here because they know or have heard about how effective it is.”
Doran says that the POS system has been helpful in strengthening linkages between the loss prevention and other departments. “We’ve helped other departments by constructing reports that give them important data more easily than they could collect otherwise. For example, we developed a report of store paid outs, ranked them, and sent them to the regional managers. They went to the stores with higher spending and helped them reduce expenses.”
Doran says that the system is also useful for transactional research and analysis, such as tracking coupon redemptions and monitoring monthly return volume.
The Next Step—Watch and Wait
Even as Doran and his team rolled out POS exception reporting throughout the Chico’s stores organization, they looked at other potential components of a shrink reduction and prevention technology infrastructure.
After intense analysis, electronic article surveillance (EAS) was vetoed. “I’ve been a proponent of EAS all my career,” Doran says. “But we concluded that Chico’s business does not lend itself to tagging. Much of our merchandise is intimate apparel and fine fabrics, which we sell in a very intense customer service environment. Tags and the detection apparatus would be overly intrusive. In addition, 60 percent of our losses are in accessories, such as trendy jewelry and belts, which also do not lend themselves to tagging.”
Doran’s feasibility study of CCTV, however, produced a different conclusion. “When I joined the company, there was no serious commitment to in-store CCTV surveillance because it was considered intrusive. We pulled together a team from across company functions and representatives from each banner to evaluate various CCTV solutions. We won enough support to start testing a CCTV solution in June 2009. We have now over fifty stores with CCTV and are seeing a strong six-month return on the investment. We are finding new things to use it for it everyday,” Doran says.
A typical store CCTV configuration consists of three to four pan-point-tilt-zoom cameras on the sales floor and one or two cameras in the backroom. The new camera systems are networked and connect to a high-speed Internet connection and are centrally monitored in real time.
Doran also made certain that the CCTV and POS systems are integrated so that the cameras can capture exceptions at registers as they occur. This gives Doran’s headquarters team the ability to send instantaneous alerts to the stores. As more stores install the camera systems, alerts and incident reports can be broadcast to stores in a specific region, thus defending against an often-used ORC tactic of “invading” popular stores within a concentrated geography.
The CCTV capability also provides value across stores operations by generating video records of everything from personal belonging checks to customer traffic to merchandise set ups. Doran expects the CCTV implementation to move forward as it generates results and ROI. “There are major new benefits to be achieved from looking at how this technology can be deployed at our most challenged stores as well as in new stores and stores under renovation. Analysis of camera positioning, how walls on the store floor impact site lines, and positioning of cash-wrap locations will help us make better decisions.”
The Next Frontier
Arguably one of Doran’s most intriguing current projects is the integration of the POS exception-based reporting system with Chico’s e-commerce channel, the fastest growing segment of its business. “I believe we are one of the first retailers to use a POS system to look concurrently at both point-of-sale and direct-to-consumer (DTC) online transactions.”
Even as loss prevention and law enforcement experts predict alarmingly strong growth in online retail fraud, Doran is determined to get ahead of the curve. From his first months at Chico’s, he realized that the most impactful loss prevention gains, including defending against ORC and online fraud, have more to do with smart technology investments than physical headcount.
Doran has established a DTC fraud unit consisting of one manager and three specialists and also has two loss prevention analysts on staff. With a loss prevention technology focus, Doran says, “our entire team is cross trained and is disciplined about analyzing incoming data from across the company’s banners—both the brick-and-mortar stores and our three e-commerce sites.”
Chico’s high-speed, business-class, Internet network, called BOSS (Boutique Operations Support System), is at the heart of the company operations, supporting the stores operations as well as loss prevention, employee training, and retention
“BOSS is extremely effective. For example, when we launched our new loss prevention module to specific boutiques and associates, we could measure the completion rate, seat time, and scores on the module’s nine-question learning review. The BOSS system will also allow communication and task information to be delivered to boutiques that is timely, relevant, and easily accessible,” Doran explains. “A major project like inventory preparation can be broken down into individual tasks so the boutiques do the right thing at the right time. Task completion can be monitored for compliance.”
Brains Over Brawn
Doran seems proud that Chico’s has recently started a program with the Great Place to Work Institute. “This program is strongly supported by our leadership team. The goal is to make the Fortune magazine Great Place to Work Top 100 list within the next two years.”
Doran is quick to quote Chico’s corporate mantra that its company culture fosters personal development, open dialogue, and risk-taking innovation in an environment of trust. Just as important to Doran personally is that the Chico’s leadership team “understands the value of loss prevention and supports us 100 percent in our mission of safety, shrink reduction, and providing shareholder value.”
But has Chico’s investments in loss prevention technology given it the silver bullet to defeat ORC and future new infestations of internal crime?
With shrink steadily declining, it appears that Chico’s “brains over brawn,” technology-driven strategies are working. While EAS implementation is not on the drawing board, Doran says that the most powerful weapons in his arsenal are POS, CCTV, and the integration of the two systems. Doran believes that “the earlier we can detect illegal activity and alert our stores, the more effective we will be in controlling losses.”
Chico’s FAS, Inc. (NYSE: CHS), established in 1983 and based in Fort Myers, Florida, is a women’s specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items. Under its three banners, the company has annual sales of over $1.7 billion, and operates 1,120 specialty stores, including stores in 48 states, the District of Columbia, the U.S. Virgin Islands, and Puerto Rico. Chico’s corporate website is at www.chicosfas.com.
The Chico’s banner operates 599 boutique and 45 outlet stores, publishes a catalog during key shopping periods throughout the year, and conducts e-commerce at www.chicos.com.
The White House | Black Market banner operates 333 boutique and 17 outlet stores, and conducts e-commerce at www.whbm.com.
Soma Intimates is the company’s newest banner with 86 boutique stores and four outlet stores. Soma also conducts e-commerce at www.soma.com.