In recent years, Gap Inc. has implemented a number of electronic article surveillance (EAS) solutions, including in-store applied hard and alarming tags, factory-applied source/soft tag labels, and factory-applied hard tags (FAHT). This 2009 article explores the key decision points, financial rationale, infrastructure requirements, and benefits of why Gap Inc. moved toward a blended solution, the key component of which was the FAHT program. This article also seeks to provide a framework for your company to evaluate the appropriate strategy that Gap Inc. found very effective.
Source Tagging
As of 2009, Gap Inc. had implemented the FAHT program in each of its three brands—Gap, Banana Republic, and Old Navy—in North America and Europe. However, each brand had an existing soft tag/security label infrastructure in place prior to the transition to the FAHT program.
FAHT differs from traditional in-store applied hard tags and factory-applied source/soft tags in three key ways. The key differences will vary depending on your current EAS strategy—that is, if you are using in-store applied hard tags, source/soft tags, or if you do not have any tagging program.
Labor Savings. By moving tagging out of the store, there are significant labor savings. As you can imagine, paying factory wages in Vietnam to tag is significantly less expensive than paying for domestic store labor in New York City.
Shrink Savings. The well-established benefit and deterrence of applying a hard tag not only reduces inventory shrinkage in the store, but (with FAHT) throughout the supply chain, by placing EAS pedestals at the entry way of distribution centers.
Ongoing Cost. With in-store hard tags, there is a one-time expense to purchase the tags with limited replenishment due to in-store tag attrition in later years, while there is ongoing annual expense with FAHT.
These differences force retailers to consider the following five key areas when exploring the feasibility and financial benefit of implementing a FAHT solution.
• Shrink rate/dollars and sales impact
• Cost of tags and product coverage
• Store payroll savings
• EAS infrastructure and vendor consideration
• Location of shrink in your real estate portfolio
Gap Inc. built a strong business case by successfully triangulating these five components. In other words, the company was able to show that a FAHT strategy reduces overall expenses, through lower shrink and payroll, even though these savings are partially offset by higher expenses associated with purchasing the factory-applied hard tags on an ongoing basis.
Shrink Rate/Dollars and Sales Impact
Not surprisingly, factory-applied hard tags have a greater positive financial impact when a company has higher shrink dollars and/or a higher shrink rate. Simply stated, the greater the shrink, the greater the dollar savings from tagging. This is the case for almost any tagging technology.
At the time of this article’s original publication in 2009, Gap Inc. had experienced shrink savings of 5 to 70 percent in product categories protected by FAHT, with the lower-end savings experienced in categories previously protected by in-store hard tags and the upper-end savings on categories without any previous protection.
The most astonishing impact of Gap Inc.’s FAHT experience was the shrink improvement realized in departments that were previously covered by in-store applied hard tags. No benefit had been expected in these categories. However, due to the near-perfect tagging compliance from the factories and the uniformity in tag placement, the company experienced an improvement in shrink. In conjunction with merchandising and store operations, loss prevention communicated specific placement standards to the factories for all product tagged.
The other key benefit associated with reducing shrink is the opportunity cost of not being able to sell the merchandise. Without a doubt, sales and margins improve when shrink is reduced because the product is sold rather than stolen. The challenge is estimating the recapture in gross margin dollars due to the reduced shrink. The recommended method to include this benefit is to use a weighted average gross margin of the tagged product multiplied by the estimated shrink savings. This way, not only is the benefit from shrink savings included in your business case, but the margin upside as well.
Cost of Tag and Product Coverage
The second critical component for evaluating FAHT for your stores is to understand the price your company would pay for tags. Pricing largely depends on the expected volume of tags your stores will use annually. Tag cost is the most crucial component of the FAHT evaluation because the business case is more sensitive to the tag cost than any other input. This is a result of the significant number of tags that will be purchased each year.
Depending upon the size of your company and the number of units tagged, your tag purchases may reach into the tens of millions or more. The price that you pay for each tag on a per unit basis from the electronic article surveillance provider will rarely be the final cost of adding the tag to the merchandise. The same holds true for any source tag or label.
There are typically five factors to consider when determining the total tag cost, referred to as the “fully loaded tag cost.”
• Tag price
• Cost to ship tag to factory from point of manufacture
• Duties applied by country of production
• Retailing country customs duty
• Applicable rebate if, for example, you recycle or reuse the tag and can negotiate a rebate from your recycling company or provider
Fully Loaded Tag Cost. Duties vary by factory location and may be applied to both the tag and the freight costs. The customs duty may not apply and therefore lower your total cost of ownership if your company uses a recirculation program for sending the tags back to the factory (the factory cannot be in the retailing country) and your company has a government customs ruling in place to identify that the tag will be removed from the merchandise and recirculated.
It is advisable to partner with your company’s finance and/or production departments to determine the exact fully loaded cost for your tag. You should research this important aspect of the FAHT program because it can have a significant impact on your tag cost and business case.
Product Categories to Tag. When evaluating what product categories to tag, it is important to consider the shrink improvement, incremental cost of the FAHT program, and payroll savings. Generally, higher-priced, lower-unit categories are more likely to show a positive return on investment as the savings on shrink and payroll exceed the incremental cost of the tags. In contrast, lower-priced, higher-unit categories are less likely to demonstrate a positive return because the cost of the tags overwhelms the shrink and payroll savings.
Shrink-reduction estimates due to FAHT should be a combination of historical rates from your company in conjunction with improvements ranging from 5 to 70 percent, depending on your current EAS solutions. As a rule of thumb, Gap Inc. used a 20 to 25 percent improvement.
Gap Inc.’s decisions regarding which products to tag were based upon both financial and production-level analysis; that is, the financial benefit of applying a FAHT at the product department level and the ability to apply a tag without damage to the merchandise. When these two decision points met, a FAHT was applied.
For example, categories tagged generally include denim, bottoms, outerwear, dresses, suiting, sweaters, and woven shirts. Categories not tagged often include knits, furnishings, and accessories. At this point, select product may receive a soft tag/label or stores may elect to use an in-store hard tag or an alarming tag applied to high-shrink items, such as leather handbags or silk dresses to minimize shrink in these categories with a high average unit retail.
Another key consideration for Gap Inc. revolved around how to protect children’s merchandise (0 to 12 years). In order to meet Gap Inc.’s stringent product-safety standards, tags with sharp points cannot be applied at source to this product category. In addition, tags with metal components may activate a factory’s needle-detection machine. Therefore, Gap Inc. elected not to include children’s merchandise in the initial FAHT program.
Interestingly, results indicated that theft has migrated to children’s merchandise as it was not protected with a tag. To mitigate loss in this category, the company began testing a tag developed specifically for children’s merchandise in an effort to overcome the safety and needle-detection issues.
Store Payroll
As stated earlier, moving tagging out of the back of the store to the factory provides opportunities to reduce store payroll, likely your company’s largest controllable expense category. Gap Inc. realized this payroll decrease through higher productivity in store receiving, with a 30 percent increase in units per hour (UPH) standards.
To assess the payroll allocated to tagging, you will likely have to partner with your finance and store operations teams. Once potential payroll savings are determined, this can be included as a benefit in your business case. Reducing payroll expense not only provides additional benefit, but it is also an opportunity to simplify store operations and gain support from your field and store operations business partners. Without fail, Gap Inc.’s in-store field teams recognized the positive impact on workload and morale through the elimination of in-store tagging.
EAS Infrastructure and Vendor Consideration
Since tags are applied at the factory and merchandise flows to all stores, it is important to emphasize that a FAHT program requires a consistent, single-technology EAS infrastructure in all stores. This requirement may cause you to add and/or replace existing EAS equipment.
If necessary, the sales on the secondary market of your existing EAS pedestals, detachers, and tags can be used to pay for or offset the cost of new equipment for a FAHT program. You may also need to consider any remaining book value associated with the existing equipment and the potential accounting implications.
Moreover, your existing equipment will likely play a role in your decision about a FAHT vendor. The ability to leverage existing equipment can reduce the overall cost of rolling out FAHT and provide a strong return on your equipment investment.
Additional considerations when evaluating a vendor is the aforementioned cost of the factory-applied hard tags, and the vendor’s ability to reuse and/or recycle the tags to reduce tag costs over time. The vendor also may be able to provide opportunities to reduce the tag cost through volume discounts and long-term contracts. This is an important evaluation because the lowest possible tag cost is crucial to developing a successful business case.
Location of Shrink in Your Real Estate Portfolio
The final decision point requires an understanding of where your shrink is occurring across your store base. One of the greatest benefits of a FAHT program is its universal coverage in all stores. This can also be its greatest downfall.
For example, if your shrink is highly concentrated in one region with little to no shrink in the remaining regions, a FAHT strategy is, in all probability, not the right solution for you to reduce shrink. In this scenario, the greatest financial benefit would likely come from using a regional in-store hard-tag strategy where you are concentrating the expense and savings associated with tagging where the shrink is occurring.
However, if your real estate portfolio covers a larger, more geographically dispersed area with shrink less concentrated in any particular region, a FAHT program may be the right strategy for you.
Implementation of FAHT
In addition to realizing the shrink savings associated with the FAHT program, solid program execution is a valuable way of gaining support for the success of your overall merchandise protection strategy. The program is essentially a production program with the tag or label considered “trim,” just like a shirt button or denim rivet. Partnerships with the production, sourcing, and store operations departments are critical to the program’s operations, and it is important that they understand the entire business case.
For example, increasing merchandise manufacturing costs by adding a security tag or label may not be well accepted by a merchant, which may lead to poor compliance in adding the tag to the merchandise bill of materials. However, when the same merchant understands that the program will enable stores to retain the product to sell at full price, they will understand that the tags provide a significant benefit.
Sourcing and production teams will be important points of contacts for your tag provider and factories. They can provide planning forecasts and factory details to yield on-time tag deliveries, as well as directing vendors on placement, costing, and ordering details via technical bulletins.
Store operations may support the program by evaluating and providing timely feedback, including tag application and factory compliance to adding the tag.
It is noteworthy that tag recycling/recirculation programs also support many environmental principles and practices that both customers and employees value today
In-Store Tagging
As of 2009, Gap Inc. had largely moved away from in-store tagging for the reasons described above except in particular circumstances. However, depending upon the factors involved, in-store tagging can have a greater financial return than FAHT. This can occur when one or more of the following criteria are met:
• A lack of a fleet-wide EAS infrastructure,
• An acute shrink issue in a particular geographic area, and/or
• A product mix where significant hard tagging may not be suitable.
The first and foremost challenge with FAHT is the requirement to have the aforementioned fleet-wide consistent technology platform. The financial return from shrink reduction may take years to pay off the cost of the infrastructure. This depends upon your company’s existing infrastructure and the size of your shrink opportunity. Your company may obtain a higher return on investment with a more surgical, less capital-intensive approach by using in-store applied hard tags.
Second, as was previously stated, FAHT is a “shotgun” or “blanket” approach, whereas in-store tagging can leveraged in a “rifle” or “scalpel” approach. For example, if there is an acute shrink issue in Dallas, the city and surrounding area can be covered while not simultaneously covering Phoenix, where there may not be an issue. This way, your resources can be focused on reducing shrink in specific geographic areas of concern.
Third, the product mix found in your stores may not be best suited to a FAHT solution. For Gap Inc.’s predominately soft-lines product mix, FAHT was an optimal solution. However, your stores and product mix may be different and in-store tagging may operationally be a favored solution.
This was the case for one of Gap Inc.’s brands where these three factors combined to favor the continuation of in-store tagging. First, this brand did not have a fleet-wide infrastructure to enable FAHT. Second, there was not enough shrink savings associated with fleet-wide tagging to justify the infrastructure investment. Finally, the average unit cost/unit was lower in this brand, which further made the ongoing cost of FAHT less palatable versus the one-time cost of in-store tagging.
Overall Benefit
Gap Inc. gained relative short-term benefit following the transition to source-tag labels. Stores that had not previously protected their merchandise with an in-store hard-tag program realized a significant improvement in shrink; however, the opposite held true for stores that used hard tags. Therefore, the larger benefit of the soft tag program was the operational framework it set to build the FAHT program upon.
Gap Inc. realized significant savings and success from implementing the FAHT program. The framework of five factors included in this article helped the company to effectively and successfully evaluate the financial, store, and production impact of moving to a FAHT program. Presenting a holistic review of the optimal shrink-mitigation strategy, whether it be FAHT or in-store tagging, enabled Gap Inc. to gain internal buyoff from business partners in finance, store operations, production, and merchandising in addition to our own loss prevention team.
By consistently applying this methodology, by being transparent with our assumptions, and by ultimately delivering on what we promised, LP has gained traction and credibility internally. Hopefully, by sharing our experience and successes, your company can leverage the framework described in this article to make informed decisions about the right merchandise-protection strategy for your stores.
This article was originally published in 2009 and was updated February 3, 2016.
