Total Retail Loss 2.0: Moving Beyond the Theory

In October 2016, the Retail Industry Leaders Association (RILA) published the Beyond Shrinkage: Introducing Total Retail Loss report, the culmination of years of research work focused on helping the retail industry to develop a more overarching and fit-for-purpose definition and typology of the full range of losses that it experiences. Since then, the total retail loss (TRL) concept has received critical acclaim across the globe, not only for the way it has encouraged a broader more wide-ranging debate about what constitutes retail “loss,” but also its review of what the future role and responsibilities of the loss prevention function might or should be.

As a theoretical idea, it has received considerable academic and industry support, and in many respects, it is difficult not to agree with the underlying premise—that the existing definition of loss, focused almost exclusively upon “shrinkage,” a loose and ill-defined term generally only covering unknown forms of stock loss, does not adequately capture the complexity of modern retailing nor the fundamentally different risk landscape it has created.

In addition, while the world of retail loss was once characterized as a data desert, which drove rather myopic approaches to its conceptualization and control, the range of data sources now available provide new opportunities (and challenges) to both understand and measure a much broader palette of retail losses. This is particularly the case when it comes to an area such as e-commerce, which has seen remarkable growth in some retail sectors. This form of retailing presents a whole new range of loss prevention challenges, not least how losses associated with it will be measured, but also how subsequent control interventions might be assessed for their effectiveness.

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However, while theoretically appealing, TRL can also be seen as a highly disruptive and organizationally challenging concept to adopt, potentially requiring a fundamental reevaluation of how retail businesses organize themselves and prioritize their activities. Because it can require a cross-organizational assessment of not only how losses are defined and measured but also how they are collected, it can be difficult in the first instance to define lines of responsibility. And even when a retail business has populated the TRL typology with calculations of the monetary value of the various types of losses it proposes, developing a business strategy to then focus upon those areas of loss likely to reap the greatest rewards can be equally challenging. With the TRL typology spanning across losses occurring in physical stores, supply chains, e-commerce activities, and central business functions, achieving agreement on who is responsible for coordinating the business response may not be easy.

Over very many years of retail organizational development, boundaries of responsibility have been developed, ring-fencing budgets, resources, approaches, and priorities. The loss prevention team deals with shrinkage, store operations deals with out-of-stocks, supply chain looks after losses in product movement, the risk team deals with health and safety issues, and so on. TRL promotes a much more holistic and cross-functional dialogue to take place, potentially exposing vested interests, questioning areas of responsibility, and perhaps requiring a commitment to reorganize. In some respects, it might often be much easier to maintain the status quo, particularly at a time of considerable sectoral instability and flux.

However, as the original RILA report strongly argues, the benefits of adopting TRL could be profound, not least by unlocking a considerable amount of lost profits at a time when retailing is struggling to maintain currently levels of profitability. It offers a persuasive case at a time of sectoral dislocation. Indeed, a number of retail companies around the globe have begun to adopt TRL (or versions of it) while many others would appear to be in the process of assessing how they might go about doing this. Certainly, references to total retail loss as a concept at international retail loss prevention conferences and workshops is becoming much more common, suggesting that it may well be getting more and more traction amongst the loss prevention retail community.

What is not clear though is how and in what ways adopters have gone about using the TRL concept, nor is it clear the extent to which they have adapted the TRL typology to fit their particular circumstances. Do the thirty-three categories of loss outlined in the original typology actually make sense for retailers? Are they all relevant, or are some missing? Equally, it is not clear how any given company responded to the introduction of TRL. Did any reorganization take place, and if so how? For those considering but as yet not deciding to implement TRL, what are the barriers and what information and help do they require to drive their adoption forward?

Since the RILA report’s publication, the global retail loss prevention community has had the opportunity to reflect upon this different way of thinking about the management of loss. Does it make sense, is it manageable, and above all is there any real value in adopting this type of approach? The purpose of this new study is to offer reflections on how TRL has fared moving from an essentially theoretical proposition to the practical realities of the real retail world. In particular, the research was interested in considering five factors:

  • Awareness—do retailers know of its existence?
  • Adoption—to what extent have they begun to use it?
  • Review—is the original typology and concept fit for purpose?
  • Development—how should it change to meet the current retail context?
  • Implementation—what advice should be given to those thinking about adopting it?

The research was based upon an online survey aimed at major retailers in the US, Europe, and Australasia and in-depth interviews with senior loss prevention executives.

Awareness of TRL

The research found that almost nine in ten of those that participated in the online survey were aware of the TRL concept. While it should be noted that the sample was predominately skewed toward larger retailers operating primarily in the US and the UK, where the original research report has been widely disseminated and reviewed, the data does suggest a relatively high level of awareness of the concept. Perhaps more importantly, almost two-thirds of those who are aware of it suggested that it was having an impact on the way in which their businesses responded to retail loss.

Adoption of TRL

Of those that were aware, it is equally encouraging that over one-half stated that they had either fully embraced the concept or had adopted some of its elements. In addition, for those yet to adopt it, nearly 50 percent were of the view that they were likely to make use of it in the next twelve months. It seems that the TRL concept is gaining some traction in the industry.

Rationale for Engaging with Total Retail Loss
The survey results point to a number of key reasons why adoption was taking place (respondents could select more than one option), the most frequently selected being that the concept provided a better framework to capture all the losses that businesses were now experiencing (78%). The second most popular response related to the way in which the model offered greater opportunities to make a positive impact on business profitability (67%). This was then followed by its capacity to help organizations target their resources more effectively (58%). The least chosen reason for adopting TRL was that the business now had the data to enable it to be utilized (50%).

In addition, in-depth interviews with loss prevention leaders also revealed that the concept offered a way to ensure that the loss prevention function continued to be viewed by the rest of the business as both relevant and of value. As one interviewee put it: “Most companies are getting toward historical lows for shrinkage. We are now thinking, ‘OK, we have taken care of shrink; now what is next?’ All of us in the industry need to be thinking [about] what is next. It has got to go beyond just merchandise and cash loss. How does loss prevention remain relevant in a retail world, which is changing so much?”

Rationale for Engaging with Total Retail Loss
Respondents to the study identified a number of key benefits to adopting a more TRL-oriented approach to their work, focused particularly upon:

  • Managing retail complexity better
  • Generating greater transparency and accountability
  • Creating new opportunities to reduce retail losses
  • Maximizing the potential of the loss prevention team
  • Utilizing organizational resources more effectively
  • Enabling the business to better understand retail losses

Barriers, Concerns, and Challenges to Adopting Total Retail Loss
Use of the term “shrinkage” to summarize various types of retail loss stretches back over 150 years, and it has undoubtedly been the dominant driver of retail loss management ever since. The research was therefore interested in understanding what challenges retailers face when thinking about introducing TRL into their businesses.

As can be seen in the chart, challenges relating to data occupy the top two categories: data being spread across the business (44%) and not having the necessary data (23%). This is then followed by issues relating to the current organizational structure (14%). Other issues were much less prevalent. Less than one in ten felt that a lack of senior management support was a barrier (9%) while a lack of resource or perceived need or desire to embark on a TRL journey were not considered to be key concerns.

While data was undoubtedly the main concern for most respondents, some also identified the problems that organizational inertia and competing priorities can present. As one respondent put it: “Be aware of organizational inertia that has built up over time. There are hundreds of years of legacy to deal with. That’s why you need a change management input to help manage this transition.”

For those now delivering e-commerce platforms, its complexity and cross-functional nature also presented real challenges when thinking about TRL. As one respondent put it: “The trick and the challenge is getting to a point where the business is able to measure these losses accurately and manageably. It is a challenge because e-commerce has often been built incrementally with tentacles stretching out across the business, making it difficult to pull the data together.”

As can be seen in the 2.0 typology chart below, addressing the issue of how e-commerce-related losses should be defined and measured is a key part of the new version of the TRL typology.

Review of TRL

As detailed in the original report, the TRL typology, while based upon detailed research with the retail community, was very much a theoretical model, advocating a set of loss categories based upon their perceived meaningfulness to the industry and their capacity to be manageably measurable. Structured around four key centers—the physical retail store, the retail supply chain, e-commerce activities, and corporate-based losses—the original typology was based upon thirty-three categories of loss ranging from customer theft through to losses due to regulatory fines. Detailed feedback from respondents to this research suggests that not only are those original thirty-three categories a good representation of the main areas of loss, but also, for the most part, many retailers routinely measure and monitor them somewhere within their businesses.

Development: Total Retail Loss 2.0

Where the original typology lacked specificity was in relation to the area of e-commerce-related losses. Back in 2015 and 2016 when the research was first undertaken, few retailers taking part had much verifiable data on the range and extent of losses they were experiencing through their e-commerce activities. As such, TRL typology 1.0 had only two categories of loss to cover e-commerce losses. Since then, many retailers offering e-commerce platforms have begun to more accurately understand and quantify the types of losses that they experience through this type of retailing. It has therefore been possible, through the latest research, to update the TRL typology to take account of these developments. Version 2.0 now contains forty-two categories of loss, with e-commerce covered by eleven types. Given the evolutionary nature of retail risk and changes in the capacity to measure it, there is little doubt that future iterations of the TRL typology will be adapted to take account of these changes.

Implementation of TRL

While the research found that levels of awareness and rates of adoption of the TRL concept are encouraging, a common concern for many would-be users has been the lack of guidance on how they might embark on introducing it into their businesses. The final piece of the study was therefore aimed at bringing together the experience and advice from those that had begun to use aspects of TRL in their organizations. The research identified twelve factors to consider:

Get the C-suite on board. Like most significant change initiatives, senior management support is key. Generating urgency, facilitating financial support, and ensuring compliance—all are important in making a TRL-based strategy a success.

Develop a business case focused on the size of the prize. Making use of the available data and the organization’s appetite for change. Build a strong business case that focuses on the financial benefits that might accrue from adopting a TRL-based approach.

Adopt an incrementalistic approach to TRL. The TRL typology should be viewed as a palette of possibilities that can tailored to any given organizational context. Start small and build gradually. It is very easy to take on more than is realistically manageable in the first instance.

Identify quick wins first. At the beginning, only focus on those areas of loss that are likely to generate successful outcomes and are readily deliverable. Do not attempt too much too soon.

Organize for utilizing TRL. Think about who will be accountable for delivering a TRL-driven approach, what resources might be required (particularly analytical), and how to leverage support from across the business.

Advocate for TRL; act as agents of change. Pooling responsibility for managing all areas of loss covered in TRL is less than desirable. Ensure that those driving TRL act as “agents of change,” collecting the data, prioritizing the work, and then recommending ameliorative actions to those best placed to deliver them.

Review reporting structures for TRL. While there is little standardization on lines of reporting across the loss prevention industry, given the breadth and scope of TRL, a number of respondents to this research argued strongly that the finance function is best placed to provide overall coordination.

Prepare for organizational antagonism. The way in which TRL often cuts across a wide range of organizational responsibilities can cause the potential for functional disquiet based upon a perceived “land grab” by those driving the TRL agenda. It is important, therefore, that an assessment of the likely reaction of those impacted by a TRL initiative is undertaken, with a view to taking preemptive actions to explain, reassure, and support.

Think about the “right” name for your TRL. While the phrase “total retail loss” has become relatively well known in the global loss prevention community, it is important that individual organizations develop their own label for their TRL-inspired initiative, based upon their particular circumstances and context. For a number of respondents, moving to “profit protection” was regarded as a useful moniker that accurately described what the TRL-inspired initiative was aiming to achieve.

Avoid terminological confusion. It is important that as a business embarks on a TRL-oriented journey, the language that is used is clear and focused. By all means continue to use the term “shrinkage” as a proxy for unknown stock loss, but ensure that there is a clear distinction made between that and the broader loss picture that you are aiming to develop.

Use TRL as an analytical lens. As well as providing a broad ranging and overarching framework for assessing and managing retail losses, the TRL concept can also be used in a much more focused way to evaluate the likely impact of any planned innovation and change by a business. By stimulating a more comprehensive assessment of the likely impact across a broad palette of losses, the TRL model can enable a more realistic and balanced ROI to be calculated for any given innovation or retail change.

Remember that timing is key. Finally, like most decisions in life and work, timing can play a huge factor in dictating the success (or not) of any given initiative. Reflect upon the current organizational climate and whether it is likely to be broadly receptive (or not) to the introduction of a TRL-based approach. Where the head winds are deemed to be too strong and other priorities too dominant, then delay may well be the right approach.

Moving Forward

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As General Eric Shinseki rather elegantly put it, “If you dislike change, you’re going to dislike irrelevance even more.” And this may certainly be the case for those in the loss prevention industry who regard their only responsibility as dealing with unknown loss (shrink). While for some parts of the retail sector it remains a dominant form of loss to focus upon, for others it is increasingly but one piece in a broader and more complex picture charting the erosion of retail profits by a range of types of losses. It is hoped that both this new research and the original work developing the TRL concept will enable the retail industry to strive toward a more coherent, integrated, and progressive approach to the management of losses and ultimately the protection of profits.

Download your FREE copy of the new report here.

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