Retail tales of knaves and fools

Alan Fisher shares some salutary tails making the point that most inventory theft is by staff and most retail failures are due to poor decision making.

There was a resort in San Diego County that I worked with for several years. Every time new staff came on board, I would venture over (with my clubs, of course) and spend some time teaching them about procedures and reports to review.

On one such occasion, the new guy who had been promoted, told me that his predecessor instructed him to print an inventory report and then write quantities that would be within the variance that the controller would approve. So if they were supposed to have 48 pairs of shoes, but there were only 38, he thought 47 would be a good compromise. This predecessor had been stealing and fencing products for a couple of years by then and landed a plush territory for a golf buggy company.

Rather than wait for a true inventory count, I decided to forewarn the controller about the hit they were going to take. Most retailers try to attain a shrinkage rate of one to two percent and that month, it was eleven percent. Now that’s not eleven percent of the inventory he took since shrinkage is calculated by dividing annual variance at cost by annual sales at cost. But it was a huge number. They never did go after him, though.

Another resort was in Florida and the director of golf was responsible for all retail except for club sets sold out of the learning centre. He told me that he knew something wrong was happening there, but never had the proof or authority to do anything about it. After he installed a computer system with a strong inventory system, he finally was able to track what was happening. Sure enough, there were over 100 sets of irons that were missing on what he estimated to be an annual basis.

He did not let it slide but brought in each employee individually into a small room in the basement area. Seated across the table was the sheriff. Each employee was confronted with the situation and given the choice of signing an admission of guilt with an agreement to never return to the resort OR they could take a ride with the sheriff. No one took the ride.

The point to consider is that most theft in retail occurs internally, not from shoplifters.

My favourite on stupidity was a call on a prestigious club in Los Angeles. The board members of the club had decided to purchase an inventory control system for the club pro and his golf shop. As I met with the board, the real facts were starting coming to light. The club pro was facing bankruptcy in his business. His inventory was a mess and he could not pay his bills.

Then, the bombshell was dropped. Three years previously, the club had voted to have a ‘Mill River Plan’. For those of you not familiar with this concept, members pay an annual fee ($100 to $300) and then have the right to purchase merchandise at cost plus ten percent. That’s a 9.1 percent gross profit before OPEX and he was responsible for his employee salaries. I almost fell out of my luxurious swivel chair.

So I addressed the board and said, “I assume most of you are captains of industry, but how many of you would invest in or start a company that could only attain a 9.1 percent gross profit? What do you think a major retailer (I used the top-of-the-line chain Nordstroms for my example) would do if we voted to force them to price all merchandise at ten percent over cost?” Of course, I got a few harrumphs and nervously swivelling executives. The board president said he guessed it hadn’t been such a good idea.

I further explained that if the Mill River fee was $200 per year, then the 350 members would pay him $70,000 at the start of the year. That would be his best day of the year. After that, he started losing about 25 cents for every dollar he sold. When he reached $280,000 in sales, he broke even and with $750,000 in annual sales, it was no surprise that he was facing bankruptcy. My suggestion was to buy the shop from him, pay him the exact cost he paid for the inventory (it was about $500,000 counting all of the hidden storage areas), and make him an employee.

The bad side (for me) was that I had gone up there to sell them an inventory control system for a golf shop. They took my advice, but unfortunately, did not buy the system I was selling. Outsmarted myself, but I do that frequently.