CONVERGING TECHNOLOGIES

John Karolefski / additional reporting: Michael Garry

Improvements in loss prevention technology may be coming just in time for the supermarket industry.

Not only are individual applications getting better, but they are now merging to produce new ways to reduce shrink. The bottom line: A new era for loss prevention is under way that retailers say should help them weather a sluggish and uncertain economy. "Without a doubt, technology is getting better," said Al Hrubeniuk, director of loss prevention services for Smart & Final Stores, Los Angeles. "It's given us the ability to measure shrink. Once you measure it, you can manage it. In many companies, that shrink number is as big as their profit number. So, the better they are able to control it, the more profitable and efficient their operation is going to be."

Marc Jampole, spokesman for Penn-Traffic, Syracuse, N.Y., said, "Anything you can do to improve your gross margins is going to help your company. But in recent years, the answer has not been to raise prices. So loss prevention is something that every supermarket is looking at more."

What they're looking at today are enhancements in techniques such as exception-based reporting of POS data, closed-circuit television systems (CCTV) and electronic article surveillance (EAS). Moreover, many of the vendors marketing these systems are beginning to form partnerships aimed at integrating the systems to enhance their effectiveness.

An increase in shrink is not uncommon during a recession, said Joseph Pichler, chairman and CEO of Cincinnati-based Kroger, during an analyst's conference call last year. "We've seen a particular problem in health and beauty care items," he said. "We have some efforts under way to address shrink that involve changes in systems, planning and additional training. It's taking longer to execute those programs than we'd planned. But we are devoting substantial resources to shrink initiatives, and we believe they will be effective."

Many companies are relying on exception-based reporting as the cornerstone of their loss prevention technology program. This application involves POS monitoring software and data mining tools. It allows analysts to look for anomalies that would suggest such things as employee theft, training issues and mismatched returns, meaning a return that doesn't align with a previous sale.

One of the latest implementations of this software was announced last week by Triversity, Toronto, which said that the Army and Air Force Exchange Service (AAFES) has deployed Triversity's FraudWatch system at 1,200 stores in 32 countries, following a 250-store pilot last June.

FraudWatch can be delivered to users over the Internet via an ASP (application service provider) model and requires no software installation. AAFES used the ASP model during the pilot, then switched to internal hosting for the full rollout, said Triversity. "AAFES required a Web-enabled solution to distribute information easily and immediately to our loss prevention professionals," said Luis Merced, AAFES' chief information officer, in a prepared statement.

Last year, Winn-Dixie, Jacksonville, Fla., announced that it was rolling out a cashier monitoring solution from Trax Software & Consulting, Scottsdale, Ariz., in more than 1,000 stores, based on a 12-week pilot program. The system is designed to reduce cashier theft while also establishing a "coaching" atmosphere to improve cashier performance, according to Trax, which said it services 11,000 retail stores nationwide, including Albertsons, Ahold, and Supervalu..

Smart & Final's exception-based reporting system, XBR, from Cleveland-based Datavantage, goes beyond the POS system, which just provides routine information, according to Hrubeniuk. It now funnels data from all of the chain's 235 stores into one server and then extracts true exceptions.

"Every night, data from the POS systems are submitted to the server [at headquarters], and the numbers are all crunched. The following day, we're able to take a look at the exceptions. We run those exceptions on a weekly basis. In the past, it was like looking for a needle in a haystack. Now it's right there and easily accessible," he said.

Since April 2002, Wild Oats Markets has also been using XBR for exception-based reporting. "We get all the transactions on a daily basis," said William Navarre, national director of loss prevention. "We have 12 different control points set up. We utilize them to see if there are any trends relating to fraud or any training issues we may have. We use that information to improve our front-end operation."

Linking Video to Software

In CCTV systems, the latest improvement is the conversion from analog to digital, linked to the POS software, according to Tom Rittman, director marketing for Datavantage. Once a retailer gets a digital copy, it is time-date stamped and sits in the store in a readily accessible medium. If retailers have connectivity between the store and the corporate office and they identify a suspicious transaction with the POS monitoring software, then they can send out the register number, date and time to the digital video file in the store and pull back the video of that suspicious transaction.

About four companies have been piloting this in the grocery industry for the last 18 months, Rittman reported, but they prefer to remain anonymous.

Outside of the grocery industry, Staples and Finish Line, the sporting goods store, are now using this latest CCTV system. Finish Line's system combines XBR and Viewops, an online video service from Ivex, New York.

Rittman said use of the application will expand as adopt broadband connectivity between the store and the corporate office .

Smart & Final is using its digital video to dial into the stores to review a suspect transaction and quickly determine whether it's fraudulent or a training issue.

"Our exception-based reporting software has the ability to link to a digital video system if it's on a network and has an IP address," said Hrubeniuk. "The biggest challenge is getting these digital video systems on a company's network. There's an issue of limited bandwidth for critical operations and systems that run the stores. And there's a reluctance of the information technology personnel to share that bandwidth with new technology. They are very cautious and don't want this new system added to their limited bandwidth and perhaps even causing a crucial system -- such as a POS system -- to crash in a store."

Wild Oats operates digital CCTV with 16 cameras in each store. It is investigating the integration of video with the POS system, including exception-based reporting.

"We're analyzing that with our IT department to see how much bandwidth is required and to see if we have the ability to make that happen," said Navarre.

Last year, in another example of the merging of video and POS monitoring software, Trax and Mirasys Communications, San Francisco, announced they have completed a program at "a large, national supermarket chain" to integrate advanced CCTV capabilities with Web-based data mining software. "We have partnerships with most of the major providers of closed-circuit television and have products installed in stores," said Ron Southard, vice president of sales and marketing for Trax.

There is also progress in the convergence of EAS systems with exception-based reporting. Datavantage and EAS vendor ADT, Boca Raton, Fla., have partnered to produce an alarm-logging box that is attached to the wall near where the alarm may go off. If that happens, a supervisor can come over, scan the product that caused the alarm, and enter a code.

"We can take that code information back in the corporate office and report on it with our XBR product. They can stream that information with the sales transaction file," said Rittman.

"We can help the retailer find out things like how fast or how slow people are responding to alarms," he said. "Maybe a product is triggering the alarm because the vendor has improperly tagged the product at the source. Is there a procedural problem with the way they deactivate the tags that is causing the alarms to go off? A lot of that information is not being captured right now because there's no easy way to send that alarm information to the corporate office. But we can now capture that information with the alarm logging box."