Low Shrink Stores: The Best ROI for LP in 2009

2. Low Shrink Stores: The Best ROI for LP in 2009 & David Lund John Liesching

3. Our Objectives We intend to cover the following three objectives during our session today. “Ferocious debate among friends” on what a low shrink store is Quantify the value that we believe is being left on the table Leave you with 3 key action items that you can takeaway to realize that value at your company this year

4. Why Focus on Low Shrink Stores? Given the state of the economy and its impact on most LP budgets, we believe there is a tremendous opportunity to drive significant bottom line results with limited spend. • Generally strong management teams • Established core LP programs • Demonstrated good execution • Typically have the ability and appetite to do more

5. Case Study -- Company X This company follows the leading practice of a three tier approach to store shrink segregation. • Three tier approach to shrink focus • Red -1.40% and above • Yellow -1.10% to -1.39% • Green -1.09% and below • Traditional attention is placed on “high-shrink” stores • “Low shrink” stores also receive special maintenance

6. Whack-A-Mole Syndrome Case Study -- Company X A group of stores were tracked for three years as focus was applied to both traditionally high shrink stores and low shrink stores in an effort to maintain and increase the “low shrink” contribution to the overall company. Starting Point Year 0 First Hurdle Year 1 Finish Line Year 2 • 30% Red Stores • 14% Yellow Stores • 56% Green Stores • 30% Red Stores • 13% Yellow Stores • 57% Green Stores • Marginal (5%) improvement in overall shrink • 16% Red Stores • 11% Yellow Stores • 73% Green Stores • Significant (20%) improvement in overall shrink Results:

7. Leaving the fairgrounds… What can you do to get away from the whack-a-mole syndrome? • Provide more attention to the “Green” stores • Develop Shrink Reduction Plans for all stores • Teach action orientation vs. memorization • Raise the Bar regularly . . . to lower overall shrink

8. Leaving the fairgrounds… Provide more attention to the “Green” stores What can you do to get away from the whack-a-mole syndrome? • Low shrink stores are traditionally left alone • Specifically budget and re-direct time spent auditing for general compliance • Use time for relationship building and developing “custom” shrink reduction activity

9. Leaving the fairgrounds… Develop Shrink Reduction Plans for all stores What can you do to get away from the whack-a-mole syndrome? • Recognize and insist that all stores can get better—don’t let good performing stores off the hook • Target store specific high shrink departments/ sub-departments and items and put action in to place • Identify and address operational contributors in the plans (i.e. administrative avenues of shrink)

10. Leaving the fairgrounds… Teach Action Orientation What can you do to get away from the whack-a-mole syndrome? • Empower associates to take specific action related to high risk product in their specific store • Contribute to overall culture of honesty and awareness • Create a sense of ownership and build protective passion

11. Leaving the fairgrounds… Raise the Bar . . . To Lower Overall Shrink What can you do to get away from the whack-a-mole syndrome? • Regularly evaluate and reset the levels for what you consider low shrink and high shrink stores • Establish acceptable tier percentages and manage to those numbers • Force the “reallocation” of labor to the appropriate stores to continue to drive shrink down

12. Our Objectives We intend to cover the following three objectives during our session today. “Ferocious debate among friends” on what a low shrink store is Quantify the value that we believe is being left on the table Leave you with 3 key action items that you can takeaway to realize that value at your company this year

13. How Do You Define Low Shrink Stores? Many retailers segment their stores as “Red, Yellow, Green” with the focus primarily being on their worst (“Red”) stores. Sales and Shrink as a Percent to Total Shrink as a Percent to Sales for Red, Yellow and Green Stores Depending on how you segment the stores (by Shrink $, by Shrink%, etc.) and where you draw the line, these pictures can look very different Yields Shrink % Stores

14. How Should You Define Low Shrink Stores? ILLUSTRATIVE 0.6% 1.4% 2.0% 2.2% 2.4% 2.8% 0.5% 0.8% 1.6% 1.1% 1.3% 1.2% 1.2% 2.0% 0.9% 1.4% 1.0% 0.7% 1.8% Avg 1.8% Shrink 2.6% Today, we typically view Low Shrink Stores as being the ones that have the lowest shrink compared to all stores in the chain. Today Low Shrink Stores Stores that have the lowest shrink compared to all stores Avg 0.8% Shrink

15. How Should You Define Low Shrink Stores? Tomorrow, we should think differently about how we identify our low shrink stores. Instead of them being the lowest shrink stores in the chain, they should be the stores that are consistently outperforming their peers. Today Tomorrow Paradigm Shift Low Shrink Stores Stores that have the lowest shrink compared to all stores Low Shrink Stores Stores that are outperforming their peer stores

16. ILLUSTRATIVE 1.4% 1.9% 0.6% 1.4% 2.2% 2.4% 1.9% 2.2% 2.8% 2.4% 1.6% 2.8% 0.5% 0.8% 1.2% 1.6% 2.1% 1.1% 1.3% 1.2% 1.2% 2.1% 1.8% Avg 2.0% Shrink 0.9% 1.4% 1.0% 0.7% 2.6% 1.8% Avg 1.8% Shrink Avg 0.8% Shrink 2.6% What does ‘outperforming their peers’ mean? Emerging trends in LP are replacing the “one-size-fits-all” approach with a much more surgical approach addressing specific store needs. A suggested way to accomplish this is by introducing Store Clustering or Shrink Peer Groups. Today Young Urban Professionals Shift

17. ILLUSTRATIVE 1.4% 1.9% 2.2% 2.4% 2.8% 1.6% 1.2% 2.1% 1.8% Avg 2.0% Shrink Avg 2.4% Shrink 2.6% Avg 1.8% Shrink Avg 1.3% Shrink 1.4% 1.9% 2.2% 2.4% 2.8% 1.6% 1.2% 2.1% 1.8% 2.6% Shrink Peer/Cluster Groups We create these shrink peer/cluster groups for the following reasons: • To measure shrink performance and key metrics against a meaningful comparison set • To create realistic shrink goals • (‘expected’ performance vs. historical or chainwide/district goal) • To distinguish between high risk stores vs. high shrink stores Young Urban Professionals

18. Young Urban Professionals Avg 2.4% Shrink Avg 1.8% Shrink Environment Avg 1.3% Shrink Employee Customer Transaction Loss Prevention Store Supply Chain 1.4% 1.9% 2.2% 2.4% 2.8% 1.6% 1.2% 2.1% 1.8% 2.6% How are Shrink Peer/Cluster Groups created? We gather all available internal and external data from multiple sources – and after cleansing to ensure relevancy, we run all the data through a clustering modeling tool. Internal & External Data Sources

19. ILLUSTRATIVE 1.4% 1.9% 1.6% 1.2% 1.8% Avg 1.8% Shrink Avg 1.3% Shrink Low Shrink Stores and the Value Proposition The Value Proposition for moving underperforming stores to their expected shrink is an attractive value proposition. • Low Shrink Stores: • Seattle and Washington DC are outperforming their peer stores • These two stores represent the Top 20% of their peer group and should set the bar for all others • Why? • Because these stores operate in similar environments, with similar challenges, drawing similar customers and employees Young Urban Professionals Value Proposition $1M can be realized by moving the Yellow and Red Stores to the Average for Green Stores 2.2% 2.4% 2.8% 2.1% Avg 2.4% Shrink 2.6%

20. ILLUSTRATIVE Avg 1.2% Shrink Avg 0.8% Shrink Avg 0.6% Shrink 0.6% 0.5% 0.8% 1.1% 1.2% 1.3% 0.9% 1.4% 1.0% 0.7% Low Shrink Stores and the Value Proposition Let’s run through another example – this time with focus on another shrink peer cluster/ group which happens to be predominately low shrink stores. Large College Universities and Farming Towns Value Proposition $400K can be realized by moving the Yellow and Red Stores to the Average for Green Stores

21. Avg 2.4% Shrink Avg 1.8% Shrink Avg 1.3% Shrink Avg 1.2% Shrink Avg 0.8% Shrink Avg 0.6% Shrink How Did We Calculate the Value? Large College Universities and Farming Towns Young Urban Professionals

22. How Should We Prioritize? Assuming a $5B Retailer, this would translate to a . . .  $600K Annual Benefit $120,000  $1.4M Annual Benefit • Why These Stores? • Strong Management Teams with solid track record • Have the ability and appetite to do more • Will NOT require much investment – therefore yields an attractive ROI $2M Annual Benefit $4.9M Annual Benefit 

23. Our Objectives We want you to takeaway three action items that you can easily implement in your organization that will drive significant value to the bottom line. • “Ferocious debate among friends” on what a low shrink store is • Quantify the value that we believe is being left on the table • Leave you with 3 key action items that you can takeaway to realize that value at your company this year

24. Examples of High Risk Products Key Takeaways: 1. High Risk Products All stores, including Low Shrink Stores, face significant challenges trying to protect High Risk Products (HRP) – and often implement actions that can have adverse impact on sales and shrink. High High Risk Products are MORE of an issue HRP Shrink High Risk Products are LESS of an issue Low High Low Total Shrink %

25. Key Takeaways: 1. High Risk Products The High Risk Product (HRP) Process enables management to effectively evaluate product performance, implement proven LP strategies, and ultimately maximize profitability. Closed-Loop Process High Risk Products • Helps determine where greatest losses are occurring . . . so LP can . . . • implement the right action . . . • to the right category . . . • to the right sku . . . • in the right store . . . • to significantly improve profitability.

26. Key Takeaways: 1. Day in the Life of a HRP Solution • Store Manager monitors performance to determine if there are any exception situations she needs to tend to immediately. • She receives an alert indicating that “Sunglasses” have been suffering from abnormally high shrinkage – thus requiring a High Risk Product action to be ordered and implemented. • The Store Manager gains insights on the extent of the issue (i.e., what skus within the Sunglasses category is driving the shrinkage) and acknowledges that a High Risk (HRP) solution, on how to implement the proven action, will be automatically ordered for her store. • The next day she receives the recommended “HRP Action-in-a-Box” solution along with the detailed implementation instructions so she can easily direct the appropriate associates to execute the required actions. • The Store Manager and District LP occasionally checks-up on the recently implemented HRP solution to ensure that the negative shrink trend has reversed and the expected benefits on the Sunglasses category are being realized.

27. Key Takeaways: 2. High Risk Employees There is a tremendous opportunity to leverage existing assets to create a more streamline process to channel/prioritize information to the field in more timely manner. Add tagline . . . Data Today’s Challenges Tomorrow’s Needs • Identifies suspicious transactions, not employees • Too much noise in data, too many queries in database • Not enough LP analysts to mine data, thus becoming a major bottleneck • Needle in the Haystack Monitoring Room mindset What If . . . you could rank all your employees based on risk and value and have all the evidence of each suspicious transaction including video packaged up from Off-Shore prioritized and delivered to your Store Managers & LP & Video

28. Key Takeaways: 3. High Risk Customers When was the last time you revisited your policies & procedures on exposure areas such as Returns and general POS Parameters? Which way are you tilting? Is it time for a change . . . Loss Prevention Friendly Customer Service Friendly The Optimal Balance

29. Primary Root Cause Cause A Cause B Cause C Cause D Accenture’s LP Approach More effectively identify/target . . . highest risk areas across all channels . . . with tailored actions prioritized based on value to deliver . . . Products What skus are driving what losses in what stores and what action is best to take? 20 - 35% Overall Shrink Reductions while Increasing Sales Prioritized Actions Predictive Analytics Employees Who are your highest risk cashiers and why and how can you identify them? Customers How can you increase each customer segments overall profitability? LP Mgmt Suppliers What is the right process, environment, and systems controls for vendors, DCs and Transportation Value-Led, Asset/Technology Driven • Where to Place Big Bets • Benchmarks • Comparisons to Leading Practices

30. Young Urban Professionals Avg 2.4% Shrink Avg 1.8% Shrink Avg 1.3% Shrink 1.4% 1.9% 2.2% 2.4% 2.8% 1.6% 1.2% 2.1% 1.8% 2.6% Summary: The LP Program Continuum Traditional Emerging Leading

31. Questions . . . and/or if you would like to learn more about today’s content . . . David Lund (724) 273-3261 david.lund@dcsg.com John Liesching (401) 419-6840 john.r.liesching@accenture.com