The wine and spirits segment of retail is unique in the sense that few other goods available in retail stores are so tightly controlled or legislated. Alcohol distributors and retailers have to contend with a multitude of federal, state, and even local laws that restrict or control the sale of their products. It's no wonder that your average retail liquor store has its share of headaches as it strives to obey the laws regarding the sale of their products, as it simultaneously contends with all the same sorts of loss prevention issues than any other retail store might have.
The wine and spirits industry also faces markedly different challenges depending on what corner of the industry that business happens to operate in. For example, retailers will have LP concerns that distributors simply don't have, even though the controls on the alcohol are the same.
Besides tobacco, there really isn't a more regulated retail product than alcohol, the sales of which are usually mired in a dizzying array of laws and ordinances. While the alcohol industry may evoke mixed feelings in Americans due to the nature of the product that is involved, it is important to note that the American alcohol-beverage industry is responsible for paying $84 billion in wages annually, as well as sustaining 3.8 million jobs. Since approximately 51 percent of the price a consumer pays for an alcohol product is essentially comprised of government taxes and fees, the alcohol-beverage industry represents a cash cow for governments at every level, generating $388 billion in economic activity in 2008 alone. To say alcohol is big business is an understatement.
Essentially, the industry exists as a three-tiered system in which the alcohol producers sell to a distributor, who in turn, sells to a retailer. Generally speaking, besides a few local sales such as a vintner selling a few bottles of wine to people touring its winery, for example, the producers are separated from the consumers in terms of sales by distributors.
Southern Wine & Spirits
SWS's loss prevention efforts are headed up by John Dummett, director of safety and security. While one would think that theft and pilferage would be high on his list of things to look out for, they're really not as high on the list as you'd expect. "Our LP efforts are focused on making sure that what comes in the door goes out the door legitimately," he states. Being big has its advantages, and one of them is dealing in large, heavy objects. It's hard to steal a pallet of alcohol that weighs several thousand pounds. Breakage, on the other hand, is a different matter.
Dummett is quick to point out that SWS's LP efforts are essentially devoted to logistics and logistical concerns, and to that end, they've set up an interesting way of ensuring that every last bit of product is accounted for. When you move upwards of 100,000 cases per 24-hour period, it's essential.
In 2004, a couple of years before Dummett's arrival, SWS operated on a more or less standard system of loading its products onto the trucks for the day's delivery. A foreman would inspect the loading and sign off on the contents of the truck via a paper form. It was an imperfect system that kept shrink numbers higher than they should have been. Human error and mistakes were the root cause of SWS's problems, and all they had to fall back on was a sign off sheet. Clearly, a better system needed to be devised.
The system that was ultimately implemented went hand in hand with the emergence of more cost-effective high-definition (HD) CCTV cameras and is still in use at SWS today. "When a truck is loaded, the cargo area is filmed in HD from three different angles," explains Dummett. Besides a network of standard security cameras that are copiously mounted in SWS's loading facilities, each truck loading bay has three HD cameras that are positioned such that they capture a detailed record of each vehicle being loaded. Additionally, they have the resolution to be able to zoom in and let the people reviewing the footage read the writing on the case and document that it actually went out.
This is extremely useful to a company whose livelihood depends on product accountability. "We've had situations where a driver calls in and says he's missing product," says Dummett. "We have the ability to forensically review the video, and let him know not only when the product was loaded, but where it is in the truck."
SWS also puts a consumer HD camera in the foreman's hand as well for an added layer of accountability. The effect of this video system has been to keep shrink low where it pertains to inventory accountability, since it is now extremely hard, if not impossible, to actually lose something on an SWS truck. The goods are taped on arrival and taped again on departure to make sure everything is present. Drivers are also trained to check in at each delivery to ensure that SWS knows where its goods are at any given time.
Does Dummett lose sleep at night from conventional pilferage, or employees working in a concerted effort to cheat the company? Sometimes, but according to Dummett, "We don't really see much of that. Southern Wine is a strong union operation with well-compensated employees." In fact, new employees will start out working nights, and stay in that position for four to five years before being graduated to conventional day shifts, all the while accumulating seniority. The move to day shifts is a serious goal of new employees, and they work diligently to achieve it, which means that SWS's employees wind up caring just as much about the company's shrink as Dummett does.
SWS's locations will often contain a bottle room, which is a place where orders are filled for quantities of alcohol less than a full case, and, consequently, the most likely location for pilferage. Southern Wine's top 750 SKUs are present in this room and orders can be placed in single-bottle quantities.
"The bottle room has the highest concentration of cameras in the whole facility," says Dummett, adding that personnel in the bottle room are subject to bag and loose clothing searches at breaks and lunches...whenever they leave company property. In fact, all Southern employees with access to the warehouse are subject to these searches. Still, pilferage is so low in a typical SWS facility that it's less of an item of concern.
So what keeps Dummett busy if not theft, pilferage, or the previously mentioned inventory control? "Safety," says Dummett emphatically. "We have on average ninety guys driving forklifts in one of our warehouses." OSHA compliance, safety, and the mechanics thereof comprise a major component of Southern Wine's LP efforts. Consider also that SWS's delivery fleet of 1,500-plus trucks is staggering in size—the nation's 160th largest commercial fleet, in fact. Delivering 94 million cases of wine and spirits per year takes lots of trucks and drivers, all of whom must be appropriately licensed, and it's these sorts of LP challenges that Dummett faces on a daily basis.
Liability is a common theme throughout the liquor industry in general, and even SWS as a distributor is conscious of it. "We regularly monitor our restaurant customers," says Dummett. This monitoring revolves around ensuring the restaurant keeps up with its licensing and financial obligations, a paramount concern in an industry where inadvertently selling alcohol to an unlicensed establishment could lead to disaster. Few industries have these sorts of problems, as well as having to deal with oversight from big federal agencies like the Alcohol and Tobacco Tax and Trade Bureau (TTB).
Total Wine & More
Common logic would dictate that if a distributor like Southern Wine & Spirits had certain LP issues peculiar to their business, then the retailers of the same products ought to have the same issues. In fact, that couldn't be further from the truth. The considerations at the retail level tend to tip the scale in favor of issues like selling alcohol to minors and theft and pilferage as opposed to logistical issues.
No one knows more about the sorts of LP issues that a large retail alcohol outfit could have more than John Velke, vice president of loss prevention and safety at Total Wine & More. If Southern Wine is a big distribution outfit, then Total Wine is its big retail counterpart, operating eighty-plus superstores in thirteen states and employing over 2,000 people. On average, Total Wine's stores are approximately 25,000 square feet in size, boasting 8,000 types of wines, 3,000 types of spirits, and 2,500 types of beers per store, not to mention things like walk-in humidors. To get an idea of how really big these stores are, consider that each store stocks over 100,000 individual bottles.
Total Wine & More is a place where the rubber meets the road in alcohol sales—the place where the consumer shops. And Total Wine attracts lots of consumers, considering they do things like wine-tasting events and also that most stores have a meeting room that they offer free to local organizations.
As a retail store, Total Wine is quite a bit more cognizant of theft and pilferage than a purely wholesale outfit like Southern Wine has to be, but that's not their core LP focus. "We are highly focused on not selling alcohol to minors," states Velke unequivocally. "To me, selling a bottle of something to a minor is a much bigger deal than having a bottle of Grey Goose go missing."
In a twist really only peculiar to the alcohol industry, illegal sales are much more of a consideration than theft. To get an idea of how serious a potential problem this is to Total Wine, consider what awaits liquor stores who sell to minors. On average, the cashier who sells the goods can be cited with a misdemeanor, and the store can face up to a $2000 fine for the first offense. A second offense can run between $5,000 and $25,000 in fines, and the store could be shuttered for three days. A third offense might shut the store for a month all the way up to a year...a thought that no doubt makes Velke's skin crawl. The lost sales this represents are far, far greater than any theft even an organized retail crime (ORC) team could exact upon a store. No amount of shrink would compare to a store being shut down for any period of time, so that is where Velke puts his LP emphasis.
"We don't even let minors in the store," says Velke. "If two people walk into the store and one is 22 and one is 19, we will ask the 19-year-old to leave." It's that serious of a consideration for Total Wine, and thus far they have done exceptionally well following this methodology.
All alcoholic beverage retailers are subject to occasional police stings where police cadets are sent into stores in an attempt to buy alcohol. Velke and Total Wine recognize and support these efforts to keep alcohol out of the hands of minors. Velke says, "It helps to keep us on our toes and reinforces our commitment to be responsible corporate citizens."
As far as conventional retail store LP considerations go, Velke has all of those as well. Employee theft is particularly low, mainly because of the age of the workers. "They have to be over 21, so we just don't see much internal theft because the maturity level is there," says Velke.
As for customer theft, Total Wine is relatively low in that category as well. Besides the usual tactics such as cameras and single entrances, Velke relies on a network of on-the-floor sales associates to keep an eye on things. Total Wine has more sales reps on the floor than your average liquor store. It's part of the culture to have helpful representatives handy to assist customers with purchases, and their mere presence deters many thefts.
Because of the number of sales reps present, Velke also doesn't overemphasize the use of locking devices. Total Wine does not use security caps or other product-protection devices on the bottles. In fact, Total Wine is one of the few places where you will see high-theft items like Patron tequila sitting unsecured on shelves.
While in the past, Total Wine has been the victim of professional thieves, Velke notes that there is one facet of theft in his stores that is peculiar to the alcohol industry—"casual shoplifters are predicable; they steal what they like to drink." Velke notes that when they do encounter theft, they often see a pattern emerge of a certain type of alcohol that goes missing, essentially being stolen over and over again as the thief runs out of it. They come to steal the same bottle much as a normal person goes to buy it when it runs out. "We have an edge when it comes to stopping shoplifters. We know if we are losing something," Velke says.
In a different segment of the same industry, Kentucky-based Liquor Barn is a rapidly growing regional liquor retailer. Originally founded in the 1980s with just twelve locations all within Kentucky, Liquor Barn only recently started thinking about loss prevention. The company's burgeoning LP department really started picking up steam in late 2009 when Brian Rachford, CFI was hired to lead their loss prevention efforts.
Liquor Barn's typical store is 30 to 40,000 square feet and features over 8,000 types of wine, 3,000 types of beers, "the largest selection of Bourbons in the world" according to their website, as well as party supplies and a humidor. Some stores even have full-service delis as well as a "growler wall," where up to forty beers are on tap and available to customers as paid samples.
Started as a small regional store, the need for loss prevention was only recognized when the company was sold to a large international liquor company and Rachford was brought on. It seems that each segment of the liquor industry has its own, odd LP considerations, and Rachford's stores are no exception. "Consumption is one of the things we really look out for," he says, in reference to the stores equipped with the growler walls and with dozens of beers on tap.
Rachford goes on to explain that consumption of alcohol on the premises is just as big of a consideration for the employees as it is for the customers, so he has put detailed procedures in place to measure the amount of beer in the kegs and ensure that it matches up with sales records. "I had large holes I had to plug when I was brought on," he says.
While Rachford doesn't have the luxury of having teams of store detectives in a company as small as Liquor Barn, he does work closely with his store managers to tighten things up and has started the ball rolling in implementing some industry-standard loss prevention practices, firmly bringing Liquor Barn into the contemporary LP world. Considering that Liquor Barn had essentially no loss prevention program prior to two years ago, they've come a long way in a short time, introducing high-end camera systems, cash controls, and inventory controls to their growing business.
Theft is a very real concern for Liquor Barn and is on the forefront of Rachford's LP efforts. "We've caught people from local restaurants with shopping lists of things to steal," says Rachford. Professional boosters are also a concern, and Liquor Barn has experienced its share of multiple bottle thefts that significantly affect the bottom line, considering how expensive most wines and spirits are.
To that end, Rachford has introduced Alpha S3 bottle caps into his stores, recently switching to the clear cap version of these devices on most of his inventory. Rachford believes that the clear caps are less obtrusive and allow most of the bottle to be seen, thus allowing the ever important visual aspect of letting consumers see the whole product. While some professionals may be able to remove the Alpha caps, "the average thief will basically destroy the bottle trying to get the cap off," states Rachford.
Rachford has also experimented with moving certain products to a more secure location. "Some things had to be locked up," he says. However, that resulted in the age-old loss prevention dilemma, "when I put something behind a counter, sales drop."
Rachford's efforts are having a positive effect on Liquor Barn. The company has recently opened two new stores. The company's future is showing healthy, strong revenue growth, while at the same time, shrink is heading in a downward direction.
The alcohol industry is really unlike any other industry out there, peculiar in its extreme governmental control. Yes, tobacco has some of the same sorts of onerous laws, but when was the last time you saw a chain of 80-plus retail stores of 25,000 square feet selling only cigarettes?
Retail and wholesale alcohol outfits put a peculiar slant on traditional loss prevention considerations, and amazingly, they have completely different focuses based on how big they are and the market segment where they focus. If there is one rule within the alcohol industry with respect to LP, it's that there is no rule. They each have their own areas of concern. From a big distributor who doesn't much worry about theft, to a small retail chain that keeps theft in its sights, and all the way to a large retail outfit whose main concern is the legality of its sales, the liquor industry is an incredibly diverse LP landscape.