The New Franchisee IT Sherriff In Town

Franchisee Columnist Todd Michaud has spent the last 16 years trying to fight IT issues, with the last six years focused on franchisee IT issues. He is currently responsible for IT at Focus Brands (Cinnabon, Carvel, Schlotzsky’s and Moe’s Southwestern Grill).

Billions of dollars are lost each year to employee theft and it is only getting worse. The National Restaurant Association (NRA) estimates that the restaurant industry alone may be losing more than 3 percent of sales each year due to employee theft. This figure is very scary to be sure, especially for franchisees who don’t typically have big Loss Prevention teams working on their behalf. What many franchisees have not discovered is that the advanced integration between POS, inventory systems and video surveillance systems can be used to catch these types of activities and dramatically improve the top and bottom line.

If you really want to be depressed, go to Google and type the words: “working at BRAND_NAME steal” or “how to steal from BRAND_NAME” or other variations of the same. What you find may be surprising. Many people have actually posted how-to guides for the best way to steal from a certain brand as an employee. A quick search I just did turned up several for the major restaurant chains.

For example, I found this comment posted on a consumer Web site: “If somebody pays for an item and leaves without waiting for you to ring it up, you can also enter a smaller order and keep the difference. For example, if somebody gets a drink ($1.65), you can enter in a cookie ($.65) and keep $1.00. This is significantly less suspicious on paper, but you absolutely have to make sure nobody is watching you. A cookie is the cheapest item that anybody can buy without it looking too suspicious on the order. A pack of butter ($.25) is certainly cheaper, but they're not the things an average person would buy.”

The primary methods for employee theft are either physically taking an item out of the store without paying for it or manipulating the POS in attempt to allocate some of the money to them. For the restaurant industry, that could be ringing up one item while selling another, providing additional quantity to the customer than was rung up, voiding items after a customer pays, etc.

Knowing the ways that it happens is only half the battle. What methods can you apply to catch errant employees? Let’s look at the three main ways to stop employee theft:

  • Catch them in the act (physically putting money or product in their pockets) either live or on video.
  • Identify variances in inventory.
  • Identify variances in POS transactions.

Depending on your business, some of these methods may be more effective than others. In some cases, it may take all three. For the most part, the old way of watching videotape to identify the thief is no longer effective. Today, the best way to identify theft is too use the inventory and POS reporting to identify which video you should look at. Many systems now automate that process. If you can recover even half of the estimated 3 percent loss ($15,000 per year on a million dollar per year outlet), why are so many retailers using outdated CCTV technologies?For the purposes of this article, let’s focus on variances in POS transactions and see how we can find theft with an integrated system. To find the theft we would:

  • Review the POS data.
  • Identify data points that don’t match expectations.
  • Identify sales transactions related to that data point.
  • Watch the video of these transactions.

As an example, let’s say you operate a QSR restaurant that has an average check of $9.00. You know it is highly unlikely that anyone in the store spends less than $2.00 on any particular visit. We have identified a data point that does not meet expectations (orders under $2.00). You know one of the ways employees may steal from you is under-ringing (ringing up less than the value of the order and pocketing the difference). So you use your video surveillance system to identify all of the transactions for the last week that are under $2.00. One cashier stands out; Billy has nearly four times the number of transactions than the rest of the crew. What next?

This step is where the integration between the POS and the video surveillance becomes critical. The report provides you with a link to the video of that transaction (which has an overlay of the POS transaction). We look at Billy’s less-than-$2.00 transactions, and we immediately notice something. The first order he rang into the POS was for a medium fountain drink ($1.50), but we can clearly see him serving the customer a burger, fries and a shake. When he’s done with the order, we see him take a penny out of the penny slot and move it to the quarter slot in the drawer (to keep track of his take).

Billy is stealing from you. You start getting upset. Then you pull a report in the system to see all of Billy’s transactions for the entire week and realize he has stolen more than $400 through various approaches. You are shocked. You never would have believed it. Billy is a hard worker who is very friendly and always on time. You never would have suspected to even watch the video of Billy because he did such a good job. Even if you had watched a CCTV video of this transaction, you would not have had any reason to believe there was fraud.

Remember, to get the money out of the register without getting caught employees have to game the system in some way. Using these tools, you are identifying situations where there may be foul play. And the integration with the POS is often quite simple. The video surveillance companies typically trick the POS into believing it is a receipt printer and simply “scrape” the transaction data that is fed to the printer and store it in a database to be used later.

That example was an easy one; you came up with the rule yourself (under $2 order). But what if you are not sure what the rule should be? The answer is to look for data that doesn’t match up. Review the number of transactions that had a discount. Does any employee or shift have significantly more discounts than the rest? How about the number of deletes/voids? Does one or more person have more than the others? In technical terms, you are using a crude form of standard deviation to identify transactions that may warrant a closer look. The more advanced tools in this space will actually do the mathematical work for you and identify any transactions that are suspect.

You may be saying “I don’t want my managers in the office looking at video and doing some college math, I want them on the floor.” Would you believe I am aware of at least two companies that will even run the reports, watch the video and E-mail you when they find someone stealing (thereby completely outsourcing your Loss Prevention)? And they provide all of this analysis for a reasonable monthly fee.

Do you really want to drive theft out of your store? Then have the corporate office maintain a rules database in which suspicious transactions are flagged and share all of those rules with every franchisee. If Joe in Mississippi discovers his employees are stealing by not fully activating gift cards, all of the other franchisees automatically get a rule in their system to look for such transactions. (This approach requires that all stores use the same system.)

In my opinion, for stores that are not currently using this technology, it is the single best program that you could implement to improve unit economics, bar none. The results I have seen from this type of system are staggering. I have seen locations realize an increase in sales of more than 20 percent as a result of implementing this type of system. It is one method by which leveraging IT to integrate two data sets (POS and video) can provide enormous value to the business.

What do you think? Love it or hate it, I’d love to gain some additional perspectives. Leave a comment, or E-mail me at [email protected].