1. Shrinkage: The Last Free Money on the Table Breakout 4-1 Stockholm 31 May 2006

2. Shrinkage: the last free money on the table Welcome!

3. The ECR Europe Shrinkage Project Team 2005-6

4. Shrinkage: the last free money on the table Session Objectives –Illustrate the value in getting shrink right –Highlight new insights to guide thinking –Demonstrate the benefits of the ECR Approach

5. Overview The Last Free Money on the Table –Kenneth Bengtsson, CEO ICA ECR Principles and Understanding Shrinkage –Adrian Beck, University of Leicester Delivering Improvement –Paul Chapman, Cranfield School of Management –Stuart Hughes, Adidas –Lars-Boye Halvorsen and Johan de Vries, ICA Norway Interactive Session: Thinking Like a Thief –Adrian Beck, University of Leicester Close and Q&A

6. Overview The Last Free Money on the Table –Kenneth Bengtsson, CEO ICA ECR Principles and Understanding Shrinkage –Adrian Beck, University of Leicester Delivering Improvement –Paul Chapman, Cranfield School of Management –Stuart Hughes, Adidas –Lars-Boye Halvorsen and Johan de Vries, ICA Norway Interactive Session: Thinking Like a Thief –Adrian Beck, University of Leicester Close and Q&A

7. Viewpoint by Kenneth Bengtsson - CEO, ICA The last free money on the table –Many external forces affect retail profitability. –Shrink is one line in the P&L and thus within the control of the Board. –Shrink reduction is a key financial opportunity to deliver extra profit and shareholders value. Strategy for shrink management –Corporate policy. –Systematic approach are making shrink management part of business process. Collaboration –Role of suppliers, retailers to co-operate along the supply chain. –Need for internal collaboration within retail organizations. Leadership –Board/Management/CEO has a vital role to set corporate policy. –Motivate people that work for suppliers and retailers to meet and sustain the challenge to start the war on shrink.

8. Overview The Last Free Money on the Table –Kenneth Bengtsson, CEO ICA ECR Principles and Understanding Shrinkage –Adrian Beck, University of Leicester Delivering Improvement –Paul Chapman, Cranfield School of Management –Stuart Hughes, Adidas –Lars-Boye Halvorsen and Johan de Vries, ICA Norway Interactive Session: Thinking Like a Thief –Adrian Beck, University of Leicester Close and Q&A

9. Measure Collaborate Focus on Hot Concept Innovate Experiment Adopt Systemic a Systematic Approach Motivate Staff Start with Non Malicious Shrink Disseminate Document Learning Use the Road ECR Road Map Adherence to Procedures Engage Senior Management ECR Europe Shrinkage Philosophy

10. Process failures Inter- company fraud Internal theft External theft Shrinkage Malicious Non- Malicious Existing ECR Europe Definition of Shrinkage

11. Shrinkage Typology, 2006 Total Loss Shrinkage Process Variance In auditing At Checkout Product Movement Data errors Physical Loss Damage Wastage/ Spoilage Internal Theft External Theft Value Variance Reductions Pricing Missed claims UnknownCash Loss Internal Theft External Theft Error

12. Two Approaches to Considering Shrinkage BenefitsConcerns Existing Definition- Simple and easy to understand - Well established - Over emphasis on malicious loss -Misses the complexity of the problem -Benchmarking is problematic New Typology- Acceptance by practitioners (Tesco; Ahold; Carrefour; Metro) - Balanced across a range of causes - Distinguishes between known and unknown - Provides a basis for benchmarking - A change from the accepted convention -Requires a different way of thinking about shrinkage -Requires new skills - Added complexity: more causes to think about and measure

13. Overview The Last Free Money on the Table –Kenneth Bengtsson, CEO ICA ECR Principles and Understanding Shrinkage –Adrian Beck, University of Leicester Delivering Improvement –Paul Chapman, Cranfield School of Management –Stuart Hughes, Adidas –Lars-Boye Halvorsen and Johan de Vries, ICA Norway Interactive Session: Thinking Like a Thief –Adrian Beck, University of Leicester Close and Q&A

14. New Learning from ECR Session led by: Dr Paul Chapman Senior Research Fellow Cranfield School of Management Store Improvement Road Map –ECR Road Map SWOT –In-store approach –Results

15. Project Results OrganisationsLocationResults TescoUK€143million annual savings Tesco & GilletteHungary- 74% losses + 288% sales B&Q & PlasplugsUK- 50% losses + 33% sales Feira Nova & DanonePortugal- 45% total shrink Ahold & sausage suppliersPoland- 42% losses Sainsbury’s spirits category UK- 40% losses + 10% sales Sonae & Colgate PalmolivePortugal- 29% losses Sainsbury’s & MenziesUK- 25% losses + 10% sales Wickes & GETUK- 7% losses Project Results

16. Corporate Policy Organisations whose corporate shrinkage policy have been significantly influenced by ECR Europe OrganisationSectorLocation AdidasSports goodsNorthern Europe AholdGroceryInternational Boots the ChemistPharmacyUK DMPharmacyGermany MetroGroceryBelgium & Netherlands P&GConsumer goodsInternational TescoGroceryUK & International Corporate Policy

17. ECR Road Map SWOT Strengths -Proven, robust method -Case studies -Leverages internal knowledge Weaknesses -Typically applied at head office -Time to implement solutions Opportunities -Free brain with every pair of hands in-store -‘Extreme makeover’ of hot stores Threats -Competing priorities in the store -Apathy

18. Store Improvement Road Map Targeted at Hot Stores Take a ‘learning-centred’ approach with store team –Focus on individuals –Engage interest by focussing on delivering results –Aim to develop capability to further improve Focus on objectives Transparent approach Engage people Principles

20. THE JOURNEY……….. Over 350 own retail stores - EMEA Transition to a centralised retail model Previously no Profit Protection/Security/Loss Prevention function Largely unknown losses Weak processes

21. STORE IMPROVEMENT ROAD MAP……………. Hot Stores………………… Back to the Floor………… One Best Way………”A Picture of What Good Looks Like” Store Managers have Zero Discretion on Process Raise Profile of Shrink Reduction Across the Business Driven Corporate Policy

22. TANGIBLE SOLUTIONS……………. Robust Stock Takes Movement Of Stock Retail Risk Assessment HR Pre-Employment Screening

23. STORE IMPROVEMENT ROAD MAP............... Adapted from Beck, Chapman and Peacock, 2001 2. Map & Measure 5. Implement 1. Plan6. Evaluate 3. Analyse 4. Develop Solutions Corporate Policy

24. Score Board…… Across 2 Areas (9 countries) Worst store result fell from 9% of net sales to under 1% in the last 18 months 66% reduction in shrink across 2 areas 10% - 15% improvement in profit margin in these 2 areas

25. Conclusion……….. You can’t “Arrest” your way out of Shrink Focus on Robust Efficient Processes Be Commercial and Holistic

26. Building the shrinkage program in ICA Norway ECR presentation Stockholm, 31st May 2006 & Lars-Boye HalvorsenICA Norway Johan de VriesAhold

27. Content  Ahold shrinkage program  ICA Norway shrinkage program  Results

28. Ahold Shrinkage Approach  Ahold has created a shrinkage approach, based on the ECR road map  Goal of the approach is to develop a ‘tailor made’ shrinkage approach for the operating company based on the maturity level of the organisation  Objective is to identify the ‘root causes’ for shrinkage, not only fighting the symptoms Best practice  Carry out interest analysis in the organisation and create a collaborative approach

29. Shrinkage Approach STEP 1  Definition of shrinkage STEP 2 (method)  Plan  Analyse  Develop solutions  Implement  Evaluate STEP 3 (analysis)  Ordering strategy  Assortment strategy  Mark down strategy  Registration strategy  Loss prevention and security strategy

30. Shrinkage Approach STEP 4 (analysis)  Flow of goods  Flow of money STEP 5 (analysis)  Basic conditions  Communication  Commitment  Training  Control  Organisation STEP 6: Low hanging fruit  Hot article approach  Hot store approach

31. Example Ahold hot stores approach 1. Increase of stock takes Objective: Minimum of 2 stock takes per year, bad performing stores up to 4 stock takes per year. 2. Hot store approach Objective:Intensive care for worst performing stores Source: P&L account. Definition: Unknown shrinkage results (stock takes) Source: Data warehouse. Definition: Unknown shrinkage (stock takes)

32. Support plan Norway

33. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! Facts about ICA Norge – 2005 – pr. 31.12.05 7359 employees (including franchise) 20,1 bill NOK sales (app. 2,5 bill Euro) 20,6% marked share 747 stores (+147 associated)

34. . Neighborhood store, ”The best store where you live/are”, locally adapted, credible prices, experience of broad assortment, service, personal, meeting place, modern Food market, food enjoyment, baker, fresh food, large assortment fruit and vegetables, delicatessen, experience of broad assortment, credible prices Large market, volume, rational, low prices, fresh food, non food, variety Fixed low prices, simple, every day shopping Our stores

35. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! Shrinkage issue in Norway Preliminary analysis showed a savings potential in in-store logistic-related topics, including shrinkage Detailed analysis was needed to decide “where to start” The analysis was carried as an “ Assessment week” Consisting of interviews, store and DC visits The analysis report was the ground basis for the Shrink Program Best practice: The shrinkage reduction approach must be based on concrete facts, perform a thorough assessment before you decide on the actions

36. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! “Vinn Mot Svinn” workstreams Definition and accounting of shrinkage Monitoring and measurement Mark down procedure Fresh departments* Awareness programme Ordering Stock level control

37. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! Example :Fresh-departments sub-streams Delivery frequency Receiving procedures Cold storage capacity Plano grams Assortment Ordering Expire date checks Quality control Theft Markdown procedures Waste handling Food safety Internal use Temperature Fresh department has the highest share of shrinkage in the stores. Make sure you use this investment wise

38. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! Adding value to the business The reduced cost of products is only one part of the total savings of shrink reduction : –Less out of stock –Less labor costs –Less stock –Higher customer satisfaction –Higher sales –Higher result Many companies base their shrinkage programme on identifying the sources and fighting the symptoms. By standardising the way of working you can focus on the execution of actions

39. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! –35 of the worst performing stores based on stock take results –Special training sessions focus on procedures training on communication skills system knowledge –Intensive care action plan store specific store manager is the owner –Weekly shrink update reports Hot store approach

40. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! Results of hot store approach

41. Efficient store operations It pay`s off ! Efficient store operations It pay`s off ! Results total programme –Sales + 20,34 % –Average sales per customer + 1,32 % –Shrinkage – 0,5 % –Gross margin + 0,17 % –Labour cost – 1,44 % –Productivity + 83 These numbers are in comparison with the average development for similar stores

42. Tack!

43. Overview The Last Free Money on the Table –Kenneth Bengtsson, CEO ICA ECR Principles and Understanding Shrinkage –Adrian Beck, University of Leicester Delivering Improvement –Paul Chapman, Cranfield School of Management –Stuart Hughes, Adidas –Lars-Boye Halvorsen and Johan de Vries, ICA Norway Interactive Session: Thinking Like a Thief –Adrian Beck, University of Leicester Close and Q&A

44. Exploiting Opportunities: The Offender Perspective Background –Rationale Opportunity makes the thief Opportunity created by poor/absent procedures or lack of adherence to them –Methodology Interviews with offenders Analysing company reports Interviewing security staff

45. Thinking Like a Thief – Exploiting Opportunities Role Playing the Offender –You are a till operator Think of 5-10 ways in which you or a friend could steal cash or goods at the checkout

46. Opportunities for Internal Theft

47. Opportunities for Dishonesty Poor processes Reduced checking Less oversight Lack of data Reduced accountability Reformers beware! Streamlining business processes can have an impact upon shrinkage – delicate balance between selling and stock loss Opportunities for Internal Theft

48. Overview The Last Free Money on the Table –Kenneth Bengtsson, CEO ICA ECR Principles and Understanding Shrinkage –Adrian Beck, University of Leicester Delivering Improvement –Paul Chapman, Cranfield School of Management –Stuart Hughes, Adidas –Lars-Boye Halvorsen and Johan de Vries, ICA Norway Interactive Session: Thinking Like a Thief –Adrian Beck, University of Leicester Close and Q&A

49. Session Objectives –Illustrate the value in getting shrink right –Highlight new insights to guide thinking –Demonstrate the benefits of the ECR Approach Did we meet our Objectives?

50. Questions and Answer session Questions from the audience to the various presenters An invitation: –Participate in future research –Join the ECR Europe Shrinkage Working Group