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This Home Depot Pioneer's No. 1 Worry: Theft. His No. 1 Tip for LBM Success: Focus on GMROI

Jim Inglis has played an important role in improving the self-service experience at major home centers around the world. But now he sees this model challenged by a crime wave that he thinks could change the way people shop--and make them like stores less.

"If your shrink goes from 1-1/2% to 4%, you may have just lost half your profitability," Inglis told Webb Analytics during an Oct. 17 interview. ... "How do we manage self-service and how do we manage the arrangement of our stores and the way we service our customers? Is there a better way to do this so that we can protect our investments and at the same time not turn the shopping experience into a negative experience? Because at the end of the day, it’s the shopping experience that creates loyalty. And so somehow there has to be a way to enhance the customer experience while stopping this incredible shrinkage problem that most retailers are facing today."

According to the 2022 Retail Security Survey sponsored by the National Retail Federation, 71% of the survey's 63 respondents said responding to organized retail crime has become more important during the past five years, and 74% said responding to all other types of external theft has grown in importance. Across all respondents, the shrinkage rate from external and internal wrong-doing stole 1.1% of sales revenue in their 2021 fiscal years. That 1.1% amounted to roughly $94 billion. (Note: This survey was across all retail businesses, and building material stores were a minor percentage of respondents.)

Inglis has spent 60 years in home centers, including five years at San Diego's Dixieline Lumber, before taking on major merchandising and development roles at The Home Depot from 1983 to 1996. Since then, he has advised building material and home centers in Australia, Chile, Germany, Japan, and other countries. Last year, he summed up his learnings and his advice by publishing a book, Breakthrough Retailing.

In the book, Inglis says The Home Depot succeeded in part because one of its key metrics was GMROI--gross margin return on inventory. (More on this later.) And he spends many pages discussing his effort to make The Home Depot "Easy to Stock, Easy to Sell, Easy to Buy." For instance, he pushed manufacturers to put their goods in boxes that provided lots of useful information, could easily be cut open, and then could be placed directly on shelves without requiring employees to handle the goods again so they'd be ready for sale.

Theft, clearly, disrupts that system.

Inglis cites drug addicts' need for money, the rise of crime syndicates, retailers' fear of violence, police with other priorities, and a legal system that downgrades shoplifting as contributors to the problem. Then, when retailers' loss prevention people are told to solve the problem, they start locking up the store.

"But they haven’t thought about the other side of the equation, which is ‘How do the employees feel about it? And how does the customer think about it?’" Inglis said. "And that’s what’s missing. There’s too much locking up without thinking about the impact on the customer."

What to do? "I think there probably will be some tech advancements," Inglis said. "And I think perhaps there will be a way for customers to come into the store and use their phone to buy the product and then have that product more often picked up at a separate location or perhaps delivered to the home. There’s more control over the distribution of the product. You already see if you go into a Costco, for example, where most of the high-cost items, you pay at the register and then go to a different location to pick the product up. And I think some of those types of things are going to have to come into play."

One can already see power tools behind lock and key at construction supply operations nationwide. According to the National Retail Federation survey, the most popular enhancements included videocameras linked to artificial intelligence (AI) systems, self-service locking cases or lockers, AI-based perimeter surveillance, and license plate recognition.

Inglis wants solutions to come from more than just the security team: "I do think that at the end of the day, there’s going to need to be bringing together operational people, loss prevention people, digital experts, and just kind of re-look at the whole picture and say ‘How can we rethink what we mean by self-service?’"

All about GMROI

Along with lots of merchandising suggestions, Breakthrough Retailing pushes hard to embrace Gross Margin Return on Inventory Investment, or GMROI. Inglis says in the book that working to increase GMROI at The Home Depot "proved to be an invaluable, competitive advantage in the marketplace" when it took on the home centers that dominated LBM's landscape in the 1980s.

GMROI is all about how many times you take money to the bank, not what your gross margins are, Inglis argues. And, for too many competitors, he believes it was a fixation on gross margin percentages that did them in. Rather than worry about margin alone, Inglis believes you should strive to generate the highest possible margin AND the highest possible turnover.

"The hardware department has thousands of little items and, as a result, they might have a turnover of 3x, 4x but they have a margin of 50%," Inglis told Webb Analytics. "And then you go to the lumber department and they’ve got a margin of 15% or 16% but they have a 12x turnover. So the hardware department and the lumber department can have the same GMROI. But one is competing based on margin, and the other is doing it on turns. In commodity products, you can’t win the margin battle, you have to win the turnover battle.

"GMROI takes the margin out of the profit and loss statement and the inventory out of the balance sheet," he continued. "The problem with so many CFOs in these companies is that they never bring those two reports together. … They forget It’s how many times you’re taking money to the bank, not how much margin you’ve made on that individual sale."

Breakthrough Retailing was written before and at the start of the COVID pandemic and subsequent supply chain shortages--times that have forced building material dealers to maintain large, expensive inventories because they couldn't be sure when the next delivery would arrive. Inglis said that has to change--most likely in a way that will hurt a lot of construction supply dealers.

"The inventories are not at sustainable levels at most retailers today, so there has to be a rethinking of how they manage their supply chain," he said. "What you see, for example at The Home Depot, is they are investing literally billions of dollars in both digital technology and logistics with the idea of ‘How do we better manage that whole flow of goods?’"

In contrast, most LBM operations are small. "They don’t have the IT groups, they don’t have the specialists that can develop many of these efficiencies that you can use through the technology and through the use of more modern facilities," Inglis noted. "And so I think the end result is that the big are going to get bigger and a lot of the smaller companies are going to find that they can’t compete because they don’t have the digital muscle and the economic power to make those adjustments to make that inventory flow at a much higher rate of efficiency."

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