Sound corporate governance cannot be separated from corporate integrity.

 

 

 

 
 

KEY ENGAGEMENTS IN THE RETAIL INDUSTRY

YOUR CONFIDENTIAL BUSINESS RESOURCE:
PROVIDING INTEGRITY SOLUTIONS TO COMPANIES OF DISTINCTION

 

 

I. Restructuring Experience
Engagement: Revco D.S. - Chapter 11 Consulting. Yake & Associates, Inc. was retained by the new management of Revco the week before the Company filed for bankruptcy protection (Chapter 11), and remained with the troubled Company until they emerged from bankruptcy nearly five years later. The engagement with Revco involved investigating matters of impropriety, including the sources of mysterious margin erosion, identifying those responsible and recruiting new management.

 

The investigation phase began with one of the many subsidiary businesses Revco had, a payroll company that had been created to handle the needs of the Company and its subsidiaries. The investigation revealed that paychecks were being produced for hundreds of “ghost employees”. That investigation eventually led to various other subsidiary businesses and the parent Company, Revco D.S.

 

The departments most vulnerable to graft and corruption in a retail business are Construction, Transportation, Real Estate and the Buying office. Yake & Associates, Inc. noticed the rents Revco was paying in the North and South Carolina market area were greater than in other market areas. In fact, the rents being paid in North and South Carolina exceeded other market areas typically commanding higher retail store rents.

 

Yake & Associates, Inc. went to work attempting to learn as much as it could about the landlord who owned most of the leases. For a long time, all we could find about the landlord was that it was a business entity, which had been set up as an obscure limited trust arrangement. The only actual or real name we could find was the name of the managing partner. Carefully concealed in almost every transaction involving this trust was any disclosure about who the members were. After months of investigation that involved combing through hundreds of court documents in North Carolina, Yake & Associates found a personal guarantee from a local bank which contained all the members’ signatures. Astonishingly, we noticed the last name of every member of the trust matched the last name of the Regional Vice President of Real Estate for Revco. This executive had leased approximately 800 store locations from his own wife and children! The managing partner was actually his father-in-law.

 

Benefits of the Y&A Learning Experience:

  1. Many troubled retail companies are abused businesses. When a business has been abused by its previous management, fraud and theft-prone environments are created that often permeate the entire organization. When senior management engage in fraudulent and illicit behavior, signals are sent to all employees that unacceptable behavior is perfectly acceptable.
  2. Yake & Associates, Inc. has been involved in many retail reorganizations. Without exception, where non-core business entities exist, so does abuse. Furthermore, in almost every engagement we have found employees setting up their own “creative severance arrangements”.
  3. In a troubled retail business, the inventory has very little perceived value to the employees. Therefore, employee theft activities normally escalate, thereby diminishing recoveries available to the creditors.

II. Inventory/Shrinkage Control Experience
Inventory Consulting - Shrink Control. Southland Corporation / 7-Eleven: Yake & Associates, Inc., partnering with a Big Five accounting firm, was retained by Southland Corporation that owned approximately 3,000 convenience food stores nationwide. Southland had been experiencing losses from shrinkage and paying enormous monthly fees for an inventory service to take an entire physical inventory in every 7-Eleven store. By using sophisticated data mining and statistical/quantitative analysis techniques, Yake & Associates, Inc. believed it would be possible to actually predict shrinkage at Southland, thereby mitigating the occurrence of shrinkage and eliminating the fees for the inventory service.

 

Traditional shrinkage consultants normally produce a 200-400 page deliverable for a client. But, Y&A believes that approach fails to provide the client with meaningful solutions. Typically, the document merely tells a retailer about numerous problems they are already aware of, which is why they hired a consulting firm to begin with. Furthermore, that approach fails to provide real solutions. A “road map” is required in order to help clients implement corrective action. Yake & Associates saw an opportunity to develop a new methodology for handling a very old problem in retailing.

 

Typically, retailers receive aged/dated information about various problems causing net operating losses. Income statements and inventory services only provide management with a “snapshot” of what they did wrong for a reported period that has already passed. Yake & Associates wanted to develop a way to provide real-time information to its clients, a proactive approach that could prevent the event from happening in the first place.

 

Working with Southland’s accounting firm, Yake & Associates developed a sophisticated risk matrix that measured 10-15 key contributors to shrinkage. Then Yake developed an extensive shrinkage control auditing force of about 60 part-time people nationwide who would audit the business practices that contributed to shrinkage at Southland. Yake & Associates, Inc. developed a shrinkage control audit that actually forced the disciplines in the stores. The result: Not only did Y&A reduce shrinkage, but they predicted the causes of shrinkage at a typical 7-Eleven store at nearly a 91% rate. Additionally, Y&A reduced the costs of taking physical inventories, returning millions more in bottom-line profit dollars. (Note: This was the accounting firm’s second largest stand-alone consulting engagement in its history, generating nearly $5 million in consulting fees.)

 

Benefits of the Y&A Learning Experience:
Thomas Yake has 30 years of retail experience, starting his career in store operations. After completing college, Mr. Yake became the Vice President of Loss Prevention for a national retailer generating $3 billion in sales. Starting his own consulting practice in 1988, he was retained by the Internal Revenue Service and wrote two opinions to the United States Tax Court regarding the causes of shrinkage in the retail industry. In those reports, he cited 108 causes for shrinkage in retailing. It is interesting to note only three of those causes were theft-related. The remaining 105 causes were related to a retailer’s own business practices. This has led to an exciting new approach to shrinkage consulting. The benefits of retaining Yake & Associates, Inc. include:

  1. Yake & Associates’ understanding of shrinkage in the retail industry is unparalleled. Y&A knows that shrinkage has been a problem for retailers since the turn of the century. Every year hundreds of millions of dollars are eroded from the bottom-line of most retail companies. Often retailers cannot identify the major sources of shrink within their own company, nor can they develop an action plan to control and reduce shrink.
  2. If a retailer can reduce shrink by merely one tenth of one percent, for every $1 billion in annual sales generated, $1 million in pure bottom-line profit is added back into the business.
  3. There are no risks associated with achieving this result. It is a strategic approach that pays enormous benefits. Additionally, it makes more business sense than the alternative of attempting to grow your way to prosperity. The risks associated with opening new stores and considering acquisitions are huge. The lack of precise control over the inventory compounds those risks.
  4. Yake & Associates, Inc.’s approach to shrinkage control means a retail business can also replenish with more precision, thereby, requiring less product (and capital) to fund the inventory.

III. Corporate Fraud Investigation Experience
Engagement: F.W. Woolworth - Litigation Support / Inventory Fraud Investigation. Yake & Associates, Inc. was retained by a prominent New York law firm to investigate suspicions and allegations that F.W. Woolworth had engaged in inventory manipulation and fraudulent securities practices.

 

Yake & Associates noticed that many of the store locations were reporting positive shrinkage results on a regular basis each year. Furthermore, these “plus shrink” occurrences were commonplace for many years, but started to escalate dramatically over a five year period prior to the engagement. Yake interviewed past and present employees to develop an understanding of the practices that could lead to positive shrink occurrences at Woolworth.

 

Upon interviewing many past and present employees, including store managers, Y&A learned that the store managers had actually been taught how to manipulate the inventory in order to decrease shrinkage at the store level. This practice had become so pervasive that district and regional managers would actually grade their store managers on how well they created “swellage”. Obviously, the term swellage was a carefully crafted Woolworth euphemism meaning to mask/cover up shrinkage. Most of the store managers interviewed revealed if they did not “pad the inventory” with adequate “swellage” they would either be demoted or terminated. Additionally, many reported whenever there was a natural disaster near any Woolworth store involving a fire, storm, high wind and/or tornado damage, the surrounding stores were required to take all of their old and outdated merchandise to the afflicted store, thereby relieving the inventory of merchandise that would never sell. Furthermore, this practice allowed for yet another fraudulent scheme: collecting insurance money on the claims of damaged merchandise.

 

During the course of our investigation Y&A learned these practices had been going on at Woolworth for decades. During interviews with district and regional store managers, they indicated the instructions to “pad the inventory” had actually come from the corporate office. Finally, after years of abuse, this practice got totally out of control.

 

Benefits of Y&A Learning Experience: The value of this engagement was immense.

  1. Rumors of Woolworth’s difficulties circulated in early 1994 when its share price fell from more than $25 a share to under $15 in the space of a few months. In an effort to conceal shrinkage in the stores, management had overstated the inventory and the Company’s stock value. 
  2. Woolworth’s auditing firm received a great deal of criticism and unnecessary exposure. Without interviewing the employees in the districts that were reporting the “plus shrink” occurrences/inventory overages, there is no way to determine the cause.
  3. When management encourages game playing with inventory, it sends a message to all the employees that losses stemming from theft can’t be detected. Then theft-prone environments are created and theft escalates.
    Inventory overages should be taken just as seriously as inventory shortages. It is often the first sign a retailer is losing control over its inventory. Y&A makes one significant point at every opportunity regarding inventory overages:
  4. Inventory does not propagate. It usually indicates to management someone is attempting to mask shrinkage. Additionally, when the inventory results lack integrity, a retailer cannot replenish properly. There is simply no way to have the right merchandise, in the right store, in the right quantity, at the right time for the customers to buy. Sales will ultimately suffer. Conversely, when bad inventories begin stacking up, shrinkage is likely to follow.

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Yake & Associates, Inc.    •     Email    •     207-985-6320    •     P.O. Box 42, Kennebunk, Maine 04043