Checkpoint Systems, Inc. Business Information, Profile, and History

Company Perspectives:

Checkpoint Systems will provide retailers and system integrators with supply chain management and security solutions that move and identify goods effectively and efficiently, control shortage, improve sales and profitability, and ensure the accuracy and protection of assets.

History of Checkpoint Systems, Inc.

Checkpoint Systems, Inc. is one of the world leaders in electronic article surveillance (EAS) technology that tags retail items to prevent shoplifting and employee theft (so-called 'shrinkage'). With 42 percent of the global market share in EAS, Checkpoint trails only Sensormatic Electronics and its 45 percent. The longtime rivals employ different technologies, which has caused some friction between the firms, resulting over the years in negative advertisements and litigation. Checkpoint is involved in other areas of security control, including closed-circuit TV and monitoring systems, and access control systems, which determine employee access to restricted areas at specified times. Checkpoint also offers a radio frequency identification (RFID) system that can simultaneously read data from a large number of 'intelligent tags' without the need for line-of-sight. The technology has been used to automate toll lanes to ease congestion at bridge and turnpike entrances. Checkpoint employs RFID in its library services, not only to prevent theft but also to control inventory and allow patrons to check out and return materials with self-service equipment. In recent years Checkpoint has expanded beyond the bounds of retail security by offering bar code labeling systems and hand-held pricing systems. With security tagging embedded during the manufacturing process ('source tagging'), Checkpoint's systems are able to provide inventory control as well as security, to track goods from manufacture to point of purchase. Despite the move to diversify its business, however, Checkpoint still relies on EAS systems to account for almost 80 percent of its sales.

Company Origins

Checkpoint was originally incorporated in Pennsylvania in 1969 as a wholly owned subsidiary of Logistics Industries Corporation, a packaging company. Checkpoint first serviced the library market, providing security and control over revolving materials. Logistics' founder, A.E. (Ted) Wolf, recognized that Checkpoint held more promise than the company's main packaging business. In the 1970s Checkpoint expanded into retail security. When the subsidiary reached $3 million in sales in 1977, Wolf spun it off and distributed the company's common stock to Logistics' shareholders as a dividend, in conjunction with a merger between Lydall Inc. and Logistics.

As long as theft was a growth industry, and there was no hope that it would suffer a prolonged slump, companies like Checkpoint were likely to prosper. Costs associated with shrinkage were staggering, amounting to the loss of billions of dollars each year. Studies from 1996 indicated that $21 billion worth of merchandise was stolen from domestic retail operations. Consumers, as a result, were made to pay higher prices, and the government lost up to a $1 billion in tax revenues. Of the $21 billion in stolen merchandise, $9.1 billion was attributed to outside shoplifters, $10.7 billion to employees, and $1.5 billion to vendor representatives on the premises. Furthermore, reducing shrinkage could have a dramatic impact on a company's bottom line. It was estimated that every percentage point eliminated from shrinkage translated into a pre-tax net increase of 33 percent.

Before such studies were conducted, retailers assumed that the vast majority of shrinkage was caused by outside shoplifters. Confronting worker theft and systemic bookkeeping errors thus were avoided in favor of blaming an underclass of habitual thieves. In addition to a skewed understanding of shrinkage, the measures taken to combat shoplifting proved unsatisfactory. Locking merchandise behind glass cases provided security but required hiring a large sales staff to wait individually on customers. Placing products in the open, to stimulate sales, necessitated fixtures and locking devices that would allow the customer to feel the merchandise but not walk off with it. Efforts to make goods even more available to customers, to stimulate impulse buying, would lead to security guards, both uniformed and plain clothes, patrolling catwalks above the floors of department stores, peering through one-way mirrors, or keeping an eye out for shoplifters from lifeguard-like perches. Security companies boasted about the numbers of shoplifters apprehended, but in reality shrinkage in the 1960s and 1970s continued to increase, as did the cost of prevention. Thus retailers were hurt at both ends. The stigma attached to shoplifting also was lessening, with some people justifying it as a 'political act.' In any case, it was becoming increasingly more difficult to spot a likely shoplifter in the crowd, as well as to assume the trustworthiness of employees, who might see theft as an appropriate remedy to grievances. It was in this environment that electronic article surveillance was developed.

The initial technology of EAS was simple enough, essentially that of radio. A transmitting tag was attached to an item of merchandise that could be removed only by a cashier. If the tagged merchandise was taken from the premises a receiver flanking the entrance would pick up the signal and sound an alarm. The system depended on proper training of personnel, to make sure tags were removed properly, and on maintenance of equipment. Still, the results were impressive, at least until shoplifters found ways to circumvent the system. Security personnel were also too quick to assume guilt when an alarm sounded, which led to a rash of falsely accused customers and costly legal settlements. Retailers learned that the new EAS systems had an elastic zone of detection that could extend well beyond the store's entrance, creating a 'bubble' that expanded during heavy pedestrian traffic. Alarms could be triggered by nearby racks of tagged items, and angry customers were stopped and searched for no reason. Even when the system caught a legitimate shoplifter, gaining a conviction proved difficult, since that would require a direct observation of the theft. Nevertheless, shrinkage was curtailed substantially and the loss prevention industry was well established.

Changing Leadership in the Early 1990s

The early leader in the EAS business was Sensormatic Electronics Corporation. By 1986 Checkpoint, focusing on drugstores, would be tied for second with Knogo Corporation, but it still lagged well behind Sensormatic. Preparing to step down, Wolf named a former accountant, Gerald Klein, to serve as Checkpoint's senior vice-president of operations, with the understanding that Klein would take charge when Wolf retired in two years. By 1992, however, with the price of Checkpoint stock virtually unchanged, Wolf removed Klein and resumed control of the company. Wolf vowed to make Checkpoint a more feared competitor, a trait that he found lacking in Klein.

In addition to beefing up the sales force by 50 percent and bringing out new security products, Wolf also initiated a program of global expansion. In 1992 Checkpoint acquired its Canadian distributor, Checkpoint Canada, allowing the company to directly sell its products in the Canadian marketplace. The following year Checkpoint purchased its distributor in Argentina. Checkpoint also moved into the Australia and Mexico markets.

Wolf clearly was determined to grow Checkpoint and challenge Sensormatic for supremacy, not only in sales but technology. The two companies had come to rely on different methods for EAS. Checkpoint was committed to radio frequency (RF) technology, whereas Sensormatic now opted for acousto-magnetic technology, in which alarms were triggered by the vibration of metal in the security tags. Both systems had advantages and disadvantages. RF tags were paper thin and easier to work with, but also led to a high number of false alarms. Acousto-magnetic tags were cumbersome and pressure sensitive, but suffered virtually no false alarms. Both systems also had big name retail customers with heavy investments in their systems who weighed in on either side. Under Klein there was good relations between the two companies; Sensormatic even agreed to distribute Checkpoint RF systems in Europe. But there was a war brewing over which system would become the standard for source tagging in the music industry.

Music retailers, with a younger customer base that was susceptible to the temptation of shoplifting and a product that could be easily concealed, were one of the major users of antitheft devices. Much of the security involved the manufacturers' use of cardboard 'longbox' packaging. The industry, facing pressure from ecologists, agreed to eliminate the packaging by April 1993. The move to source tagging, embedding the security transmitter directly into the product, was the logical solution to providing product loss security for the new smaller tape cassette and compact disc packaging. Most music retailers, however, used a tagging system that relied on microwave technology, which would not be compatible with source tagging. Furthermore, the microwave system had proven to be easily defeated by shoplifters who used body shielding or foil-lined bags. In preparation for the longbox conversion, the National Association of Recording Merchandisers (NARM) tested EAS systems with the intention of establishing a standard. Of the four participants in the testing (Checkpoint, Sensormatic, 3M, and Knogo), only Checkpoint was wedded to just one technology. The others also offered RF and could more easily adjust if NARM ruled out magnetics in favor of radio. Thus the stakes for Checkpoint were extremely high, even though it was likely that the winner would license its technology to the other companies.

As NARM delayed announcing its decision, Wolf and Checkpoint released a full-page ad in the January 9, 1993 issue of Billboard that claimed that certain magnetic deactivation systems could distort the audio quality of audio and videotapes. While Sensormatic was not mentioned in the ad, the acousto-magnetic technology it criticized was proprietary to Sensormatic, and based on NARM criteria it was really the only logical alternative to Checkpoint's RF system. With NARM on the verge of announcing its decision, Sensormatic lost no time in filing suit against Checkpoint for false and misleading advertising, seeking $35 million in damages.

In February 1993 rumors that the NARM subcommittee working on the security question had recommended the Sensormatic system sent Checkpoint stock tumbling, losing a third of its value in two days. In March NARM announced its decision to go with Sensormatic, only to discover through further testing that indeed the system's deactivation process did cause deterioration in the sound quality of some cassettes. Now the price of Sensormatic stock dropped and Checkpoint's was driven up. While Sensormatic rushed out new deactivation devices that it maintained corrected the problem, Checkpoint again trumpeted the studies that led to the company being sued, as it tried to pressure NARM to reopen its process.

The Mid-1990s and Beyond

On June 26, 1993, Sensormatic agreed to drop its suit against Checkpoint, when the two entered a pact agreeing not to criticize one another in their advertisements; also as part of the settlement, however, Sensormatic discontinued its agreement to sell Checkpoint products in Europe. The next month, to forestall a loss in European sales, Checkpoint acquired Dutch makers of security products and services, ID Systems International B.V. and ID Systems Europe B.V.

The NARM controversy, with the stakes so high, was destined to fester. Checkpoint and Target stores, which used Checkpoint systems and sold a great deal of music products, filed suit against NARM. When PolyGram in 1996 began to employ the source tagging standard recommended by NARM, Checkpoint and Target sued the music distributor. PolyGram suspended its operation, with its president, James Caparro, commenting, 'We maintain support of source-tagging, but we will not fund the fight on behalf of the entire industry.'

In the meantime, Checkpoint continued to grow. Kevin Dowd took over as president and CEO in 1995, with Wolf now serving as chairman of the board. Also in that year the company acquired Eagle Security, its distributor in Norway, as well as Actron Group Limited in the United Kingdom. In 1996 Checkpoint opened a European distribution center in Mechelen, Belgium. Checkpoint moved into the closed-circuit TV (CCTV) security market in 1995 with the purchase of Alarmex, then over the next two years made further purchases to bolster its position, adding Canada's Vysions Systems, Denmark's Check-out Security Systems, and Belgium's D & D Security.

In April 1997 the suit against NARM was settled out of court. While NARM urged manufacturers to begin placing Sensormatic tags on CDs, it also sent a letter to the six major music distributors requesting that they meet with Target to discuss its concerns, in effect asking them to consider embedding more than one tag or tagging separate batches of CDs with both technologies, a position that NARM had opposed for the 12 years that it had been involved in the question of source tagging. Target had maintained, however, that much had changed in the intervening years: other industries had dealt with the same question of multiple technologies in source tagging. While Checkpoint concurred and urged that market forces be allowed to work, Sensormatic took the position that CDs were not conducive to two tags and that the delays cause by litigation had simply prevented merchants from enjoying the savings that could be realized by better security measures. Even though music companies would pass along the cost of tagging to the retailer, and in turn the consumer, they were clearly in no hurry to implement source tagging, despite everyone's general support of the concept. It was not until 1999 that Sony Music Distribution and WEA announced that they would begin to embed Sensormatic tags in their CDs but would also conduct talks with Checkpoint about accommodations with the company's competing system. They held out the possibility of placing the RF tags on blow-in cards in the CD package or on album artwork.

Also in 1999 Wolf stepped down as chairman of the board of Checkpoint in favor of director David Clark. The company continued to diversify beyond EAS, entering the access control business and working with Mitsubishi on RFID technology. Checkpoint made a major move in 1999 when it purchased the German company Meto AG for $265 million, plus the assumption of $35 million in debt. Not only would the deal double the size of Checkpoint, it dramatically increased its European presence and allowed the company to expand into the bar-code labeling system. The so-called 'auto identification' market was estimated to be worth $8 billion to $10 billion a year. According to Dowd, who was quoted by the Wall Street Journal, 'This transforms Checkpoint from the electronic article surveillance business into retail supply chain management.'

Checkpoint also returned to its roots with the introduction of its Intelligent Library System (ILS). Building upon its RFID technology the Checkpoint system would attach a paper-thin, flexible 'circulation circuit' label to each item in the library that could then be inventoried rapidly with a hand-held wand without the need for line-of-sight reading. The system also would have the capability of providing ATM-like self-checkout units that printed due date slips. Academic libraries that installed ILS reported that material handling time by staff was reduced by as much as 75 percent.

In little more than 30 years Checkpoint had transformed itself from a subsidiary of a packaging company into a global concern with its own subsidiaries in Australia, Argentina, Brazil, Canada, Denmark, France, Germany, Italy, Japan, Mexico, The Netherlands, Sweden, Norway, Portugal, Spain, Switzerland, and the United Kingdom. Checkpoint had diversified beyond EAS into the broader category of material handling, as well as RFID technology and its myriad of applications (from libraries to toll booths to cattle herds), and other security services (from CCTV to Access Control). These efforts should help insulate Checkpoint from the dangers of being overly committed to its radio frequency EAS format.

Principal Operating Units: Electronic Article Surveillance; CCTV Systems and Monitoring Services; Access Control Systems; Radio Frequency Identification; Bar Code Labeling Systems; Hand-held Labeling Systems; Retail Merchandising Systems.

Principal Competitors: Sensormatic Electronics Corporation; 3M; Knogo Corporation.

Chronology

• Key Dates:

• 1969: Checkpoint is created as subsidiary of Logistics Industries.
• 1977: Company is spun off as part of a merger between Logistics and Lydall, Inc.
• 1986: Founder A.E. Wolf names Gerald Klein to succeed him.
• 1992: Wolf resumes control of company.
• 1995: Kevin Dowd becomes new president and CEO.
• 1999: Company acquires Meto AG.