Sensormatic Electronics Corp.

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Sensormatic Electronics Corp.

500 N. W. 12th Avenue
Deerfield Beach, Florida 33442
U.S.A.
(305) 427-9700
Fax: (305) 428-9253

Public Company
Incorporated: 1968
Employees: 4,000
Sales: $487.3 million
Stock Exchanges: New York
SICs: 3812 Search & Navigation Equipment; 3663 Radio &
Television Communications Equipment

Sensormatic Electronics Corp. is the world’s leading producer of electronic devices used to prevent theft in retail stores and other industries. In the 1970s, Sensormatic achieved substantial success by outfitting department stores with small, white, plastic tags attached to clothing that sound an alarm when passed through an exit gate. Since then it has grown into a world-wide source for a variety of security devices, including close circuit television and electronic access control systems. Its electronic and magnetic tags are now affixed to a myriad of objects ranging from filet mignon to wallpaper samples and even babies in hospital maternity wards. Customers included drug stores, supermarkets, and music and entertainment stores, as well as casinos, hospitals, manufacturing facilities, nuclear power plants, and office buildings.

Sensormatic’s origins date to a hot July morning in 1965 when Ronald G. Assaf, the manager of a Kroger supermarket in Akron, Ohio, spied a husky young man walking out of the store without paying for the two bottles of wine he held under his arms. “Without thinking of the consequences,” said Assaf in a company newsletter, “I took off chasing the shoplifter. As I was running after him, the thought occurred to me: if I caught him, I was probably in a great deal of trouble ... he was seven inches taller and a good 50 pounds heavier.” Assaf let the thief outrun him and returned to the store. Upon returning, the first person he saw was his cousin, John Welsh, an amateur inventor who loved to tinker with things in his garage. “Jack,” the exasperated Assaf said to his cousin, “If you could invent something to stop shoplifting, you’d become a millionaire.”

Welsh took the idea seriously. For over a year, the cousins met twice a week to discuss the possibilities of developing a theft prevention system that could be sold to retailers. Welsh decided it was wiser to track the movement of goods through the store than to use surveillance cameras, security guards, and other techniques to watch customers. He came up with the concept of an electronically activated tag that would sound an alarm when passed in front of a screen located at the store’s exit. Sales clerks would remove the tags when a customer purchased the goods.

The cousins pooled their finances and hired two scientists from the University of Michigan to develop a prototype based on this concept. By 1966, the prototype, a large electronic receptor and a plastic disc the size of a dinner plate, was finished. Assaf and Welsh determined the size was too large to appeal to retailers; however, they were pleased with the concept, and continued to raise capital to finance more research. Within a year a more suitable system was created with four-inch paper tags that could easily be hidden on clothing and other goods. In 1967 the two took on James Rogers, a former union official, as a third partner and began marketing their product.

As Assaf later told Dun’s Review the three “started out by making just about every mistake possible.” Bordering on bankruptcy, the team raised $3 million in capital by selling marketing franchises nationwide. The original plan was that Sensormatic would act as a middleman between independent manufacturers of the system and its marketing franchises. Selling the system to retailers, however, proved to be difficult. When weeks had passed and Sensormatic’s sales representatives had secured no orders, Assaf decided to go out and try selling the system himself. “The first week,” he said, “I called on every retailer in Akron and found that they were not in the least bit interested in this new toy or gimmick. The second week I decided that if they wouldn’t pay for the system, I would go out and give it to them so we could obtain the necessary experience of having the system in a store. I had no better results. We couldn’t even give it away.” Finally, Assaf found a shopping mall that was willing to install the system if Sensormatic would pay $300 per month for the inconvenience of attaching the tags to clothing.

After its first year of business, Sensormatic had installed only 20 systems nationwide, and, of those, only one store actually paid for the system. In 1969, the company went public, raising capital to buy back its floundering franchises. Although Sensormatic’s early struggle was to overcome retailers’ resistance to the concept of electronic article surveillance, the system itself also had defects. Originally plagued by false alarms and other malfunctions, Sensormatic kept improving the system until it actually proved too good at catching shoplifters. In one incident, the system was installed at a military PX and within a week had nabbed the wife of the base’s commanding officer. Unwilling to encounter other similarly delicate situations, the base packed the system and called Sensormatic to remove it from the premises.

From this event, Assaf said he realized that retailers prefer to deter shoplifters, not actually catch them. One reason for this was that the actual cost of prosecuting shoplifters often outweighed the cost of the merchandise lost, and litigation was slow and time consuming. With this in mind, Sensormatic developed conspicuous white plastic tags that could only be removed using a special device. In 1970, with the fear of bankruptcy hanging over his head, Assaf moved the company to Deerfield Beach, Florida, where he set up Sensormatic’s first manufacturing operations. This greatly reduced production costs and also allowed the company to focus on improving the quality of its electronic chips, a crucial component in the system.

Assaf also instituted a major marketing drive led by several former IBM executives that focused on the use of the system as a means of deterring shoplifters. The company relegated 25 percent of revenues to marketing and expanded its sales force to cover the globe. Sensormatic had one major rival in the field: Knogo Corp., which had introduced the concept of “electronic article surveillance” in 1965. Because Knogo was having some success selling to smaller boutiques and specialty stores, Sensormatic went after large department stores. Sensormatic’s big breakthrough came in the early 1970s when Bloomingdale’s department store in New York City and Famous-Barr in St. Louis ran successful trials of the system and agreed to install them. With two well-known stores as clients, Sensormatic’s sales force found others more willing to purchase the system. After three years of near failure, sales finally began to climb.

1973 marked the company’s first profitable year: sales were $3.8 million and earnings were $191,000. Sales took off with the introduction of the “alligator tag,” a thin white plastic tag that could be easily attached and removed from clothing by store personnel. The alligator tag became a common sight in department and clothing stores across the United States, and Sensormatic entered a ten-year stretch of record earnings. By 1977, sales were $7.7 million. Two years later they jumped to $27.6 million, with earnings of $4.4 million. By 1982 sales had exploded to over $67 million and earnings hit $15 million.

Analysts say the company’s success was fueled more by an industrywide fear of shoplifting rather than by an actual increase in the number of crime incidents. Nevertheless, shoplifting cost an estimated $26 billion in lost revenues in the United States in 1981, and retailers were beginning to find that systems such as Sensormatic’s not only helped prevent shoplifting by as much as 70 percent but might also reduce theft by in-store personnel.

By 1983, Sensormatic’s continuously strong growth had made it a “darling of Wall Street,” and stocks were trading at three times earnings. The company held 80 percent of the U.S. market and 70 percent of the worldwide market for security tags, and analysts estimated that only 4.7 percent of the worldwide market for such goods had been penetrated. Sensormatic expanded its product line, developing Shopkeeper, a small system for boutiques that it hoped would sell well in Europe, and SensorGate, a surveillance system for hard goods. SensorGate was developed for retail outlets such as grocery, hardware, and liquor stores and used soft, magnetically sensitive labels which could be adhered to high priced items. Customers would pass through a gate and receive the purchased goods on the other side.

By 1984, however, Sensormatic’s impressive growth had stalled. Sales of its much-touted SensorGate system were far below expectations, and orders from Sensormatic’s traditional clothing retailers had also slackened. Quarterly earnings early that year plummeted from 20 cents to 6 cents per share. Sales were flat in 1985, at $24.9 million (compared to $24.8 million in 1984 and $51.2 million in 1983), and the company reported a loss of $4 million.

The company diversified slightly during this time, purchasing $2.5 million worth of convertible notes from Datavision Inc., a residential security company. This gave Sensormatic the potential to own 20 percent of Datavision if it chose to convert the notes into common shares. In 1985, the company purchased I.D. Systems, Inc., a small manufacturer of radio-wave article surveillance systems similar to Sensormatic’s own line. I.D. Systems became a division of Sensormatic, and the company began marketing its products to smaller specialty stores. Also that year, Sensormatic entered into a joint venture with Allied-Signal to develop a new, computerized system to monitor hard goods called Identitech. The company began marketing Identitech to the retail sector while Allied-Signal began marketing it to the industrial customers.

Despite the company’s financial woes, it still retained 70 percent of the worldwide market, far outstripping any of its competitors. In 1986, Allen Dusault, a company director since 1984, was appointed president and CEO. Assaf remained chairman of the board and oversaw development of new technology. Dusault, who was known as a turnaround wizard, set out to improve Sensormatic’s finances. He immediately sold the company’s new $9 million headquarters in Boca Raton, Florida, cut middle management by approximately 200 people, and moved a percentage of manufacturing from Florida to Puerto Rico. Dusault also improved operating margins, which had fallen from 37 percent in 1983 to 6 percent in 1986. Within a year, sales rose 10 percent to $95 million.

Once Dusault had gotten Sensormatic’s finances back under control, Assaf resumed his position as CEO and began an extensive marketing campaign for two new systems. One was an improved, magnetic-field system of tracking goods in hardware stores and supermarkets. The other was a software package that combined close-circuit television systems with electronic ID door openers and was aimed at industrial customers seeking to reduce on-the-job theft and fraud. Sales resumed their upward trend, climbing from $95 million in 1987 to $239 million in 1991.

Foreign expansion fueled much of this growth. Sensormatic stepped up its overseas marketing, setting up a sales headquarters in Singapore and making headway into the newly opened Russian market. Another percentage of Sensormatic’s growth came through the acquisition of new companies. In 1992, Sensormatic merged with BURLE Industries Inc., the leading manufacturer of close-circuit televisions and accessories in the United States. It also significantly increased its European market presence with the purchase of Automated Security (Holdings) PLC’s electronic article surveillance and close circuit television businesses. Sensormatic merged the operations of both companies yet continued to market products under both the Automated Securities and BURLE names.

Having recovered from its problems in the mid-1980s, Sensormatic entered the second half of the 1990s on track for impressive growth. Its market share was unrivaled worldwide, with European sales alone totaling more than the combined sales of its two largest competitors. As it approached the turn of the century, Sensormatic was continuing to expand both through product introduction and through the acquisition of new companies. In 1993 Sensormatic purchased its largest European rival, Automated Loss Prevention Systems, a top manufacturer of electronic article surveillance and close-circuit television systems. Revenues neared the $500 million mark, and the company posted record earnings of $54 million.