“Sales volume is not the only way to make money in this business… For every dollar we save in shrinkage we add a dollar to our bottom-line profit.” – Lionel M. Levey
Retail Shrinkage is an unfortunate reality for many retail businesses. From employee theft and shoplifting to administrative errors and vendor fraud, shrinkage can significantly impact a retailer’s bottom line. However, identifying and preventing shrinkage is possible with the right policies and practices. This blog discusses the various types of shrinkage in retail and explores the importance of monitoring and reducing it. What’s more, we also provide actionable tips for identifying and preventing shrinkage. By taking these steps, retailers can protect inventory, reduce financial losses and improve operational efficiency. Let’s get started!
What is “Shrinkage” in Retail?
Retail Shrinkage, or simply “shrink,” occurs when a retail store has fewer products in inventory than it has on record. Factors contributing to shrinkage include employee theft, shoplifting, administrative errors, vendor fraud, product damage, and other factors. (FYI: Shrinkage is originally an accounting term that refers to the loss of inventory)
Why is product shrink essential to monitor?
It is essential to monitor product shrink because it directly affects the profitability of a retail business. For example, retailers lose money when products are stolen, damaged, or lost due to administrative errors or other factors. By monitoring product shrink, retailers can identify areas of concern and implement strategies to reduce shrink, which protects profits. Additionally, effective monitoring of product shrink can help retailers identify and address operational inefficiencies and improve business performance.
What Insights do current studies or statistical data tell about shrinkage?
- In the US, shrinkage accounted for $94.5 billion in retail losses in 2021-22 (2022 National Retail Security Survey)
- 41% of retailers surveyed reported increases in overall inventory shrink in 2019-2020. (Forbes)
- 40% of shrinkage is the result of shoplifting retail (National Retail Federation)
- 30% is retail theft is caused by employees (National Retail Federation)
The Main Types of Retail Shrinkage
Shrink caused by Employee theft refers to employees stealing products, cash, or other assets. Examples of employee theft include theft of money, merchandise and falsifying records. Moreover, employee theft occurs for manyreasons, such as financial stress, a feeling of entitlement, or dissatisfaction with pay or management.
Tips for Dealing with Employee Theft
- Implement an employee theft prevention program with a code of conduct, clear policies and procedures, and regular training sessions.
- Conduct background checks and pre-employment screening to identify potential issues before hiring employees.
- Use technology to monitor employee activity, such as surveillance cameras, point-of-sale (POS) systems, and inventory tracking software.
Shoplifting is the act of stealing merchandise from a retail store. There are many ways in which shoplifting occurs, for instance, concealing items on one’s person, switching price tags, or exiting a store with unpaid products. Shoplifting occurs for several reasons, such as financial gain, poverty, thrill-seeking, or peer pressure. This kind of shrinkage results in a direct loss of revenue and increases costs associated with security measures.
Tips for Reducing Shoplifting
- Improve store layout and product placement to increase visibility and deter shoplifting.
- Train employees to identify and respond to shoplifting incidents, including approaching suspicious customers and using non-confrontational methods such as offering assistance or asking if they need help finding a particular item.
- Use security cameras, electronic article surveillance (EAS) tags, and customer tracking software to deter shoplifting and identify potential theft.
Administrative errors are mistakes made in processing transactions, such as incorrect pricing, inaccurate inventory counts, and failure to record transactions. There are several types of shrink related errors, including human input errors, calculation mistakes, technical malfunctions, or inadequate training. In the medium-to-long term, this form of shrinkage can lead to a loss of revenue, inaccurate inventory records, overstocking, wasted resources, and decreased customer satisfaction.
Measures to Reduce Administrative Errors
- Automate inventory management processes using an inventory management system to reduce human error in tracking and ordering merchandise.
- Conduct regular audits to identify potential errors and discrepancies and implement procedures to address them.
- Provide ongoing training to employees on best transaction processing and record-keeping practices to reduce the risk of administrative errors.
Vendor fraud is fraudulent or criminal activity undertaken by a retailer’s vendors, such as overcharging, false billing, and product theft. This type of shrinkage often occurs due to poor security, or collaboration between the vendor and retail employees. Moreover, vendors may be motivated to commit fraud due to pressure from superiors or a desire to maintain profitability. This fraudulent activity negatively impacts the relationship between the retailer and vendors, resulting in increased costs and decreased supply chain efficiency.
Tips for Reducing Shrinkage Caused by Vendor Fraud
- Implement a vendor screening process to assess the credibility and reliability of potential suppliers before entering into a contract with them.
- Use vendor management software to track vendor performance and identify potential red flags such as inconsistent billing or shipping patterns.
- Conduct regular audits of vendor transactions and records to identify potential fraud or billing discrepancies.
Product damage describes broken, expired, or otherwise unsellable goods. This can occur due to mishandling during transportation or storage, environmental factors, accidents, or customer mishandling. Damaged products can increase costs associated with restocking and disposing of damaged items.
Tips for Preventing Shrink Caused by Product Damage
- Train employees on proper handling and storage techniques to prevent product damage, including appropriate temperature and humidity control, appropriate stacking and shelving, and using appropriate packaging materials.
- Conduct regular merchandise inspections to identify potential damage or defects before they become problematic.
- Use sensors and monitoring devices to track environmental conditions and detect any changes that may lead to product damage.
“Shrinkage is not just another cost of doing business. It is a cost that can be controlled.” – James L. Goss
Retail businesses are significantly impacted by shrinkage. However, there are practice steps retailers can take to identify and prevent it. By selecting a reliable team, setting clear expectations, and implementing accurate tracking systems, retailers can reduce losses due to shrinkage. Proactively monitoring inventory and engaging in loss prevention efforts can also help safeguard stock and improve the bottom line. By following the tips provided in this blog post, retailers can ensure better protection against shrinkage-related losses and increase operational efficiency. With the right policies and practices, retailers can successfully manage their resources and maximize profits.
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