After several hard weeks of gathering inventory counts and overnight shifts, the numbers come in and they aren’t as pretty as they should be. The store has been in the red for the past few quarters and while there has been some improvement, it isn’t enough to get the store cleared. Speaking with other managers, you learn that your store isn’t the only one in the red. In fact, this has been a trend throughout the entire region. So where did things go wrong?
Large retailers with high shrinkage usually have pretty strict policies in place that focus on loss prevention. Corporations will ask store managers to review tactics like product, fixture and cashier placement, alarm tagging practices, and ask floor staff to be more vigilant. However, these policies are an oversimplification of the issues behind high shrink.
The Layers of Shrink
Research by the National Retail Federation reveals that shrink hit $45.2 billion in 2015, an increase of $1.2 billion in 2014.1 Shrink continues to be a serious problem in retail with symptoms that can be masked by poor operational practices, like record keeping and inventory counts. This is especially true for retailers with high spoilage goods, like grocery stores. One study by FMI and The Retail Control Group sampled 2,900 U.S. retail supermarkets and found 64% of store shrink was directly caused by a breakdown of store operating practices.2 The remaining 36% of store shrink is caused by theft.3
The breakdown of store operating practices ranges from damaged inventory to inaccuracies in inventory counts and mismanaged merchandise orders. Yet, despite the breakdown in operational practices being the leading cause of shrink, 47% of retail supermarkets are expanding their loss prevention departments to prevent theft.4
The big picture is murkier for other retail stores whose merchandise is non-spoilage goods. According to a study by The Retail Equation, the majority of shrink in retail stores can be divided into 5 broad categories:5
- Shoplifting: 38%
- Employee Theft: 34.5%
- Paperwork Error: 16.5%
- Vendor Fraud: 6.1%
- Unidentifiable within store: 6.1%
Although theft from shoplifters and employees presents a major problem, over 60% of all retail shrink is internal. Like in retail supermarkets, the main course of action taken is beefing up loss prevention to prevent future theft. Since 2014, 39.4% of retail corporations have increased their loss prevention budgets year-after-year.6
The Underlying Issues of Internal Shrink
Though the portion of shrink from theft-related causes is substantial, 62% of shrink is coming internally and 6.1% of all shrink as “unidentifiable by the store.” This points to deeper issues within organizations.
Typically, these types of shrink are brushed off by store managers as they work to offset the losses in other accounts like the cost of sales. However, the internal problems of shrink continue to be a major issue for loss prevention departments as they work to manage shrink that they can’t identify. What does this mean? Inaccurate finger-pointing and ineffective policies. This frustration drives store leaders to view shrink as an external event they can’t control. Like the weather.
To help the mounting problems of shrink, retailers should consider creating greater transparency within operations and their stores. Retailers that work with greater transparency enable their loss prevention departments to better manage the pockets of operation that lead to internal shrink. After all, store and field leaders can’t manage what they can’t measure. In the case of shrink—there are solid metrics available, clear and best practices to control loss, and a real opportunity to improve performance.
Investments in the right place will yield improved results in the complex issue of loss prevention. Bring greater visibility and strengthen communications within your company with our store relationship management platform, CoEFFICIENT. CoEFFICIENT helps teams keep track of their progress with immediate access to progress reports, briefs, and streamlined communication. Curious how CoEFFICIENT might benefit your team? Read more.
1. Ana S. “Retailer Inventory Shrinkage Increased to $45.2 Billion In 2015”. National Retail Federation. https://nrf.com/media/press-releases/retail-inventory-shrinkage-increased-452-billion-2015 ↩
2. Jean B, et al. “Estimated Fresh Produce Shrink and Food Loss in U.S. Supermarkets”. MDPI. http://www.mdpi.com/2077-0472/5/3/626 ↩
3. Ibid. ↩
4. Ibid. ↩
5. Kathy A. “Retailer Estimate Shoplifting, Incidents of Fraud Cost $44 Billion In 2014”. National Retail Federation. https://nrf.com/media/press-releases/retailers-estimate-shoplifting-incidents-of-fraud-cost-44-billion-2014 ↩
6. Ibid. ↩