In retail, shrink refers to the loss of inventory or assets. This phenomenon can happen due to various factors, such as theft, errors, and damages.
Shrink is a significant concern for retailers worldwide, directly impacting their profitability and overall business operations. And it’s getting worse. The NRF reports that it’s becoming a nearly $100 billion problem for retailers. And their annual Retail Security Survey doesn’t anticipate the trend reversing anytime soon.
This article delves into shrinkage in retail, its causes, consequences, and potential solutions to mitigate its adverse effects.
Table of Contents
Calculating Shrink in Retail
Retailers measure shrink as a percentage of a retailer’s total sales. Calculate your shrinkage by dividing your total losses by total sales. This equation will yield your percentage of retail shrinkage.
Retail shrink % = total losses (÷) total sales
Ideally (but realistically), you want this number to be below 2%.
Causes of Retail Shrinkage
Retailers may deal with one or many causes of shrinkage. Here are the most prevalent issues to think about:
Shoplifting
One of the most common causes of shrinkage is shoplifting, where customers steal merchandise without paying for it. Shoplifters employ various tactics to conceal their actions, making it challenging for retailers to detect and prevent these losses.
Modern asset security technology, including the increasing use of RFID, has made it easier for retailers to prevent shoplifting and/or catch shoplifters.
Employee Theft
Unfortunately, not all shrinkage comes from external sources. Employee theft is another significant contributor.
Employees may steal merchandise, manipulate inventory records, or provide unauthorized discounts to friends and family.
Administrative Errors
Clerical mistakes, such as inaccurate inventory counts or pricing errors, can result in shrinkage. These errors may occur during data entry, stock replenishment, or when merchandise gets moved within the store.
Using outdated inventory management systems and manual inventory reconciliation often worsens these matters.
Vendor Fraud
Sometimes, suppliers or vendors play a role in shrinkage by misrepresenting products or quantities delivered. Vendors may provide fewer items than invoiced, causing inventory discrepancies. They may also send damaged or expired products, leading to unsellable goods that retailers must write off.
Some vendors might even supply counterfeit or subpar merchandise, which retailers can lead to customer complaints and returns.
Damages and Spoilage
Merchandise can get damaged during transportation, while on the sales floor, or even due to customer mishandling. Perishable items may also spoil, leading to financial losses.
This factor can significantly impact profitability for convenience stores, groceries, and even beer distributors.
Consequences of Shrink in Retail
Shrinkage has far-reaching consequences for retailers, affecting their bottom line and overall operations:
Financial Impact
Shrinkage represents a direct loss of inventory or revenue, which can erode a retailer’s gross profit margin. When items are stolen or lost, it’s as if the retailer is purchasing products without any corresponding revenue. Of course, this contributes to reduced overall profitability.
Pricing and Margins
To compensate for shrinkage, retailers may increase product prices. These measures can make them less competitive in the market. Customers are more likely to look elsewhere and purchase similar products from competitors.
On the other hand, if the retailer decides to reduce profit margins, they are looking at potentially serious damage to their bottom line and cash flow.
Irregularities and Stockouts
Retail shrinkage can lead to stockouts when inventory losses are not promptly identified and replenished. When merchandise gets stolen, damaged, or unaccounted for, it creates a discrepancy between recorded inventory levels and actual on-hand stock.
If retailers do not adjust their inventory ordering and restocking processes to account for these losses, they may inadvertently under-order, leading to insufficient stock levels. These irregularities, in turn, can result in stockouts, leaving customers unable to purchase desired items.
Customer Experience
Retailing environments and experiential shopping are more critical than ever to the success of businesses. Many customers discover new stores and products through local inventory searches and eCommerce platforms.
Empty shelves, inaccurate product information, and out-of-stock items will frustrate customers, potentially driving them to competitors.
How To Prevent Shrinkage In Retail
Businesses employ various strategies and technologies to address shrink in retail. Retailers should invest in security systems, surveillance cameras, and trained personnel to deter shoplifting and employee theft.
Inventory Management Software
Inventory management software reduces retail shrinkage by providing greater visibility and control over a store’s inventory. Such software more readily identifies shrinkage patterns and trends, enabling retailers to implement targeted strategies for loss prevention.
These tools minimize the chances of theft or errors going unnoticed. Many inventory management solutions offer demand forecasting and optimization tools, helping retailers maintain appropriate inventory levels and reducing overstock situations.
Finally, some integrations with security systems will trigger alerts and notifications for suspicious activities or inventory movement.
RFID Tracking
RFID (Radio-Frequency Identification) tags, attached to individual products or packaging, allow for real-time store tracking and merchandise monitoring. This technology enables retailers to conduct automated, highly accurate inventory counts, reducing the likelihood of discrepancies and errors that can lead to shrinkage. Studies show a minimum of 25% average improvement in inventory accuracy with the use of RFID.
RFID can also trigger security apparatuses when tagged items leave the store without being purchased.
Employee Training
Employee training reduces retail shrinkage by creating a more vigilant and knowledgeable workforce. Educating employees about the various types of shrinkage, including theft and errors, raises their awareness of potential risks.
Emphasize the importance of accurate inventory management, reducing errors and miscounts that can lead to shrinkage. Proper training equips staff members with effective loss-prevention strategies. Staff members will recognize suspicious behavior among customers or colleagues and adhere to security protocols.
Foster a culture of accountability where employees understand the impact of shrinkage on the company’s profitability. Encourage your staff to participate in prevention actively.
Vendor Audits
Enhancing transparency in the supply chain helps prevent discrepancies and fraud related to incoming inventory. Regularly auditing vendors is important for ensuring that the merchandise received matches the original order, reducing vendor-related shrinkage.
Set up a scheduled cadence to ensure that you are doing your due diligence and that your vendors provide exactly what they agreed to in your contracts.
Data Analytics
Data analytics enable retailers to analyze historical shrinkage data and identify patterns. This insight helps them understand where and when losses are most likely.
Predictive analytics forecasts potential shrinkage risks, allowing retailers to allocate resources and implement preventive measures proactively.
In addition, real-time data analysis triggers alerts for suspicious activities, such as unusual inventory activity or transaction anomalies, aiding in immediate loss prevention.
Improved Store Layout and Surveillance
An improved store layout can reduce retail shrinkage by enhancing visibility and control over the retail environment. Strategically place high-risk or high-value items near checkout counters or within staff sightlines to make it harder for shoplifters to operate discreetly.
Well-organized retail floor plans reduce clutter and make it easier for employees to spot misplaced or missing items. Smart floor designs with open sightlines and strategically placed displays and mirrors can deter shoplifters by minimizing blind spots.
Lastly, ensure you use high-resolution security cameras in strategic locations and check on their functionality frequently.
Locking Up Sensitive Areas
Locking up sensitive retail store areas, such as stockrooms, cash offices, and high-value merchandise sections, will significantly reduce retail theft by limiting unauthorized access. This restricts the opportunity for both employees and customers to steal items or tamper with inventory records discreetly.
Additionally, it acts as a deterrent, making it more challenging for potential thieves to execute their plans and ultimately contributing to a safer and more secure retail environment.
Conclusion: Secure Your Inventory with KORONA POS
Modern retail point of sale plays a crucial role in reducing retail shrinkage. KORONA POS provides detailed end of day reports showing all actions taken by cashiers on the floor. Our dashboard is completely customizable to taper access according to staff needs and clearance.
In addition, real-time inventory tracking and RFID mitigate the risk of errors and discrepancies immensely. KORONA POS generates detailed sales reports, allowing retailers to identify irregularities or suspicious activities, aiding in the early detection and prevention of theft. Our software eliminates blind spots and errors across all aspects of retail.
Click the button below to learn more about KORONA POS and how we can help take your business to the next level.
FAQs: What Is Shrink in Retail
In retail, the term “shrink,” or “shrinkage,” refers to the loss of inventory or revenue due to theft, fraud, damage, errors, or other causes. These factors result in a discrepancy between the recorded and actual inventory on hand. Retailers often closely monitor and implement strategies to reduce shrinkage to protect their profitability and assets.
An example of shrinkage in retail is when a store experiences theft of merchandise by customers or employees. For instance, if a cashier intentionally under-rings items to give unauthorized discounts to friends, it results in a loss of revenue and merchandise for the store. Another example of shrinkage is receiving damaged merchandise from a wholesaler.
To effectively prevent retail shrinkage, retailers should adopt a multifaceted approach. This includes implementing robust security measures such as surveillance cameras and alarms, fostering a culture of integrity among employees through training and awareness programs, and implementing stringent inventory control practices. Conduct regular audits and use data analysis to identify and address discrepancies promptly. Controlling access to storage areas and high-value items helps reduce internal theft opportunities, contributing to a comprehensive strategy to minimize shrinkage.
