What Is Shrinkage in Retail? 5 Major Causes and Solutions Explained

Preface

Running a retail store is no small feat, whether it’s a cozy nook filled with books or a massive department store bustling with activity. While keeping track of stock and the company’s financials, the word “shrinkage” is enough to cause alarm. Thus, what is shrinkage in retail, and what are the common causes of shrinkage? If you are wondering what this is all about, then you are not alone. Retail shrinkage is an ongoing problem that steadily eats into your margins and creates havoc. In this blog post, you’ll learn about:

• The concept of shrinkage and what it means
• Why shrinkage is important for companies
• Methods to calculate shrinkage
• The main reasons for shrinkage
• Measures and methods to minimize shrinkage

What Is Shrinkage in Retail?

Shrinkage in retail is defined as the loss of inventory stock that has not been sold, which leads to a negative difference between what was reported and the amount of inventory that is actually in the possession of the retailer. This big issue harms the profits made by a retailer’s sales workers and is usually attributed to shoplifting, employee theft, administrative errors, vendor fraud, and human error. Such problems can incur substantial costs and hamper overall productivity. The principle of shrinkage is crucial for any retail store manager as it is critical in stock-taking and formulating preventive measures against losses. Knowing the factors that lead to shrinkage will enable retailers to achieve lower asset loss and a smoother flow of business.

Why Retail Shrinkage Matters?

Retailers need to pay attention to their losses as shrinkage is a problem that no business in the retail industry would wish to have. According to the available details and figures published by the National Retail Federation in its recovered annual reports, about 1.4% of retail sales or revenue is lost due to retail shrinkage which leads to billions of dollars within a year. It will not only decrease the profit margins of the business, but shrinkage will also have a significant impact on the retailer’s bottom line and hamper the workflows by creating inefficiencies and if not properly managed, affect customers.

Such losses restrict potential for the improvement which can be in the form of developing more robust training of staff or better customer service operations. Concentration on shrinkage is not only a focus on reducing costs, it is also essential for the competitive advantage of your retail organization. Retailers can reduce cost structure and use their staff as the first line of defense and primary prevention tool by integrating good inventory control systems and loss control measures which will increase the efficiency with accuracy and make shopping for the customers seamless. These methods, when employed consistently, can prevent long-term shrinkage and enhance the operational effectiveness of a business by improving its profitability through time and resource savings.

Calculating Shrink in Retail: Step-by-Step Guide

Calculating shrinkage in retail may appear complicated at the outset, but it becomes easier when you begin through the formal process. The following illustrates the steps and formulas for conducting it effectively:

• Determine Recorded Inventory: Start with the total inventory count documented in your records before conducting a physical count.
• Conduct a Physical Inventory Count: Perform a thorough check to measure the actual number of items present in your store.
• Calculate Inventory Loss: Inventory Loss=Recorded Inventory Count−Actual Inventory Count

This procedure assists you in identifying the amount of inventory that is missing.

• Compute the Shrinkage Rate:

Shrinkage Rate=(Inventory Loss/Recorded Inventory Count)×100%

The shrinkage rate converts inventory loss into percentages, which provides a clearer picture of how bad shrinkage is.

Key Types of Shrinkage in Retail and How to Identify Them

To prevent inventory shrinkage problems from arising, it is important to take a look at the root causes as the first step and the types of shrinkage that exist. Each type presents its challenges that also need to be tackled distinctly.

Cause #1: Shoplifting

Shoplifting still accounts for an unfortunate percentage of retail shrinkage. National Retail Federation’s 2020 National Retail Security Survey revealed that increasing shoplifting in stores has been able to account for nearly 36.5% of the retail shrinkage. This type of theft, also known as external theft, can range from opportunistic individuals to organized retail crime rings. Placing cameras around the premises and several employees to watch the security footage can help control any potential shoplifters.

Cause #2: Employee Theft

Employee theft, or internal theft in other terms, is a major cause of shrinkage. The same survey’s participants claim that employee fraud accounts for approximately 33% of lost inventory. Society’s actions of this nature include stealing goods from the store, taking cash from the cashier, and even manipulating transaction records. But this is dodged through, as will be eventually seen, measures such as strict internal controls to prevent significant theft losses, frequent audits, and the promotion of integrity and responsibility throughout the organization.

Cause #3: Administrative Errors

According to estimates, administrative errors represent 20% of shrinkage. These mistakes come from things like incorrectly counting inventory, entering data wrongly, or simply making errors in the documentation involved. To an extent, these issues can be reduced by having excellent inventory systems in place and training employees continuously for better handling of inventories and eventual reduction of discrepancies during stocktaking.

Cause #4: Vendor Fraud

Vendor fraud, although less common, can still significantly impact inventory levels. While specific percentages vary, vendor fraud is generally considered to contribute to a noticeable portion of shrinkage. This involves suppliers providing fewer items than billed or engaging in deceptive practices. Establishing clear contracts, conducting regular audits, and maintaining effective communication with suppliers can help retailers minimize these risks.

Cause #5: Operational Loss

Operational losses due to abnormalities within the supply chain such as bad inventory management or shipping practices, are losses caused by the business at the center and generally account for a smaller percentage of the total loss by shrinkage, but worth noting. Improvement in these losses may be achieved through training on the tenets of inventory management and the application of inventory management technological tools. Besides, evaluation and refinement of the operations of the supply chain management system must be done to minimize operational losses.

How to Prevent Retail Shrinkage: Top 6 Strategies and Tools

If you decide to address the issue of retail shrinkage, it is not enough to just know the reasons behind it, but also to apply relevant tools and tactics. To look at shrinkage issues, the following six circumscribed measures can be proposed, each showing a different focus on the problem.

Optimize Store Layout to Reduce Theft Opportunities

The purpose of theft reduction and shrink prevention makes the proper design of the store layout of great significance. Properly designed layouts help retailers reduce the chances of shoplifting. The layout should also serve the purpose of avoiding the creation of blind spots ensuring that all areas are out of the scope of retail employees or cut-out areas such as mirrors and security cameras. These features serve as preventive tools undermining any attempts by prospective burglars to go about their business unnoticed.

To prevent this kind of theft, display areas for higher valued items should be located so that staff is likely to see them. When a viewpoint is straight, these items cannot be taken without being noticed. In addition, organized and spacious aisles make it easier for store personnel to monitor the store for suspicious activity occurrences more effectively.

Another area of great concern is enhancing the lighting of the store. Good lighting improves visibility and enhances the shopping experience, which in turn benefits shoppers. A well-designed store layout protects against shrinkage and shows the entire shopping process in the best possible light, including strategically limiting security that implements annoyance to customers to make the shopping experience more enjoyable and comfortable.

Create Strict Return and Refund Policies

Retailers must control return fraud, one of the significant causes of shrinkage, to reduce overall shrinkage. This refers to situations where customers try to return stolen items or counterfeits, which could be detrimental to the retailer’s profitability. Therefore, devising a strict return and refund policy helps prevent such losses while increasing overall profitability.

The effective policies must be comprehensive and include, but are not limited to, the: stipulation of timelines within which items ought to be returned, provision of proof of purchase, and acceptable state of returned items. These policies curb fraudulent activities by ensuring instances of returns are valid. Retailers can limit their exposure to fraud by applying verification activities and thus controlling their return policies.

Also, when return policies are well communicated, customer trusts are built as well. If the return policy is self-explanatory, the return process becomes easier, and it helps protect the business from shrinkage.

Real-Time Monitoring and Data Analysis for Shrink Prevention

As a countermeasure to retail shrinkage, many retailers are adopting technologies such as a point of sale (POS) system and RFID tags. These technologies enable active inventory control, which makes it easier and faster to find out about discrepancies. With strong, reliable, and timely management of inventories, retailers can quickly resolve disputes and prevent losses from errors or thefts.

Moreover, simply knowing the data is not enough, as data analytics can be a good friend in helping to check shrinkage. Monitoring these activities is made easier by separate tools, which employ data analytics to look at patterns in the inventory and enable automatic flags on abnormal patterns that could indicate shoplifting and other internal theft. With early detection, retailers can take appropriate action to avert possible losses and improve overall inventory control measures.

It should be noted that the increased visibility throughout the retail store also deters. When employees and customers know that regular inventory audits and stocktaking are done frequently, chances for theft greatly decrease. Such a degree of transparency not only lessens the chances of shrinkage but strengthens the security climate in the store, encouraging respect and responsibility.

Inventory Accuracy with ESLs and Management Systems

Electronic Shelf Labels (ESLs) have dramatically improved retail operations by providing immediate price updates directly at the shelf, minimizing pricing errors, and ensuring management accuracy. This not only keeps prices current but also eases the workload on staff, allowing them to focus on customer service rather than manual price changes.

The compatibility between ESLs and advanced inventory tracking systems guarantees that the stock is well monitored. It is important to have real-time updates of the inventory for the employees to ensure they have the right stock and for the customers to know the availability of the products without delay. This integration helps to minimize human intervention and improve the general management of stores.

Cycle counting and inventory physical stock checks are some of the best practices that should be conducted in inventory management. These methods ensure that any discrepancies in the records are detected early and hence reduce the losses that may be occasioned by administrative mistakes. This diligence helps to improve the decision-making process in the supply chain and enhance the overall financial performance of the retailers.

Enforce Effective Vendor Management and Audit Procedures

Efficient management of vendor relationships is critical agency to minimizing inventory losses, especially in instances where there is an inconsistency between the billing and delivery records. To avoid this, regular site audits and proper assessment procedures have to be employed. Frequent checking of receipts against delivered and invoiced items helps prevent unnecessary complications by providing a solution to potential problems before they surface.

Strong contractual agreements with vendors serve as a foundation for accountability. Clearly defined terms regarding quality, quantity, and delivery schedules allow for a streamlined process that helps mitigate risks. Keeping communication lines open enables retailers to address and resolve issues proactively, reducing the chance of errors or fraud.

There is a need to extend these initiatives by looking at the details of other surveys like the National Retail Security Survey. These tools can assist those in the retail trade in evaluating how well they have been managing vendors with abusive behavior.

Implement Comprehensive Employee Training Programs

Efficient management of vendor relationships is critical agency to minimizing inventory losses, especially in instances where there is an inconsistency between the billing and delivery records. To avoid this, regular site audits and proper assessment procedures have to be employed. Frequent checking of receipts against delivered and invoiced items helps to prevent unnecessary complications by providing a solution to potential problems before they surface.

Moreover, ensuring that staff members know how to use point-of-sale systems makes it possible for them to keep records, notice problems, and make the right adjustments on time. This technical knowledge adds to their cooperation from observations thus forming a strong defense against internal and external threats.

Furthermore, positive reinforcement, auditing, and accountability, coupled with teamwork create more effective measures. Making employees part of the store’s security system by encouraging them to report any security risks they see helps make them more responsible for the store’s safety. The program is also effective because training is updated based on staff feedback and new threats, making the approach strong and flexible against loss.

Key Technology Comparisons for Retail Loss Prevention

Final Thoughts

Navigating the complex landscape of retail shrinkage can be tough, but it’s far from impossible. Whether it’s understanding what is shrinkage in retail or implementing security measures to curb it, being proactive can yield substantial returns for your retail business. By applying these insights, you set the groundwork for a more efficient, secure, and profitable retail operation. Remember, the first place to start is awareness, informed by insights and supported by reliable tools and strategies.

Minimize Retail Shrinkage with Zhsunyco®’s ESL Solutions

The problem of retail shrinkage is something that requires effective methods, and so Zhsunyco®’s Electronic Shelf Labels ESLs provide the most appropriate and successful solution to this problem. Through the use of our ESLs, price changes, and inventory levels are updated truly in real-time, decreasing record-keeping interrupts and avoiding errors. With the help of simple technologies such as NFC or mobile control, Zhsunyco makes the need for managing inventories with constant nonprofessional assistance a reality. This not only helps reduce the area of shrinkage but also makes sure that optimal operations in the store translate to more accurate and profitable operations. Let Zhsunyco® assist you in enhancing your shop – talk to us today about our creative solutions.