Ways to Reduce Retail Shrinkage and Start Protecting Your Profits

Ways to Reduce Retail Shrinkage and Start Protecting Your Profits

Shrinkage costs the global retail industry over $100 BILLION annually. In 2019, roughly 6 percent of retail shrink was literally unaccounted for, meaning nobody could classify a loss under any of the shrink categories. And another survey averaged the retail industry shrink rate in 2019 was nearly 2 percent.

If you’re a retailer, these numbers are startling. If, however, you think 2 percent is no big deal, think of it this way: If you have $1 million in sales with, for the sake of simplicity, 50% gross margins, a 2-percent shrinkage rate will cost you $10,000…and that’s not taking into consideration the total loss you experience in the form of lost sales. 

That’s scary…and makes it clear that shrinkage is a problem that needs to be addressed quickly. Whether the source is employee theft, shoplifting, administrative errors, or supplier fraud, shrinkage impacts your profits and ability to grow. All retailers should have a plan to prevent loss across the spectrum of entry points and leverage technology to combat risks. 

The good news is retailers are beginning to increase their loss prevention strategies—or to put it in a different light—be better at “profit preservation,” with technology playing a huge part in the effort. The even better news is that profit preservation does not have to be a large, expensive, time-consuming project. You can start by simply enhancing return policies, adjusting POS policies, (like staff permissions), or even just updating property trespassing policies.

In a recent Tribe Talk, retail experts discussed the sources of retail shrinkage and what retailers can do to mitigate it.

The Causes of Retail Shrinkage 

The most common reasons for shrinkage retailers encounter fall into four areas:

Reason for Retail Shrinkage #1: Organized Retail Crime

One of the most common reasons is organized retail crime. Considered an “outside” occurrence, organized retail crime is where groups of people work together to take a retailer’s merchandise without purchasing those items. A common pattern is where teams target the same brand at multiple locations—for example, you are a retailer who has two locations that are both hit on the same day at around the same time—or they target multiple cities. Another scenario that’s becoming more prevalent is where crime teams study a retailer’s warehousing trucks, targeting their internal deliveries. 

Reason for Retail Shrinkage #2: Internal Theft

Internal theft is another common reason. Otherwise known as employee theft, internal theft occurs when employees steal from the company where they are employed. On average, it accounts for more than 30 percent of a retailer’s overall amount of inventory shrink—more than 3 times the amount stolen by the average shoplifter…yet most retailers spend more money on external security than ensuring their own employees are on the up and up. 

Reason #3: Administrative Errors 

Administrative errors are not crime; they are mistakes. But they still cost you money. Things like inaccurate or inconsistent price labels or mistakes on sale items can add up, along with just plain bad policies that open the door for more errors, such as a return policy that doesn’t include accountability like requiring proof of purchase with a sales receipt or price adjustments that need clearer definitions.

Reason #4: Vendor/Supplier Fraud 

Supplier or vendor fraud, like “lost” cargo during transit, is another issue. Fortunately, it accounts for the smallest portion of overall shrink, but it needs to be watched for, addressed, and prevented.  How does it occur? Depending on what the vendor is doing in the store can determine how they can steal. Another factor is the type of vendor—smaller products being easier to conceal in a purse or bag, larger products concealed in a pile of empty boxes being carried to the dumpster, and so forth.

How Retailers Can Enhance Their Profit Preservation Strategies

Profit preservation or preventing shrinkage/loss can be broken down into two approaches: One at the store level and the other at the product level. Retailers should always think in terms of both. 

Where it might be more obvious to think at the store level in terms of beefing up policies and security—for example, trespassing and returns policies, installing security cameras or hiring officers, etc., few retailers think to focus on the product level—meaning how to protect and secure each individual item. For example, come up with a consistent way to tag items, including how they’re put on and taken off at the end of the transaction, where to store them, and so on. This not only helps with preventing shrinkage; it also makes the transaction process much smoother.  
As you’re looking at your policies and procedures, it’s very important to remember to take into consideration changes in number of staff, staff training, and technology adjustments to accommodate those changes.

Is there a perfect go-to product or profit preservation strategy? That depends on your business—or more specifically, the item or item category. First and foremost, what is already in place? Evaluate what you are currently doing and go from there. That might mean starting with the policies or on a broader prevention level.

In addition, what other kinds of storage, displays, or fixtures could you use? Which takes the discussion back to the item or category. What are you protecting? Do you want the customer to be able to touch or wear the item? Do you need it locked with a tethered cable, like we see with mobile devices and laptops? Or are the items sold in boxes and nothing will be handled by the consumer before purchase so a spider wrap can suffice? If a number of different items have the same kind of tag, for example, they could be locked in the same cabinet. Technology designed for retailers can assist with executing these policies and processes, but you first have to evaluate what you have and how you intend to secure your items.

So, it is clear that any one of these approaches, a physical device such as an EAS, spider wrap, or cabinet mechanisms, or just a policy improvement can make a substantial impact on reducing loss, but more importantly, preserving profit. 

How To Stay Ahead Of The Shrinkage Game

No matter what you do, someone out there is working feverishly on a way to get around it. It can be costly and time-consuming. However, if you start with the biggest threat—internal theft, you can make a difference very quickly and without spending a lot of money. Review your policies around hiring, POS activity, and permission categories. Capture data on everything you want to track and measure to spot patterns. This can uncover issues with administrative errors as well as theft. Also consider yearly audits and even quarterly audits to help ensure profit preservation.

As for external issues, there are different approaches. If you transport goods from a warehouse to a store or store to store, look at making routes and times less predictable, and again, do employee background checks.

Another approach we highly recommend: Implement a cycle counting strategy. With the support of technology, cycle counting helps you keep a much tighter rein on inventory and traceability. 

Stop Losing Money Through Shrinkage

There are many other factors to consider, including physical locations, busy shopping periods, ecommerce loss prevention, and more. To learn more, watch this ArcherPoint Tribe Talk video, Loss Prevention—Reducing the Shrink through Data, Insights, and Technology. Then talk to the retail experts at ArcherPoint about how we can help with technology.

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