Shrinkage refers to the measures taken by businesses to minimize theft and fraud. These avoidable losses, caused by human error or deliberate efforts, are known as “shrinkage.”
What is shrinkage?
Shrinkage is an accounting term used to describe a situation where a store has fewer items in its inventory than what is recorded on the books. Factors contributing to shrinkage include employee theft, shoplifting, administrative errors, vendor fraud, product damage, and more. There is a direct relationship between shrinkage and profit: the higher the shrinkage, the lower the profits. A 2020 national retail security study showed that shrinkage reached an all-time high, accounting for 1.62% of retailers’ net profits, costing the industry $61.7 billion. Reported shrinkage rates exceeding 3% are nearly double compared to previous years.
Types of inventory shrinkage
Now that you understand the basics of loss prevention and its impact on retailers, let’s take a look at common types of inventory shrinkage: shoplifting, return fraud, employee theft, administrative errors, vendor fraud, and unknown loss.
Shoplifting
The 33rd annual retail theft study by Jack L. Hayes International reported that the value of shoplifting incidents rose by 13% in 2020. Shoplifting represents the largest share of retail shrinkage, accounting for over 35% of annual losses.
When thinking about shoplifting, you might imagine someone walking out the door with a product hidden under their shirt – and that’s part of the shoplifting issue.
But that’s not the full picture. Shoplifters may steal items ranging in price from $1 to $1000. They may work alone or as part of a group of thieves. They may strike once or return every week.
Shoplifting can take many forms and can be a problem for any retailer. That’s why it’s crucial to take steps to reduce the possibility of shoplifting in your store.
Here are some ways to achieve that:
1. Monitoring and clear signage. Don’t underestimate the power of monitoring your store and making it clear to customers that you do so. Surveillance cameras allow you to catch shoplifters before they leave the store, and signage can remind customers of the cameras and your willingness to pursue shoplifters, which can be an effective deterrent to such behavior.
2. Thoughtful store organization. Depending on your store’s layout, you may be making it easier for shoplifting customers to carry out their activities. Dark, unmonitored corners and overflowing or disorganized merchandise make it easy for shoplifters to slip by undetected. After all, how can you know something is missing if you don’t know where it was in the first place? If your store carries high-value items or items that are frequently stolen, consider securing them in cases.
3. Excellent customer service. Encourage your staff to greet customers as they enter the store, assist them while they browse, and have staff in areas like fitting rooms. Reminding shoppers that there are people around to catch shoplifters is another great way to deter shoplifting behavior.
Return fraud
One underrecognized cause of loss in retail is return fraud. It is overlooked because it is difficult to detect in the first place – its effects only become apparent when they accumulate over the year. Return fraud can take various forms, including: returning stolen products, returning products purchased with counterfeit money, returning used products, using fake receipts to return products, and returning exchanged products.
It can be difficult to limit return fraud due to all the ways it can occur. However, you can combat each type of return fraud by establishing a smart return and exchange policy that is consistently enforced by staff:
1.
Requesting Receipts for Cash Refunds. Most merchants require a receipt for cash refunds on returned items, and you should do the same. The absence of a receipt does not mean that customers can just receive store credit or exchange the item. Make sure to enforce this policy 100%.
2. Train employees to detect return fraud. Return fraud isn’t as obvious as shoplifting. That’s why training employees to identify and stop return fraud is essential.
3. Require ID to track returns. Regardless of your return policy and employee training, some fraudulent returns may slip through. It’s a good idea to ask for a valid ID during all returns and exchanges so you can flag customers who are acting suspiciously or unlawfully.
Employee Theft
Employee theft is not something merchants want to worry about. It’s easy to say you trust your employees and leave it at that.
However, lack of proper preparation for internal theft leaves you vulnerable. In fact, employee theft accounts for 90% of significant losses, with businesses losing $50 billion a year as a result.
Employee theft can take many forms, and not all look as obvious as the direct theft you might imagine. Employee theft includes the following: direct product theft, issuing false returns and fake gift cards, “sympathy” (not scanning all items for a friend or family member correctly or misusing employee discounts), and cashing out from the register – usually in small amounts that can accumulate into significant losses.
So, how can you stop employee theft in your store? You always have the option to install surveillance cameras in all employee areas, post signs indicating that employees are being monitored, and check employees’ bags before they leave. But as you can imagine, this type of enforcement doesn’t create the best morale or work environment.
Here are some other practical ways to reduce employee theft and fraud:
1. Review your hiring practices. Merchants may not always be known for strict hiring requirements, but you should take care in choosing your front-line partners in loss prevention. Look for conscientious employees who act with integrity. They are less likely to exploit their authority as employees and will be better allies in helping you combat all kinds of retail loss as well.
2. Properly train employees. Once you have the right team, it’s your duty to provide them with the training they need to reduce errors and losses, identify shoplifting and fraud, and decrease shrinkage rates.
3. Consider your store culture. When you have a great work culture in your retail store, employees stay longer and invest more in the success of your store. Work on creating a positive and low-turnover culture (in addition to the tips above), and you will see a decrease in employee theft and fraud.
Administrative Errors
When your net profits are harmed, it doesn’t feel good. But not all retail losses result from malicious or illegal behavior. Administrative and simple paperwork errors account for up to 18.8% of annual retail shrink – sometimes referred to as “shrinkage due to paperwork.”
This is a significant percentage of sales you could retain just by implementing proper systems to accurately and smoothly track inventory and sales.
How do administrative errors translate into retail losses? Mistakes such as incorrect labels, incorrect markdowns, and accounting errors can lead to selling products for less than they should be or refunding them for more than they should be. This means real dollars are being lost.
Errors
The administrative aspect is inherently circumstantial, but that doesn’t mean it can’t be prevented. Let’s take a look at how to avoid and detect “shrinkage” before it costs your store a lot:
1. Employee training. Whether they are trying stock, conducting rounds with a price gun, or processing returns, properly trained employees are less likely to make mistakes that contribute to retail losses.
2. Partial stock counts. Depending on the number of products and variants you carry, completing a full inventory count may take a long time. You might consider doing partial counts (also known as cycle counting), where you count the available stock for one type of product instead of all products you carry at once. Since it can be done quickly and more frequently than a full physical inventory count, partial counts can help you identify and address shrinkage before it becomes a bigger problem.
3. Supplier fraud. About 5% of shrinkage is attributed to supplier fraud. This type of inventory shrinkage involves two aspects: check fraud and billing schemes, or theft by suppliers from the store during inventory deliveries.
Some ways to combat supplier fraud include:
1. Conducting thorough background checks on new suppliers. Suppliers are an extension of your retail business, especially if they are delivering orders to your store. How much do you really know about the suppliers and their employees? Be sure to check their reputation or any existing fines or lawsuits. You might also look at their social media, verify business records, and see if any employees have criminal backgrounds.
2. Creating an anonymous reporting line. Some employees or external parties may be hesitant to report fraud. They might not want their name associated with a report for fear of repercussions. You can create an anonymous support line or messaging system where people can report fraud without disclosing their personal information.
3. Delegating specific employees to handle inventory and invoices. If you don’t handle all the invoices and purchasing of goods, have separate employees manage each task. One employee for purchasing goods and another for invoices.
Unknown Loss
Here is the more bizarre and frustrating type of shrinkage: unknown causes. According to the National Retail Security Survey, over 6% of shrinkage is unexplainable, leaving you and millions of other stores in the dark.
Shrink Prevention Strategies in Retail
Despite the many known (and unknown) causes of inventory shrinkage, there are useful ways to prevent it. Any combination of the following methods can work: reviewing hiring and training practices, establishing clear policies, creating strong deterrents, gaining buy-in from everyone, hiring a shrink prevention manager, enhancing stringent accounting practices, and improving inventory management.
Reviewing Hiring and Training Practices
While the latest technology and tools can improve your processes, traditional employee training is making a comeback. The percentage of discussions about shrink prevention during new hiring rose significantly in 2020, with 95% of companies using these strategies consecutively.
By considering shrink prevention during the hiring and training process, you can influence the larger factors in these issues – shoplifting and employee theft.
When it comes to employee theft, you might imagine store workers hiding products for themselves. But employee theft also includes things like misuse of returns and abuse of discounts.
When hiring store workers, what qualities and skills are you looking for? You should screen candidates who demonstrate conscientiousness and integrity.
Employees who excel in those areas are partners in combating shrinkage. They are less likely to take advantage of their power as employees and will be better allies in helping you reduce retail shrinkage.
Employees
Good employees want to prevent inventory losses, but it’s your responsibility to provide them with the necessary tools and training to achieve that. Training in shrink prevention can make a significant difference in reducing shrinkage.
When it comes to shrink prevention training, you have many options. You might try an online course from an organization like the Shrink Prevention Academy or the Shrink Prevention Foundation. Or you could bring in an external expert in shrink and safety to train employees in person.
Establish Clear Policies
Clear policies are essential for reducing inventory shrinkage. In fact, over 92% of companies reported using a code of conduct as part of their shrink prevention awareness program in 2020. Although this does not effectively prevent employee criminal behavior, it expresses your business’s commitment to ethical conduct and sets expectations for employee behavior.
Develop a policy that highlights the acceptable use of company property and present it to employees during onboarding. Be clear about the disciplinary actions that will be taken if someone is caught stealing from the company.
It is important that the same standards are applied to everyone. For example, if you do not want store employees to steal cash or use supplies for personal purposes, do not allow supervisors or managers to do so either.
Create a Strong Deterrent
Organized retail crime (ORC) continues to be a serious problem for retailers, with average losses exceeding $700,000 for every billion dollars in sales. Eased law enforcement guidelines and reduced penalties have led to an uptick in ORC activity, according to the 2020 Organized Retail Crime Survey.
Retailers often change their strategies to combat retail crime, whether driven by employees or customers. Giving the impression that you have strong security is as important as it is effective. It shows that you take losses seriously and can deter people from engaging in bad behavior.
When was the last time you reviewed your shrink prevention system and its effectiveness?
In 2020, the top five retail loss prevention systems in use were: theft alarms or electronic article surveillance (95%), digital video recorders (88%), visible customer surveillance cameras (78%), armored car deposit receipts (77%), and point-of-sale data mining (72%).
All of these tools saw significant growth from 2019, according to the NRF survey.
But these aren’t the only means retailers use for deterrence. The same NRF study showed significant year-over-year increases in the following five retail loss prevention tools:
1. Point-of-sale analytics and visible customer surveillance cameras have become widely used tools. In contrast, retailers continue to rely on traditional tools like theft alarms to deter crime. The question to consider is: what new or emerging technologies should you explore?
Small businesses can easily benefit from tools like surveillance cameras and digital video recorders. For example, Shopify partnered with Google and Nest to help retailers use high-tech security cameras at an affordable price.
Instead of installing a massive and expensive security system in your store, you can start using a Nest camera for just $199. It takes minutes to set up, and with the Shopify app, you can monitor in-store activity from anywhere, saving you time and protecting your valuable assets.
Improve Inventory Management
Inventory management should be a priority for your business if you want to improve shrink prevention. By managing inventory well, you can track items and prevent shrinkage.
Some ways to improve inventory management include:
1. Implement item tracking. Tracking items is straightforward and can help you know where a particular product has gone, whether in the warehouse or on the floor. You can install RFID tags on products, which use radio frequencies to track items, automatically monitoring inventory and stock levels.
2.
Count inventory regularly. While a full inventory count can be time-consuming to do consistently, you might consider doing partial counts instead. With Shopify, you can compare the stock levels you have in-store with the levels recorded in your point of sale system, filtering and updating the recorded stock levels when you find discrepancies.
3. Conduct surprise audits. If you suspect that an employee is stealing from you, conduct a surprise audit. Random inventory counts can reveal irregularities in stock without giving employees time to prepare.
4. Invest in inventory management technology. By using inventory management software instead of ledgers or spreadsheets, you can make inventory management less prone to human errors – it also provides you with the tools, data, and reports that help you manage inventory more efficiently and maximize your return on investment.
For example, with Shopify POS, you can order and categorize an unlimited number of products and variants, track and reconcile inventory across multiple store locations, and access detailed reports on the inventory available to you from one office.
As your retail business expands and managing inventory becomes more challenging, inventory shrinkage is likely to increase. You might consider investing in the right tools to help you understand potential gaps and mitigate risks so that you can achieve higher profits for your business.
Creating a Shrink Prevention Plan for Your Store
In the retail world, shrinkage is a part of life – but that doesn’t mean you have to resign yourself to wasting your sales every year.
No matter how hard you try, it’s a major issue for retailers, especially those with already tight margins. Electronic item tags, high-tech monitoring devices, and facial recognition allow retailers to find an easy and effective way to reduce inventory loss.
But the reality is that an effective shrink prevention plan is your best bet for reducing your retail store’s losses. It’s the only way to effectively combat issues like shoplifting and employee theft.
Source: https://www.shopify.com/retail/loss-prevention-retail-shrinkage
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