This is retail shrink: causes, impact, and how to reduce it
Shrinkage has always been a hot topic for retailers – and it remains one of the most relevant talking points at trade shows and in retail forums. As retailers struggle to prevent shrinkage, they are often tempted to implement inefficient or invasive technologies.
What is retail shrinkage?
Retail shrinkage means the loss of inventory, and thereby revenue, caused by other factors than sales. Retail shrinkage, or just shrinkage, can occur for multiple reasons such as theft, administrative errors and fraud.
The inventory shrinkage differs between various markets and industries, however according to Statista, the average shrinkage rate among retailers is 1,6 percent. This number might seem low, but it usually represents a lot of profit loss for a single retailer. It thereby remains one of the most prominent issues to handle.
What causes retail shrinkage?
Retail shrinkage can be divided into two categories: internal and external shrinkage. At the category names suggests, the shrinkage types are either created by internal or external factors.
There are several reasons for internal and external retail shrinkage to occur, some of them are:
Administrative errors
While not always being seen as a cause of shrinkage, administrative errors such as mislabelled items can cause plenty of damage. Administrative errors are also seen as “human errors”, as most of them occur due to human mistakes. While administrative errors are not intentional, they can be very costly for retailers.
Operational loss
Operational loss refers to losses that are often accidental, and not always preventable. Examples of operating loss include expired food items, broken merchandise or other events that makes a product unsellable. While not always being preventable, retailers can work to reduce this type of shrink by implementing better inventory management and control systems.
Employee theft
Employee theft is a type of internal shrinkage where individuals within a business steal from the company. This can occur in multiple ways, such as removing items from the store, or by performing defraud. The amount of employee theft differs between industries, however it accounts for about as much as administrative errors and operational loss together, according to Retail Dive.
External theft: Shoplifting and organized retail crime (ORC)
Perhaps the most prominent reason for retail shrinkage is external theft. According to NRF, about 36 percent of shrinkage came from external theft, a combination of shoplifting and organized retail crime.
Shoplifting refers to when one or more individuals steals items from a store. It can be done by concealing items when exiting the store, switching price tags or simply walking out without paying.
Organized retail crime (ORC) refers to more elaborate methods to steal inventory, such as through break-ins, robbery, credit card fraud or burglary. These methods often requires coordination and planning.
The impact of shrinkage
Shrinkage has an impact on many stakeholders – employees, suppliers and customers. Here are some of the most prominent effects of retail shrinkage:
Loss of revenue and profit margins
The most obvious impact of retail shrinkage is the loss of revenue – product items that could have been sold for a profit are instead damaged, missing, or otherwise not sold. This increases the cost of goods sold, meaning that profit margins are affected.
Supply chain managers and retail managers usually have to take some level of shrinkage into consideration when planning stock. However, shrinkage is hard to predict, which can negatively affect the bottom line.
Increased operational costs
Shrinkage can lead to higher operational costs in several ways. For instance, replacing lost or damaged products adds to expenses, as does investing in additional surveillance systems and software to prevent future losses. These costs, although varied, are all directly linked to efforts to manage or reduce shrinkage.
Higher prices for consumers
When profit margins shrink and operational costs rise, retailers often compensate by raising prices. This shift impacts consumers, who end up partially covering the cost of missing or unsellable items.
While increasing prices may seem like a drastic response to retail shrinkage, for some businesses, it is the only viable way to remain profitable.
Reduced trust between employees and employers
In companies where the rate of employee theft is high, retailers might feel forced to increase the number of security measures to minimize internal theft. This type of situation tends to reduce the level of trust between the employer and the employees, potentially having negative effects on the work culture and atmosphere.
How can retailers reduce retail shrinkage?
One of the most common questions is regarding how to reduce shrinkage. As there are several reasons for shrinkage to occur, there are also multiple strategies to combat this problem. Some of the most effective strategies are:
Surveillance systems & AI-based monitoring
Implementing surveillance systems allows retailers to better understand how shrinkage occurs—and, more importantly, how to prevent it. There are several types of systems that can be used, including:
Surveillance cameras: Useful for monitoring and reviewing suspicious behavior from both customers and employees.
Internal surveillance tools: Designed to track internal operations and detect issues such as inventory discrepancies or pricing errors.
AI-based monitoring systems: Ideal for identifying more complex or subtle forms of shrinkage that traditional systems might miss.
Employee training and education
Training and educating staff is essential—not only to help them recognize suspicious behaviour, but also to promote understanding of procedures and encourage consistent adherence to routines. This can prevent perishable items from being too old to sell, but also to spot and prevent potential shoplifters. Training and education can also have positive effect on the workplace culture – making employees less likely to steal.
Improved inventory management
Enhanced inventory management can be a great way to provide additional shrinkage – modern systems can provide additional features such as automated stock tracking and regular audits. This is a great help for retailers who might not understand why and how the shrinkage is happening, and help them to plan for the future.
The inventory management is especially helpful for internal shrinkage, such as administrative errors.
Future trends in retail shrinkage prevention
As retailers continue to battle shrinkage, new technologies and retail solutions offer opportunities to keep shrinkage rates low. Some solutions are refined versions of existing technologies, while others are completely new.
Here are some future trends and solutions that retailers can use to combat shrinkage:
Identification through biometric and facial recognition technology
A controversial yet more common way to identify thieves and shoplifters is the use of biometric solutions. The use of facial recognition and other biometrics makes it harder for both employees and store visitors to commit theft – as they are identified from start. Using biometrics has been an increasingly more popular way for shoppers to pay for their purchases.
Of course, this raises the question about ethics and how retailers store their employees and customers biometric data.
Digital receipts and blockchain for fraud prevention
In an effort to battle new and inventive fraud techniques, digital receipts and blockchain solutions can be an efficient way to provide security and traceability in retail.
Digital receipts offer a secure, traceable, and tamper-resistant alternative to traditional paper receipts. By linking purchases directly to customer profiles or payment methods, retailers can prevent return fraud and better track the transaction history.
Blockchain brings an extra layer of security, traceability, and accountability to retail operations by creating a decentralized, immutable ledger of transactions and product movement.
AI-driven security solutions
The use of AI has unlocked a world of possibilities – so also for security solutions. By using AI the right way, retailers can detect shrinkage patterns and take appropriate measures. AI can be used in a variety of ways, such as:
Analyzing shopper behaviour at the self-checkout area, to determine whether or not the shopper is scanning the correct items.
Forecasting demand and preventing inventory to run out – or to expire before being sold.
Shrinkage has challenged retailers for as long as retail has existed—but today, there are more tools and technologies available to help prevent it. So, is shrinkage finally decreasing?
Unfortunately, the answer isn’t that simple. Shrinkage is influenced by a wide range of factors and can vary significantly between countries, industries, and even individual store locations.
Much of the current focus is on external shrinkage, which includes losses from shoplifting and organized retail crime.
“When it comes to external shrinkage, it’s important to be proactive without being invasive. By integrating anti-shrinkage solutions with existing systems and processes, retailers can strengthen security without compromising the customer experience,” said Fredrik Englund, Managing Director at Datema Retail.
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