The Top Sources of Retail Shrinkage

In the retail world, shrinkage, or shrink, is the term used to describe a reduction in inventory due to shoplifting, employee theft, or other errors. The common misperception is that retailers absorb shrinkage as part of the cost of doing business. While retailers have to factor loss into their bottom line, it's a costly problem for all. 

According to the National Retail Federation (NRF) 2019 National Retail Security Survey, the average shrink rate in the retail industry is 1.38% of sales, which has stayed approximately the same since 2014. While that may not sound like a lot, consider that shrinkage cost retailers more than $50.6 billion in losses in 2018. Therefore, if your retail store earned $1 million in sales with 50% gross margins, your shrinkage at just 2% cost you $10,000, which is significant. 

The survey also indicated that the retail landscape is changing, with more online shoppers bringing new challenges and fraud risks. Those surveyed indicated their budgets for loss prevention (LP) efforts will increase by 44.5%, with 68.2% of respondents saying they'll implement new technology, as well as hire IT staff with strong analytical, cybersecurity, and investigative skills to help combat fraud.

There are four major sources of inventory shrinkage in retail: employee theft, shoplifting; administrative errors such as record keeping, pricing, and cash counting; and supplier fraud. There's also a fifth category of shrinkage, which represents all of the unidentifiable reasons for loss in your store. 

Shoplifting

Mature man shoplifting in supermarket
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According to the National Retail Security Survey, a leading cause of shrinkage for a retail business is shoplifting. Customer theft occurs through concealment, altering or swapping price tags, or transfer from one container to another. Customers may also attempt to return stolen goods or imitation designer products to receive cash.

Stealing by shoppers continues to cost retailers billions of dollars every year. According to the NRF survey, the average dollar loss per shoplifting incident has remained unchanged from the previous year as security measures such as cameras and digitized tags that set off alarms continue to combat theft. 

Employee Theft

Internal or employee theft accounts for half of all retail shrinkage. Incidents occur when company workers steal or misappropriate funds or goods. Types of employee theft include fraudulent use of discounts, refunds, and credit cards.

Implementing security measures such as installing cameras throughout the store, as well as procedures for employees to follow when purchasing products and entering and exiting the store can help mitigate theft.

Another place to check is the cash drawer. If the drawer keeps on coming up short, it's helpful for security to review the day's footage to determine if money is being stolen or simply incorrectly counted.

Administrative Error

Administrative errors can also cause shrinkage. Simple pricing mistakes due to markups or markdowns can cost retailers quite a bit, so it's crucial to have good protections in place, and use simple, easy-to-understand accounting systems and programs.

Poor record keeping and inventory management cause shrinkage. A solid practice of cycle counting your inventory can greatly reduce shrinkage. Many errors in the point-of-sale (POS) system can be uncovered with this practice before the inventory is sold and becomes shrinkage. 

Vendor Fraud

A small percentage of shrink is due to vendor fraud. Retailers report that most vendor fraud occurs when outside vendors come into a store to stock inventory.

For example, convenience store inventories are checked and monitored by the vendor. Whether it's failing to provide as many units as invoiced, or stealing of other products, vendor fraud can cut into a retailer's bottom line.

Unknown Causes

The smallest and perhaps most frustrating segment of retail shrinkage is due to unknown causes, according to the National Retail Security Survey. Roughly 6% of all losses are not able to be accounted for under any of the other categories.