Shrinkage in stores often has a significant source, and it's rarely due to criminal activity.
In the midst of the Covid-19 pandemic, retailers have faced unprecedented challenges. One of these challenges has been the rise in retail shrinkage, a term that refers to the difference between recorded (book) stock and actual stock. According to industry expert Brand Elverston, laxity related to labor, pricing, promotions, stock management, and other store operations have contributed to this issue, leading to billions of dollars in losses for U.S. retailers.
The primary causes of retail shrinkage are employee theft, shoplifting, administrative errors, and vendor fraud. Among these, employee theft is often the largest contributor due to employees' knowledge of internal processes and their ability to exploit them more easily than customers can shoplift.
In-store inefficiencies related to labor, pricing, promotions, and stock management contribute to shrink in several ways. Manual cash handling and reconciliation are error-prone and time-consuming, leading to cash discrepancies and increased shrinkage risks. Inefficient labor processes slow down operations, leaving more room for human error and less time for staff to monitor for theft or fraud.
Incorrect pricing or promotional scanning can cause administrative errors, leading to revenue loss that counts as shrink. Promotions that are not properly tracked or implemented can also result in inventory not matching sales records. Poor inventory control, such as lack of regular physical counts, inaccurate recording, or mishandling, leads to untracked losses. Damage, theft, or supplier fraud can go undetected without rigorous stock management protocols, resulting in financial shrinkage and potential stockouts, which harm customer satisfaction.
Adoption of self-checkout technology has been shown to significantly increase shrinkage. Self-checkout tends to create opportunities for theft or accidental non-scanning of items, with studies revealing shrink rates of 3.5–4% of sales at self-checkouts compared to under 1% at traditional staffed checkouts.
Sixty percent of retailers have turned to AI for loss prevention, with another 30% planning to do so in the next year. Technologies that find mistakes, flag needs, and detect patterns are enabling the collection of data and visibility into store operations. This data is being used more and more for operational integrity issues, according to Verensics' CEO-founder Russ Law.
Addressing these inefficiencies is essential for reducing shrink and improving profitability in retail stores. Retailers risk undermining their systems if stores are inadequately staffed, according to loss prevention specialist Brand Elverston. Understaffing in retail stores leads to significant inventory loss, exceeding the losses from smash-and-grab robberies.
More than 80% of retail business decision-makers are losing at least 5% of their operating margin to in-store inefficiencies. Overcoming these inefficiencies could save U.S. retailers in certain sectors up to $162.7 billion. U.S. retailers' investment in store intelligence technologies for the next year has skyrocketed over 150%, according to Coresight.
Tech is helping break down the divisions between loss prevention and operating teams, according to loss prevention consultant Brand Elverston. Mistakes related to promotions, pricing, and out-of-stocks are the biggest challenges for retailers. Some tech designed to detect crime or criminal intent has gained broader uses, such as Verensics' employee questionnaire-based platform and ThinkLP's platforms that leverage point-of-sales data, human resources data, inventory data, and more.
More than a third of retailers plan to invest at least $500,000 in store intelligence technologies, with each company dedicating more than $415,000 on average. Nearly two-thirds of inventory loss is due to causes that are unappreciated and unaddressed. Loss prevention teams are often viewed as cost centers, but they can be profit drivers if perceived as protectors of profits and margins.
In conclusion, addressing retail shrinkage requires a focus on in-store inefficiencies and the adoption of technology solutions. By improving labor processes, pricing and promotions accuracy, stock management, and self-checkout systems, retailers can significantly reduce shrinkage and improve their profitability.
- Retailers are dealing with significant losses due to retail shrinkage, caused by employee theft, shoplifting, administrative errors, and vendor fraud, among other factors.
- Adoption of self-checkout technology has been linked to increased shrinkage rates, with studies showing shrink rates of 3.5-4% at self-checkouts compared to under 1% at traditional checkouts.
- Sixty percent of retailers have turned to AI for loss prevention, using technologies to find mistakes, flag needs, and detect patterns for operational integrity issues.
- In under-staffed retail stores, significant inventory loss occurs, surpassing the losses from smash-and-grab robberies.
- Nearly two-thirds of inventory loss is caused by factors that are unappreciated and unaddressed, and tech platforms are being developed to detect crime, criminal intent, and improve operational efficiency.
- Retailers are investing heavily in store intelligence technologies, with more than a third planning to invest at least $500,000 and each company dedicating over $415,000 on average.
- Addressing in-store inefficiencies and adopting technology solutions is crucial for reducing shrinkage and improving profitability in retail stores, as demonstrated by the potential savings of up to $162.7 billion for U.S. retailers.
