There are different types of shrinkage in retail that many businesses are facing today. Shrinkage not only eats into profit margins, but it can also be a signal of deeper issues in operations, security, or employee engagement.
Implementing ample retail security systems may be the logical step to curbing shrinkage. However, understanding the types of shrinkage and learning how to address them is critical for businesses that want to maintain a healthy and profitable company.
In this blog, we’ll explore what shrinkage is, the various forms it takes, and the steps you can take to address it.
What Is Shrinkage in Retail?
Shrinkage refers to the loss of inventory that occurs between the point of manufacture or purchase from a supplier and the point of sale. In simpler terms, it’s the difference between the amount of inventory a business should have and what is actually available. This discrepancy can seriously affect a company’s sales performance and profit margins.
Retailers usually discover shrinkage during inventory audits. Even small levels of shrinkage can balloon to affect profitability, especially for businesses with narrow margins. Aside from the financial aspect, shrinkage can also hurt customer satisfaction by leading to stockouts or poor product availability.
What Are the Different Types of Shrinkage in Retail?
There are various types of shrinkage types in retail. Below are the most common types:
1. Shoplifting (External Theft)
This is one of the most visible and common causes of shrinkage. Shoplifters can be individuals or organized groups that target stores to steal merchandise.
The impact of shoplifting is not limited to the loss of goods. It also increases the need for additional security measures like hiring security personnel and staff training.
2. Employee Theft (Internal Theft)
Unfortunately, shrinkage can also come from within the organization.
Employees may steal merchandise, manipulate transactions, or offer unauthorized discounts to friends and family. Internal theft is damaging because it often goes undetected for a longer period of time, and it can be harder to address without causing morale issues.
3. Administrative and Paperwork Errors
Errors in pricing, inventory counts, or shipment receipts can result in shrinkage that isn’t immediately noticeable.
For example, a mistake in scanning items or recording the wrong quantities can skew inventory data, leading to stock discrepancies.
4. Vendor Fraud or Errors
Shrinkage can also occur at the supplier level. Vendors might short-ship items, send damaged goods, or invoice inaccurately.
While some issues are unintentional, others may involve deliberate fraud, especially when relationships aren’t closely monitored. So, it’s best to keep a good working relationship with your vendors for easy escalation of any issues your business may have.
5. Damaged or Expired Goods
Products that are broken, expired, or otherwise unsellable also contribute to shrinkage. While some of this loss is inevitable, proper inventory management and handling procedures can minimize it. Perishable items, electronics, and fragile goods are especially vulnerable to this type of shrinkage.
6. Return Fraud
This occurs when a customer returns an item that wasn’t actually purchased or returns a used or damaged product under the guise of a legitimate return. This form of fraud is increasingly common with the rise of online shopping.
What Happens if Shrinkage Is Not Resolved?
Unchecked shrinkage can snowball into the biggest problem for retail businesses. While the immediate impact of shrinkage is financial loss, which can range from a few percentage points of revenue to a significant dent in profits, the bottom line can result in:
- Distort inventory planning, leading to stock imbalances.
- Lower customer satisfaction due to poor product availability.
- Erode employee morale, especially if internal theft is suspected but not addressed.
- Increase operational costs by requiring more frequent audits and tighter controls.
- Damage brand reputation if theft or fraud is made public.
Over time, businesses that fail to address shrinkage by implementing retail loss prevention solutions and other techniques may find it harder to stay competitive, especially in industries with low margins.
What Are the Different Ways to Curb Shrinkage?
Fortunately, there are several strategies retailers can employ to reduce and prevent shrinkage:
1. Invest in Security Systems
Installing merchandising security solutions such as CCTV cameras, electronic article surveillance (EAS) tags, and alarm systems can deter theft. In fact, the visibility of security measures alone can act as a deterrent.
2. Implement Employee Training
Educate employees about what is retail loss prevention, how to identify suspicious behaviors, and company policies to arm them with ample knowledge to reduce shrinkage. Remember, when staff members are well-informed, they are more likely to uphold store integrity.
3. Use Inventory Management Software
Advanced point-of-sale (POS) systems and inventory management software can flag inconsistencies in real time, helping to catch issues early. These tools also make audits easier and more accurate.
4. Conduct Regular Audits
Scheduled and surprise audits keep both employees and suppliers accountable. Audits help verify inventory levels and expose patterns of loss or theft.
5. Strengthen Hiring Practices
Screen new hires carefully and perform background checks to reduce the risk of internal theft. Promote a culture of integrity and accountability.
6. Monitor Vendor Relationships
Maintain transparent and detailed records of all vendor transactions. Review shipments and invoices thoroughly before approval.
7. Enforce a Clear Return Policy
Limit opportunities for return fraud by requiring receipts, monitoring return frequency, and training staff to handle returns carefully.
8. Improve Store Layout and Visibility
Strategically place high-value items within the line of sight of staff or near security cameras. Use mirrors and adequate lighting to eliminate blind spots.
Safeguarding Your Store Against the Different Types of Retail Shrinkage
Shrinkage is a silent profit killer in the retail industry, but it doesn’t have to be inevitable. By understanding the different types of shrinkage and implementing proactive measures, you can protect your assets and maintain a better bottom line.
Addressing shrinkage isn’t just about reducing losses. It’s also about building a more efficient, transparent, and resilient retail operation. You can begin this process by finding a solutions provider that can give you the tools you need to secure your products like Inewvation.
Work with us in securing your retail merchandise today!
