Shrinkage in retail and how to prevent it

Retail Shrinkage is a significant problem faced by retailers. 1.44 to 2.00 percent shrinkage is seen in retail sales. It may seem like a slight loss at first glance, but it results in tens of thousands of dollars in losses each year. Retailers are adopting a range of technological solutions to mitigate shrinkage, such as artificial intelligence-based video analytics, self-service locking cases, autonomous security robots, and license plate recognition.

What is retail shrinkage?

Shrinkage in retail refers to the loss of merchandise that occurs due to factors such as theft, damage, or error. This can have a significant impact on a retail business as it can reduce profits and increase costs.

The shrinkage can be calculated as Shrinkage = System inventory – Physical inventory.

For example, the System inventory is 20 lks, and the Physical Inventory is 19.5 lks. Then shrinkage is 10 – 9.5 = 0.5 lks.

Preventing shrinkage is very challenging for a retail business. Shrinkage has a lot of potential in a retail store. It can be collected by customers or employees.

Primary causes of retail inventory shrinkage

How the shrinkage in retail is happening

• Shoplifting
• Employees
• Return fraud
• Administrative
• Unattributed loss

Shoplifting

Shoplifting is theft. This is the act of deliberately taking goods from a store without paying for them. Shoplifting causes a 36.5% shrinkage in retail businesses. Shoplifting is a crime that is punishable by law and can result in fines, imprisonment, and other legal penalties.

It also negatively affects your business image. It will also cause your sales to decrease. Customers don’t want to go into shops where shoplifting is common, they feel unsafe there.

Product falsification can lead to huge financial losses for retailers. Also, it is expensive to secure and authorize the replacement of goods to prevent such thefts. 

Related: How to Increase Sales in Retail Stores

Employees

According to a study by the National Retail Federation, more than 30% of shrinkage in retail occurred due to employee or internal theft. 

Refund fraud

Another shrinking factor in the retail business is refund fraud. Stolen items are returned to the store for a money refund. This can be difficult for retailers to identify as refunds are requested using fake bills or receipts.

Special training for retail employees is essential to prevent such fraud. If you provide a valid ID or something else on the bill at the time of purchase, you can do verification on it.

Administrative

This is an error when receiving goods and billing products to customers. For example, a cashier is billing for a 10-count product. But only 8 items were billed and the other 2 items were sold without payment. So we lost 2 products because of the error.

It can be of 2 stars either done intentionally by the cashier or unknowingly omitted to scan. If the cashier purposefully misses scanning the products then it will be called a “sweet heartening” or “Under Ringing”.

However, other administrative errors can happen in stock inwarding or outwarding. For example, if you are transferring 50 goods from one store to another, and you mistakenly print 48 goods, then you lost 2 goods. 

Such mistakes from the administrative side can lead to huge losses and are difficult to identify.

Unattributed loss

This is shrinkage, which does not fall into any of the above categories, but which retailers cannot understand. This leaves you and millions of other retail stores in the dark.

Ways to prevent and control the shrinkage in retail:

Retail stores often take measures to prevent retail shrinkage, such as 

Security cameras

Shoplifters can be easily detected by placing security cameras in the store. And help you deal with them legally.

Security guards

Shoplifters can be quickly identified by hiring more employees. Shoplifters cannot engage in any form of shoplifting when staff is present in all critical areas of the store. It will also help you to provide a premium customer experience

Anti-theft devices

Shop theft can be prevented with the help of advanced technology. By using anti-theft devices such as security tags and alarms, shoplifters sound the alarm when goods are taken without payment.

Train your employees to identify customer behavior

Train your employees to understand customer actions and identify shoplifters. Be careful not to blame customers just because of suspicion. It will affect your business negatively.

Use proper product placement (Increase store visibility)

Increase your store’s visibility. Make sure you have visibility into your most expensive and most likely to be stealing products in your inventory. This will reduce the nuisance of shoplifters to some extent.

Implement strict inventory control procedures

An inventory management software tool can accurately track inventory and identify discrepancies that indicate shrinkage. So you can ensure that your inventory is efficient and it is more helpful to monitor and manage your inventory operations.

Employee training on proper inventory management procedures

Employees should be trained to accurately record and track inventory. Make them aware of the potential loss to the business due to shrinkage.

Audit inventory levels regularly

Retailers need to regularly audit their inventory levels to accurately identify and prevent inventory discrepancies. Such operations can be easily managed with inventory management software.

Invest in point-of-sale (POS) software

By using POS software, many operations in your business will become easier and more efficient. POS software ensures that inventory is accurately tracked and payment transactions are secure and efficient.

It also has employee tracking and data like their shift reports. This will help you quickly identify shrinkage in your store and how it happened.

Assign employees roles

If you use point of sale software, you can set the roles of your employees. Important functions like ordering and receiving goods can be delegated to key employees only. So you can control your employees.

Give receipt

Be sure to give the customer the receipt of their purchase. Ask for the receipt at the time of arrival for a refund. Receipts prove that the item was not stolen.

Daily stock check of high-value items

Your inventory items such as high-value items or fast-moving SKUs when prone to shrinkage. Those types of products may experience more shrinkage.

A common entry and exit point

Give employees an exit point. Employees should be allowed to leave only through it. It will help in identifying staff who are involved in the theft.

Physically check the received order

The purchase order receiving manager should physically check the stock of orders received. Vendors are prone to fraud and faulty products. There is a possibility for fraud or the absence of goods by the vendors.

However, The average shrink rate in 2021 was reported to be 1.4%, signifying that, on average, retailers experienced a 1.4% loss in their total retail sales due to shrinkage. By taking these steps, retailers can help prevent shrinkage and protect their inventory, which can ultimately lead to increased profits and customer satisfaction.