Every year, the National Retail Federation (NRF) conducts a survey, the National Retail Security Survey, that helps the retail industry know what’s going on in the world of loss prevention. In 2018, it was estimated that $50.6 billion was lost to retail shrinkage. Every business experiences at least 1.4% loss through shrink in retail. Let’s break down what’s happening here.
What is shrink in retail, and why is it important?
Shrink in Retail
Merriam-Webster defines inventory as “an itemized list of current assets.” For retailers, it’s basically the items that they buy and sell.
This is the difference between the recorded value of a retailer’s inventory, and the actual value of their inventory after all the items have been sold.
Let’s simplify it with an example.
Retailer buys items and records them in the inventory. The items are worth $450,000. Retailer plans to sell the whole inventory’s worth of items for $500,000. The profit would be a round $50,000.
To get the full $50,000, every item in the inventory must be sold, at full price. Say there are 10,000 items to be sold at $50 each. To break even, retailer should sell at least 9,000 items.
Of the remaining 1,000 items, 100 are shoplifted, 100 are stolen by employees, 100 are lost in transit, and 100 are lost due to clerical error. Retailer only has 600 items left in the inventory. Instead of gaining $50,000 in profit, he only gains $30,000. It’s a 40% loss in profit.
That 40% loss, $20,000, is the retail shrinkage value. The possible profit “shrank” by $20,000. To stay competitive, retailers need to sell a high volume of items with small profit margins. In our example, our retailer only added $5 to the price of each item. But when multiplied by 1,000items, the potential gain or loss multiplied as well.
TL;DR: Why should we care about shrink in retail? Because it hurts profit, and anything that hurts profit hurts the business.
Causes of Shrink in Retail
Anything that reduces your inventory worth by illegal means can be considered something that causes shrink in retail. Here are the most common ones, and what they might cost you on average.
Shoplifting. On average, shoplifters will walk away with about $1,000 worth of goods on average. While this will help retailers prosecute because of the average high worth of the loss, it’s not a light number.
Return fraud. $1,700 is lost on average every instance of return fraud. Ouch! Retailers might want to include tighter security measures when items are returned, like asking for the original receipt and the buyer’s ID.
Employee theft. Itemizing the kinds of employee theft would take too long, but they do include both the misuse of employee discounts and outright theft. Each loss might be worth $1,900 on average.
These are the three most common contributors to shrink in retail. When it comes to security practices, retailers can prevent much loss just by focusing on and investing in these three areas.
New Ways to Steal, New Ways to Prevent Loss
In their survey, the NRF showed that cyber security was becoming a bigger problem. Store-based loss is still around 43%, but online commerce loss is at 30% and hybrid online-store-based retailers are already 22% of the loss. Retailers now have to trace purchases that never passed through their CCTVs, employees, and cash registers.
Shrink in retail is a never-ending, always-changing area that is an inevitable part of the retail industry. One run through a search engine won’t be enough. Make sure to stay updated on the latest security updates and best practices in addressing shrink in retail.