What is Shrink Shrinkage in Retail?

Making up for the lost sales normally means raising prices or even cutting costs (employee salaries, headcount, benefits, etc.). This can lead to loss of customers and problems in keeping quality employees on staff. Retailers should place resources into loss prevention measures to avoid shrinkage and not accept it.

Cycle counting refers to the practice of counting a small amount of your inventory on an ongoing basis. You might do a weekly count of 10 different SKUs, for example, or you might pick 20 particular SKUs to count weekly for a month to monitor stock level changes for those products. It doesn’t take much shrinkage to make a noticeable impact on your business. Even with shrinkage lowering to 1.44% in recent years, that number translates to over $94 billion lost. Organized retail crime, where two or more people conspired to steal merchandise to resell, also falls under the shoplifting label. Price tag swapping also falls into this category, where a shoplifter pays less than what an item is worth because a different item’s SKU is recorded in the sale.

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Both you and your vendors can the risk of human entry error by using online B2B platforms like NuORDER. In 2020, shoplifting increased by 13 percent and is typically the largest contributor to retail shrinkage. Shoplifters could steal any product ranging in price so the impact can be highly variable. Acceptable shrink rates typically fall between 1% to 2%, with the average for all retailers landing around about 1.6% in 2020. Consider instituting surprise audits to reduce the chances that employees will time their theft to your inventory count cycle. Solink’s integrated VSaaS solution helps remove this uncertainty by connecting all of your data sources.

In the food and beverage industry, the same goes for any measuring and portioning done by people. Those 598 cases of wine are loaded onto a truck, driven to the wholesaler’s warehouse, and unloaded. The wholesaler stocks it, scans it, inventories it, sells it, and ships it to hundreds of individual retailers. Getting a second person to verify the records helps prevent inaccuracy and omission of key details. A double-check system also helps to identify loopholes that may contribute to stock shrinkage and to implement measures to curb fraud. Sometimes, inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage.

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For accounting purposes, the business must create a journal entry that records the $5,000 loss as an expense. Every piece of inventory that’s missing is essentially lost sales and money for your business, and should be considered an expense. Management errors such as miscounting, wrong units of measurement used, or any other type of human error that was a mistake can lead to inventory shrinkage. This is even possible when automation is used for inventory management. Whether inventory shrinkage occurs because of theft, shipping damage, or human error, it’s in the best interest of your company to prevent shrinkage. For every piece of inventory that’s unaccounted for, you’re essentially throwing away money or losing product.

That’s why employee payroll software like Hourly is so important since it automatically tracks your workers’ hours. Unfortunately, some customers will have malicious intentions when engaging with retail businesses. Walmart’s McMillon touched on the issue of retail theft during the call Thursday.

Forbes Magazine describes how you can spot employees stealing from inventory (read our article on theft prevention). As such, an acceptable inventory shrinkage rate is as small as possible. Even a moderate amount of shrinkage can have a big impact on your business, which is why it’s important to get your shrinkage rates as low as possible. Marking sellable goods as damaged, stock receipt miscounts, sliding items to friends during checkout, and applying excessive discounts are some of the ways internal theft takes form. Later, we will look at some of the ways you can deter employee theft, from making a pleasant work environment to installing access controls. Whenever possible, there should be two employees working near each other.

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A better way to look at acceptable levels of retail inventory shrinkage is the median 2018 reported shrinkage. The median is the point in which half the numbers are above it and half below. In businesses with complex supply chains, the inventory may at one point be handled by third parties who are not part of the company. The theft may occur during transit from the supplier’s warehouse to the business premises or when loading and unloading the products. Deliveries should be counted every time they enter or leave the business premises and recorded appropriately.

Items are damaged when transported, on the shelf, or in the back room. Maintaining a clean and organized store front and back room can reduce the likelihood of merchandise being damaged. During the bottling process, they only fill 398 bottles Inventory Shrinkage in Retail instead of the expected 400. Then, when loading the truck with cases to send to the warehouse, an employee drops a case, shattering 12 bottles. Shrinkage can either be normal (planned) or abnormal (due to errors or dishonesty).

Prevent damaging new product through improvements to your receiving and stocking processes. Train your employees on how to handle and store products in the warehouse or backroom. Smart product placement on store shelves is another way to prevent damage.

Walmart’s ‘shrink’ challenges differ from those of other retail giants, CEO says

Add to this rapidly changing marketplace inventory loss, or shrinkage as those in the trade call it, and you can see that retailers are up against the tide. The last thing you want is loss, through shoplifting or employee theft. Use some of the above resources to get control of your inventory management process and increase profits in 2019. Shoplifting occurs when a customer exits a store with more than what they paid for at the cashier. Shoplifting accounts for 38% of inventory shrinkage, and it surpassed employee theft as the leading cause of shrinkage in the 2016 National Retail Security Survey.

This ensures employees need to speak to customers before they can touch these items, which both deters theft and gives employees a chance to upsell to customers. In 2020, the retail industry’s average shrink rate rose to all-time high recently, after years of holding steady. According to the 2020 National Retail Security Survey, POS analytics remains the most popular loss prevention measure, deployed by 56.5% of retailers. Only 20% of surveyed retailers had no current plans to implement POS analytics. About 45% of retailers say that they have seen an increase in employee theft since the start of the pandemic. To get an accurate count of your inventory and its shrinkage you must track your inventory levels continuously.

• To give you some perspective, the entire wine industry has a market value of 70.5 billion dollars.
• And even otherwise loyal staff sometimes push the limits by stacking discounts or giving employee discounts to friends.
• Of note, what’s known as “POS exceptions” contribute to internal theft and are especially relevant to the hospitality industry.
• Thankfully automation has gotten us pretty far in dealing with both of these problems and we’ll touch on that in a bit.
• Cost accounting is a less involved inventory valuation method based on costs.
• An excellent way to tighten up your bottom line and increase profitability is to address your inventory shrink.

These costs work to further reduce profits, or to increase prices if the expenses are passed on to the customer. These increased prices are passed on to the consumer, who is required to bear the burden for theft and inefficiencies that might cause a loss of product. If a consumer is price sensitive, then shrinkage decreases a company’s consumer base, causing them to look elsewhere for similar goods. This week, Target CEO Brian Cornell said that the company is facing an “unacceptable amount” of retail theft and organized retail crime. If you’re using a POS system like Lightspeed, you can check your inventory levels and past cycle counts at a glance, making it simpler to monitor potential shrinkage rates. Cycle counts also take less time, because you can scan inventory levels directly into the system—which cuts down on potential administrative errors entering the counts.

While vendor fraud is rare, it still accounts for about five percent of retail shrinkage and typically takes two forms. A vendor will either over charge or add fees to the invoice or steal physical inventory from the store when they’re onsite. Accurate stock counts are essential for spotting theft-related shrinkage quickly. Clerical errors, however, happen all the time, despite being the easiest inventory shrinkage issue to solve. It is typically a matter of fixing your receiving, counting, and tracking procedures as well as automating your processes. Tag swapping is another pervasive form of retail shrink that affects inventory numbers and profits directly.

Ongoing training that details how inventory shrink occurs and why it is important can help you reduce your shrinkage. The important word here is “ongoing” because any effective shrinkage training should be an ongoing discussion with employees. Considering how much inventory shrink can cost you, the ROI of a solution that helps eliminate it is significant. This is troubling because it represents missing information.

Make it easy and safe for employees and customers to reach their items and place bigger items on the bottom of shelves. Retail business owners who leverage the above strategies are likely to see a lower overall shrinkage percentage than retailers who do not. If you have additional questions about how Loomis can help your business reduce shrinkage, contact us here. The employees of the store are often the first line of defense in stopping shoplifting as well as return fraud. Therefore, regular employee training should not be taken for granted.

Clerical Errors

Accounting for inventory shrinkage is crucial to growing your business. Without knowing where your products are going, you can lose out on profits, risk misrepresenting your value on accounting reports, and increase your cost of goods sold. With direct access to all of your products, employees may be capable of stealing from your inventory. For example, if your inventory shrinkage percentage is consistently low, a sudden spike is probably just the result of a simple miscalculation. However, if it is always high, you should begin considering other, more nefarious causes, like shoplifting, employee theft, or vendor fraud. Stock control and clerical errors are other common causes of retail shrink.

In order to discover precisely how inventory shrinkage has affected your business, you’ll need to calculate, track, and monitor it over time. It can lead to a drop in profits and require you to alter your accounting books, which will cost you even more time and money to fix. Well, in the case of a wine issue, it could be several things. There might be a bartender pouring more than a standard glass for each serving. There could also be theft going on, either employee theft or customer theft. This situation may require monitoring, a different way to store your opened wine or could even require terminating an employee.

As mentioned, the current average shrink rate percentage for retail businesses is 1.62%. However, this is deemed as extremely high and can definitely cause huge damage to businesses. Low cash flow and shrinking profit margins might also lead business owners to increase their pricing, which negatively impacts customer relationships. Business owners may need to recalculate other budgets, such as the spending on marketing or growth, their security budget, not to mention stock purchasing and security.

Third-party logistics or 3PL providers are professional fulfillment companies that help ecommerce businesses store inventory in the 3PL’s fulfillment center to pack and ship orders. They take precautions to keep your inventory safe and secure while allowing merchants to outsource fulfillment, which is often costly and unproductive to manage in-house. It is important to insure that employees understand the systems and that you have proper systems in place for recording inventory, recording the sale of inventory and managing your inventory. Another way you can lose money from workers is with employee time theft.