How Retail Organizations Use a Top-Down Strategy to Reduce Shrinkage without Decreasing Revenues

Shrinkage happens. And, according to the National Retail Federation's 2023 Retail Security Survey, it is happening at an increased rate. For FY 2022, the average shrinkage rate was up to 1.6% which represents $112.1 billion in losses. Many in retail accept loss as a cost of doing business. But not all losses are the same. By knowing the various forms of shrinkage and focusing on those forms which are more easily preventable, your retail organization can deploy more effective strategies to minimize shrink without sacrificing revenues. This requires a top-down strategy, data-driven conversations, and technology to bring it all together so you can efficiently track progress against loss prevention goals.

Why Preventing Shrinkage Has Become So Important in Retail

The retail industry faces several challenges which have only become more difficult to overcome in a post-pandemic economy, and shrinkage exacerbates the problems.

Whether unintentional or malicious, shrinkage has a direct negative impact on many aspects of running a retail business. Since retail organizations operate on low margins, they need to generate higher volumes of sales to remain profitable, leaving little room for error. So, anytime there is missing or damaged inventory there will be decreased revenues that results in a hit to the bottom line. Additionally, with any increase in lost inventory, retailers are forced to increase prices on consumers, which might cause them to turn to a competitor for their purchases.

Compounding the challenges, the retail industry also deals with one of the highest employee turnover rates. So, while trying to recruit, hire, train, and retain employees, shrinkage leaves less in the budget for employee wages and benefits. This creates a vicious cycle and contributes to additional shrinkage in the forms of employee errors and theft. There is an ongoing disconnect between employees and the retail organization’s asset protection objectives.

Understanding Where and How Much Shrink Occurs is Key to Developing a Loss Prevention Plan

For retail organizations to successfully combat shrinkage they must first gain in-depth knowledge of how it occurs. Generally, any type of loss can be attributed to one of two broad categories: intentional or accidental. Intentional, or malicious, shrink generally covers theft or fraud. Accidental, or non-malicious, shrink is caused by errors people commit or shortcomings in operational processes. Both types of shrink are detrimental to business surfacing in many different forms in a typical retail setting:

1. Shoplifting, 37% of retail shrinkage, occurs when customers steal items from a store.
2. Employee Theft, 28.5% of retail shrinkage, happens when employees steal merchandise, money, or other assets from the store.
3. Administrative Errors, 25.7% of retail shrinkage, is caused by humans making mistakes. These mistakes can happen while following store procedures or by gaps/failures in defined processes.
4. Vendor Fraud is when suppliers or vendors deceive the retail organization. Vendor fraud can come in the form of overcharging or delivering fewer goods than agreed upon.
5. Return Fraud is when customers engage in fraudulent return activities, such as returning stolen items or using counterfeit receipts.
6. Organized Retail Crime (ORC), is capturing headlines as merchants report incidents were up 26.5% last year. This is when groups of criminals collaborate to steal or commit fraudulent activities at retail stores. Several large cities have created task forces to thwart such smash-and-grab or flash mob thefts.
7. Supplier Errors are mistakes or inefficiencies made by suppliers that can lead to inventory discrepancies or financial losses.
8. Point of Sale (POS) Fraud happens within the checkout process. POS fraud includes under-ringing items, voiding transactions, or using counterfeit payment methods.
9. Damage and Spoilage can happen during storage, transportation, or in-store handling, resulting in financial losses.
10. Employee Errors are unintentional mistakes made by employees in handling merchandise, inventory control, or cash handling that lead to loss.
11. Theft by Contractors is when external contractors or internal maintenance personnel engage in theft or fraudulent activities while working at the retail store.
12. Operational Non-Compliance, whether intentional or not, is when employees fail to follow established policies and procedures. This non-compliance leads to financial discrepancies in areas such as cash handling, inventory management, or security protocols.

Combating Shrinkage as a Function of Operations

Protecting a retail organization’s assets requires a comprehensive loss prevention program. Senior leaders in asset protection need to use a combination of people, processes, and technology to ensure success. While working toward the development of a top-down strategy, asset protection teams can first focus on the shrinkage that can be more easily controlled.

So, what can be done to reduce shrinkage in the short term?

1. Begin by clarifying and communicating company policies and procedures.
2. Continue with ongoing employee training to improve operational compliance as well as minimize unintentional errors.
3. Perform regular process audits to identify incidents of operational non-compliance and take corrective actions.
4. Elevate awareness of loss prevention program progress with routine reports and best practice sharing.

Next, continue to empower employees with ongoing asset protection education. Make sure that all employees understand and can recognize various ways that loss occurs. Provide training programs that highlight the actions employees can take to help the organization reduce overall loss.

Some examples of what to include in a retail asset protection training program, include:

1. Minimizing Employee Errors: Providing comprehensive training on how to minimize unintentional errors made by employees. By emphasizing the importance of accuracy in tasks like inventory management, cash handling, and record-keeping, retailers can greatly reduce the risk of these types of errors.
2. Store Policies and Procedures: Employees should be well-versed in the store's policies and procedures related to loss prevention. This includes understanding return policies, security measures, and the reporting process for suspicious activities.
3. Point of Sale (POS) Use: Regular training for cashiers and customer service personnel on identifying potential fraudulent activities can also be effective in reducing theft.
4. Recognizing Suspicious Behavior: Employees should be trained to recognize signs of suspicious behavior, such as nervousness, excessive browsing, loitering, and wearing bulky clothing, which may indicate potential theft.
5. Defending Against Organized Retail Crime (ORC): Train management and employees on the power of collaborating with local law enforcement agencies and actively participating in industry sharing networks.

Utilizing Technology and a Data Driven Approach

Along with training and clear communication with employees, retail organizations can thwart potential loss with the use of tools and technologies. Implementing security systems such as surveillance cameras, access control technology, electronic article surveillance (EAS) tags, inventory management tools, and burglar alarms can also deter criminal activities.

All these tools contribute to reducing theft and errors; however, long term effective loss prevention can be better achieved with access to better data. With the right data, leadership can identify patterns of shrinkage and glean insights to help in the development of loss prevention strategies. With timely, accurate data, loss prevention teams are able to detect unforeseen issues as well.

Implementing a Top-Down Strategy by Using Scorecards

Armed with policies and procedures, continuous training, and the use of technology, asset protection leaders now have a strong foundation upon which to combat shrinkage. Now, to be sure objectives are met, asset protection needs to be part of a retail organization’s overall strategy. That strategy begins with involvement and participation from senior leaders and cascades all the way down to the associates.

By elevating asset protection to the strategic objective level, with corresponding measures, KPIs, and mitigation plans, retail organizations enable employees to participate in the success of reducing shrinkage. Employees can see how their efforts tie directly to meeting the objectives. This fosters a higher level of employee engagement and elevates accountability.

Reducing Overall Shrinkage is an Ongoing Challenge That Requires Continuous Attention

Reducing shrinkage to absolute zero is impossible. Shrinkage is inevitable. The mission for asset protection teams is to reduce it to a level that is acceptable to the business. This requires a comprehensive program and allocation of the necessary resources. By creating strategic objectives for loss prevention, frequent communication about those objectives, and empowering employees with the right knowledge, tools, and technologies shrinkage can be more easily controlled.

Leverage Technology to Accomplish Overall Loss Prevention Objectives

ESM is a cloud-based application that enables organizations to align their Asset Protection program with organization-wide business objectives, risk tolerance and budget. ESM saves time, reduces manual effort, enhances communication and creates a user-friendly hub to manage your Asset Protection Program. In the end, ESM focuses your team on what matters most – reducing shrink and protecting assets for your organization.