Shrinking Shrink

The bad news? Retail shrink is on the rise and it costs the industry billions annually. The good news? Retailers can control, and often reduce, the percentage of shrink eating away at profits. In fact, retailers with a serious shrink problem can increase the bottom line by 0.5% -1 %.

The key elements of shrink - internal and external theft, vendor and carrier fraud, inaccurate accounting charges -- haven't changed much. However, with the advancement of retail systems, some new elements are appearing - pricing integrity, store polling accuracy, UPC management, and others. Therefore, the way retailers are attacking shrinkage is changing. Traditionally, shrink was considered a store-level problem. But no more. Retailers are finding out that shrink can originate at all levels - from buying to distribution to selling. That's why they're turning some of their attention to non-store activities, such as buying, information technology, and accounts payable.

Where Retailers Rank
Shrinkage was divided into employee theft (43.7%), shoplifting (32.6%), administrative error (12.9%) and vendor fraud (5.4%). The remaining shrinkage resulted from unknown causes. Companies reporting in the NRF Study indicated that 18.7% of employee theft cases involve collusion between internal and external sources. Retailers with lower-than-average shrink include office supply stores, home furnishings stores, and entertainment and media gaming stores. Retailers with higher-than-average shrink include supermarket and grocery stores, specialty accessories stores, and furniture stores. (Much of grocery stores’ shrinkage comes from spoilage according to the NRF,
which is not an issue that many traditional retailers have to deal with.The shrink numbers from drug and pharmacy stores doubled over last year.

Root Causes
Sources of shrinkage vary Widely and include such variables as:
  • Lack of pricing integrity in the POS system
  • Inaccurate capture of all price adjustments
  • Inaccurate physical inventories due to poor
  • Cutoff errors in distributing merchandise to stores
  • Inaccurace charging of interstore transfers
  • Duplicate or overpayments made to vendors
  • Lack of reconciliation of charge backs to vendors
  • Refund and void fraud
  • External theft by organized gangs

Getting on Track
While shrinkage is difficult to identify and correct, the results are worth the effort.
Following are best practices that should be a part of your improvement plan:
  • Review policies and procedures for new item set-up, price changes, DSD, special deals and ad breaks
  • Identify and correct unauthorized items and inaccurate UPC codes before products arrive at the store
  • Establish a thorough IS audit program
  • Adopt cycle inventories to provide more frequent information on changing trends
  • Establish a quality program to monitor accuracy of intracompany shipments
  • Utilize electronic article surveillance tags on high-theft items
  • Utilize exception reporting at the associate level for sales clerks and cashiers
  • Implement associate awareness and training programs (a very effective component)
For more information on this topic contact Pat Fitzpatrick at Atlanta Retail Consulting Inc