Can Retailers Reduce the High Cost of Inventory Shrinkage?

When armed and dangerous criminals enter a store terrorizing employees and stealing valuable merchandise, the effects of the robbery on the retailer can be catastrophic. Not only is the psychological impact felt by employees and customers, but the financial implications to the retailer can be devastating. An armed robbery will likely have an obvious impact on the retailer’s bottom line, but what about the more insidious ways retailers are struggling to prevent financial losses from inventory shrinkage? Shrinkage is an enormous and expensive problem for retailers costing the US retail economy $48.9 billion in 2016 according to the 2017 National Retail Security Survey.¹

Theft is Not the Only Cause of Shrinkage

Inventory shrinkage is an inevitable but painful part of doing business in the retail sector. Shrinkage is the difference between what a retailer has recorded in their books as inventory and what physical inventory they actually have when counted. Shrinkage can be caused by administrative errors and employee theft, with the biggest offender being shoplifting that includes organized retail crime. Retailers suffer from a decline in profits while consumers may also feel the pinch through increased prices to make up for the retailer’s losses.

Shoplifting is a Major Headache for Retailers  

Shoplifting and organized retail crime accounted for 36.5% of retail inventory shrinkage in 2017 as reported in the 2017 National Retail Security Survey.² Most people think of shoplifting as people shoving merchandise in their pockets or purses and escaping the store unscathed. Incidents like this could be thought of as a one-off or moment of indiscretion but still damaging to the retailer’s bottom line. On the other hand, organized retail crime is far more costly than the average “garden variety” of shoplifting.

Organized Retail Crime Is A Scary Reality

Organized retail crime consists of sophisticated networks of criminals who strategically scope out and target retailers. These “gangs” steal the retailer’s merchandise and then sell the stolen goods to other criminals domestically or overseas. Portraying themselves as legitimate, these thieves sell the merchandise back to retailers to sell to customers. Goods are marked up at each stage of the criminal process making it lucrative for criminals but costly for retailers.

Not all Shrinkage is Caused by Outside Sources

The cause of inventory shrinkage can’t be blamed solely on the actions of criminals coming in from the outside. The unfortunate reality is that not all employees are honest. Research findings from the National Retail Federation indicate that the average cost per dishonest employee was $962.60 in 2017 up from $622.00 in 2016.³ Though the workplace does have its fair share of dishonest employees, the hope is that it’s comprised of predominantly honest workers. But even the best employees can make mistakes while completing administrative paperwork. Human errors happen but these mistakes cost retailers money in lost profits.

Shrinkage Can’t be Beaten But Could be Reduced

Though inventory shrinkage is unavoidable, retailers need to tackle the problem head on. Here’s a list of suggestions that retailers could try to help reduce inventory shrinkage in their stores:

• Make it harder to become a victim of theft. Organized retail crime gangs watch their targeted stores sometimes for months before striking by observing various activities including when employees are alone, if the store shelves are messy or neat, and what security equipment, if any, is in place.
• Keep surveillance equipment and signage clearly visible so would-be criminals know security is being taken seriously.
• Strategically place security cameras by paying particular attention to back exits and garbage areas.
• Consider increasing spending on loss prevention measures.
• Hire uniformed security guards and plain clothes loss prevention personnel.
• Stay informed about what’s happening with neighboring stores. Chances are if an organized retail crime ring is hitting one store they may hit similar stores in the area.
• Review your hiring practices by improving employee pre-screening through criminal background and reference checks.

The problem of retail inventory shrinkage is here to stay, but retailers can take positive steps to reduce its impact. Shrinkage affects not only the retailer, but consumers who will ultimately foot the bill by paying increased prices.

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Sources:

^1,2,3 National Retail Federation, 2017 National Retail Security Survey, pages 6, 8 and 14.