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Five Types of Shrinkage in Retail and How to Prevent Them

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In 2021, shrinkage in retail accounted for $94.5 billion in losses, or a shrink rate of 1.44%, which decreased compared to the previous couple of years, according to the National Retail Federation.

Organized retail crime (ORC), which is among the major components of that shrink, is a relatively growing challenge for retailers and the retail industry.

The survey also shared the majority of retailers reported rising complaints about in-store, e-commerce, and omnichannel fraud. Organized retail crime (ORC), which is among the major components of that shrink, is a relatively growing challenge for retailers and the retail industry. Retailers reported a 26.5% increase in ORC.

To prevent retail shrinkage caused by frauds, for example, you will need to know how shrinkage affects businesses, as well as its different types and measures to avoid it.

Outline

What Is Retail Shrinkage?

Retail Shrinkage

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Retail shrinkage is used to define a store with relatively lower or fewer items in stock compared to its recorded inventory on a business's balance sheet. It is simply the loss of inventory due to different factors including employee theft, shoplifting, administrative error, return fraud, and operation loss.

This is among the key problems of retailers, as it results in loss of profits. Up until today, retailers are experiencing retail losses due to several factors. Below are some of the types of shrinkage in retail that you should know.

Five Types of Shrinkage in Retail

Shoplifting

Shoplifting

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Shoplifting is illegally taking goods or products from a store without paying for them. Imagine someone walking calmly out of a shop with a product hidden under their shirt, or those scenes in movies where a group of individuals tries to steal items in retail businesses in the most strategic way possible — that is how we often describe shoplifting.

Approximately one in every 11 people in the United States have reportedly shoplifted in their lifetime, meaning there are estimated 27 million shoplifters across the entire country. It costs businesses $13 billion in losses annually solely due to shopping robbers.

Twenty-five percent of those caught by authorities are said to be children while 75% were adults – with 55% of them claiming they began as teenagers.

Shoplifting can actually be done in different forms, all can significantly affect every retailer. Among the financial effects of shoplifting is that it takes away a significant amount or percentage of your revenue and profits. Each product lost to a shop thief leads to no revenue from it. A consistently high number of shoplifting incidents may severely affect your profit margins.

Aside from that, regular shoplifting may lead to price increases on products and services you offer to the customers as this will become your only solution or alternative to address the loss of inventory.

Think about those small businesses, that just started, the need to raise prices can be really difficult since they are still in the stage of establishing their brand and trying to gain loyal customers. That is why retailers continue to use electronic item tags, surveillance cameras, and facial recognition to prevent inventory loss.

Operational loss

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Operational losses or errors are caused by failed retail processes, regulations, policies, or circumstances that disrupt the entire business operations. This may be due to staff errors, fraud, and other physical events that can trigger operational risks or problems.

As an owner, you might also encounter various issues in getting the funding or capital you need to invest in new products, equipment, technologies or even to hire the people you need in order to deliver excellent customer service.

When you have several teams working on different business angles, you need comprehensive performance monitoring in every operation to avoid operational issues.

Without properly monitoring performance both on a team or individual level, your staff employees can be lost in the middle of doing their parts in your business and it will be difficult for you to find the error that needs fixing. You have to establish a distinct operational flow in order to set things apart from each other and to avoid confusion.

Employee theft

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Employee theft is the unauthorized taking and use or the stealing of money, business information, retail merchandise, and work time from the workplace, with the intention to personally gain from it. It can happen through larceny, embezzlement, tampering, or fraudulent disbursements during the course of work activities.

Retail stores often suffer from internal theft, which happens multiple times higher compared to external losses. Employee theft is costing U.S. businesses $50 billion yearly.

Hiring store staff is a crucial part of running a business, you have to be clear regarding what qualities and background experience you are seeking for in an employee. Try to allot more time in screening applicants, spot those with loyalty and integrity. You can try putting them in different scenarios and observe what responses they would make in order to identify who are the most qualified based on your set standards.

Administrative errors

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Retail management needs to be clear of any mistakes in order for a store and the owner to achieve each goal they put in since the beginning. An administrative error means a clerical error in writing, which may include unintentional omission of a number in calculation leading to a miscalculation.

Administrative errors are often caused by administrative burdens. Administrative error shrink comes from information or data that has been recorded incorrectly recorded. It can be from inventory checks or even marketing and sales promotions.

The retail industry manages and controls a lot of inventory daily. A poorly handled inventory is among the most common types of administrative error shrink. If a retailer or a staff isn’t appropriately counting their stock, this could result in them trying to locate shortages that might not actually exist in reality.

The moment they begin investigating these losses, the retailer could end up wasting a massive amount of time due to the careless and inaccurate inventory they made.

Tools like Shopify POS, as we mentioned above, eliminate the hassle of manually checking inventories. These kinds of technology advances help businesses precisely and meticulously finish everyday tasks.

Return fraud

A chart shows the percentage of shoppers who admitted to committing return fraud or e-commerce policy abuse in the United States in 2022

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Return fraud may take place when customers bring an item or product back to you to request a refund in exchange for store credit, discount, or cash despite the violation of the merchant’s stated return policy or instruction. The return request may be ineligible for a refund due to several factors such as the fact that it was purchased from another retailer, or because the item is used and such.

In 2022, return fraud was identified to be more widespread among younger shoppers. Almost two-thirds of shoppers aged 18 to 29 years old confessed to being part of this fraudulent practice, while in regards to shopping online, this number was three times lower among those aged 60 and above.

There are cases when merchants turn a blind eye against to suspected return fraud. For instance, some shoppers can use tons of staged excuses just to claim a return, or sometimes, owners have no way of verifying their claim which is why the only solution they think is to give what the customer wants. Frustrating customers can lead to more reputational damages, so settling and coming up with terms is often the much easier thing to do.

If you run an online shop, then you stand to lose several times from return fraud. Aside from the monetary loss, you will also have to account for the wasted time, shipping or delivery costs as well as communication efforts in dealing with the customer.

How To Prevent Them?

Fraud is anywhere and it can happen anytime. Whether inside your physical store or on your website and online store, you are not safe from it. That is why being equipped with the right tools can be beneficial as it may somehow put you far from the possibility of losing money, data, and equipment.

Suppose, you are planning to launch an online store, and want to accept payments from Visa, Mastercard, American Express, or Discover, your software and hosting site significantly need to be a Payment Card Industry or PCI compliant.

Shopify is certified Level 1 Payment Card Industry Data Security Standard (PCI DSS) compliant and this compliance automatically extends to all stores powered by Shopify. The PCI DSS is a security standard for any companies and organizations that handle credit and debit card information, this helps in controlling payment data in order to avoid fraud incidents.

Additionally, note that you can utilize Shopify POS to manage real-time inventory across different channels, observe employees' performance and even establish customer relationships. This way, you can improve the accuracy of your monitoring with less manual work required.

Have an Intelligent Return and Exchange Policy

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To avoid being a victim of fake returns, design a clear return and exchange policy to follow. By having specific terms and conditions on how to return or exchange products, it will be easier for you to filter the reals away from the fake ones.

Always require identification cards and contact for returns. Among the mistakes of some retailers is that they only ask for a receipt when procession a refund. If the item was bought through your online account or the shop, ask for the buyer’s contact details and immediately cross-reference them with the order.

Avoid cash refunds, instead, try to provide credit or gift receipts. The fraud starts with those eye-catching incentives. If you can offer credits or gift receipts instead of cashback on returns, it will be better. Thieves aren’t necessarily looking for items, often they prefer to launder money through your store.

Regularly update your return policies. If you notice something new that will help in double-checking the authenticity of a return request, then include it in your policies. Just make sure to be rational in establishing your return policies, we don't want shoppers to feel like you do not want to accommodate their return needs.

Increase Physical Security

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Physical security help business establishments monitor the entire personnel movement, receive real-time security alerts even if you are far away from the shop, and file reports regarding incidents and happenings daily.

Physical security works to protect business personnel, software, and hardware, as well as data from behaviors, actions, and events that could cause loss or damage to a retailer, company, or business. This also includes immediate protection from fire, typhoons, flood, burglary, theft, and such.

Aside from adding security teams to handle everyday store functions, you can have door access controls, which is a security solution that controls the entry and exits of all individuals within an area or facility. You can also issue exclusive ID cards for employees. This allows you to be fully informed regarding who is inside your store.

Install Obvious Surveillance and Anti-Theft Signage

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Include interactive surveillance cameras, which come equipped with built-in microphones and speakers together with live video footage. This lets retailers view real-time recordings, and communicate with employees and shoppers on the store. Surveillance systems can scare off thieves or shoplifters and those violent customers that aim to cause inconvenience to the store without limitations.

Anti-theft signage also helps create a sense of boundary inside the store. It will tell customers that they are being watched and monitored 24/7. Plus, signage can effectively state or deliver what the consequences of shoplifting can be. By putting anti-theft signage across the entire store, retailers effortlessly give warning to potential thieves from acting against the law.

Implement Strict Accounting Practices

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Incorporate accounting rules and guidelines when submitting and reporting financial data. These will make it easier to review financial data by adopting all the terms and methods that accountants must use.

Examples of this are the International Financial Reporting Standards (IFRS), one of the most used accounting principles, and the generally accepted accounting principles (GAAP), which is the practiced method by the United States.

Accounting standards are being followed in order to improve the quality of financial information reported by companies or businesses. By having this, store associates and owners can easily present everything all at once while having a full understanding of the financial status of their companies.

Improve Inventory Management

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Retail shrink due to losses. Having improved inventory management can prevent unnecessary defeats especially when everyone who manages the store honestly applies it to their work routine. Inventory management includes all the strategies and practices that affect your inventory.

It begins with your initial orders or restocking through receiving purchase orders. This requires a very large amount of details, like sales volume as well as the current stock numbers. Also, through accurate data collection, you will know what are the demands and sales projections of your business. The better your inventory management practices, the more useful this information can be.

Conclusion

Reduce retail shrinkage by being more involved in your business. Through proper task delegation, strict inventory compliance, accurate daily monitoring report, and such, you can lessen reports of fraud that lead to shrinkage in retail.

The national retail federation, which is the world's widest retail trade association with almost everyone in the retail industry, needs to be more aware of all possibilities resulting in business losses. Internal theft and external theft can be seen in different disguises. Implementation of rules and regulations should be continued and improved moving forward as that is among the ways that will help reduce retail shrinkage.

As a business owner or someone who is thinking of starting a venture in the retail industry, having advanced knowledge about the measures you need to take in order to achieve your projected sales records and accurate inventories can significantly bring advantages to your side.

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