Modern brick-and-mortar retailers face plenty of challenges in today’s world. In recent years, shrinkage has become an increasing problem for retailers. Shrinkage typically refers to money, products, inventory, or any other resource that is missing and unaccounted for. While most retailers report shrinkage being 2% or less of total sales, that money adds up over time and can hinder a retailer in other ways. In total, retailers lose tens of billions of dollars every year because of shrinkage.
Fortunately, modern technology is helping to provide tools that can help reduce shrinkage. Stores with self-checkout kiosks and similar forms of technology have started to get a handle on retail shrinkage. However, if retailers want to get ahead of this problem, they first have to understand the sources and causes of shrinkage. Let’s take a closer look at some of the factors that contribute to high levels of retail shrinkage.
Shoplifting
Traditionally, shoplifting is the most common and the most costly form of shrinkage. In fact, some retailers use shrinkage and shoplifting interchangeably because it makes up such a big part of the problem. In today’s world, shoplifting remains the top source of shrinkage, accounting for roughly 35% of lost revenue. Every retailer is vulnerable to shoplifting and takes steps to prevent it. Yet, all retailers are still victimized by it - even stores with self-checkout.
Nevertheless, the extent of shoplifting's impact varies from one store to another. This is because there is no fixed profile for a shoplifter, their behavior, or their targeted items. Additionally, each store possesses a unique layout and technology setup, leading to differing levels of preparedness against theft. However, serious instances of shoplifting can result in substantial financial losses for retailers, reaching hundreds or even thousands of dollars in a single incident.
Cost of Living/Inflation
Regrettably, shoplifting is among the world’s oldest professions. As long as people have sold things, other people have attempted to get a five-finger discount, especially when dealing with economic hardships. The recent rise in inflation and the increased cost of living have driven more people to attempt shoplifting, feeling that they need to do so to make ends meet or believing the potential reward is worth the risk. As a result, people who don’t fit the profile of a criminal and perhaps don’t even have a criminal record are more likely to attempt shoplifting. Needless to say, this has made the challenge of preventing shoplifting more difficult for retailers in all industries.
Organized Retail Crime
One of the growing trends when it comes to shoplifting is an activity called organized retail crime (ORC). This involves a group of people working together to shoplift a large collection of items or a small collection of valuable items. This is much different than the type of shoplifters who grab an item and make a run for it.
Those participating in ORC try to create chaos and sometimes resort to violence – putting employee and customer safety at risk – while stealing items. ORC groups tend to target items that are easy to access, valuable, and sometimes disposable. Of course, there is a virtually endless list of retail items that fit these descriptions, which means few retailers, even stores with self-checkout, are off-limits when it comes to ORC. The bottom line is that this is a new frontier in shoplifting, creating a new set of concerns for retailers and adding to concerns retailers have with regard to shrinkage. In fact, in 2021, retail shrinkage amounted to $94.5 billion, marking an increase from the $90.8 billion recorded in 2020. It's clear that as time is passing, retailers are facing more and more security-related challenges on many fronts.
Price Tag Swapping
One of the more traditional subsets of shoplifting and shrinkage is price tag swapping. This is simply swapping price tags between two items so a customer can buy an expensive item at a cheaper price or altering price tags in some way. This seems harmless and not as bad as traditional shoplifting or retail theft. However, it still contributes to retail shrinkage and can be challenging to detect for conventional retailers.
Return Fraud
Another method of shoplifting that also gets overlooked in the larger scheme of things when it comes to shrinkage is customers committing return fraud. This can involve returning a previously stolen item for cash or producing counterfeit receipts for an item. Return fraud can sometimes be committed in an organized way by perpetrators who are experienced in this tactic and know how to succeed at it.
As a result, instances of return fraud have been on the rise in recent years, adding to retail shrinkage. This creates just another front for retailers to worry about with the war on shrinkage. Obviously, it’s difficult to be suspicious of every customer who tries to return an item or create policies and procedures that can prevent return fraud. This means that return fraud will continue to contribute to retail shrinkage.
Nevertheless, stores with self-checkout hold an advantage in combating return fraud, as customers must still interact with an employee when making in-person returns. This direct interaction provides an opportunity for stores to mitigate the risk of fraudulent returns.
Employee Theft
Unfortunately for retailers, theft is sometimes an inside job in the form of employee theft. Believe it or not, employee theft makes up more than 30% of shrinkage, nearly as much as all of the various forms of shoplifting. Some employees steal items or steal cash out of registers, while others will use their knowledge of store policies to participate in return fraud.
It’s also common for employees to provide unauthorized discounts for friends and family or conveniently forget to ring up certain items. With so many different forms of employee theft, it’s hard for retailers to closely monitor each of them. Obviously, hiring trustworthy employees and having a zero-tolerance policy for employee theft can help. But it’s not always possible to find employees who can be trusted 100% or keep tabs on those who you suspect could be committing employee theft.
Point of Sale Mining
In traditional retail settings, point-of-sale (POS) mining is one of the easiest ways for employees to get away with theft. Most POS systems have flaws that can be manipulated once employees understand how the system works. They know how to give discounts or omit the scanning of certain items. They also have access to cash drawers and may figure out how to steal cash out of them in a way that won’t be detected. Again, this comes back to finding employees who can be trusted and having a zero-tolerance policy.
Stores with self-checkout, however, can mitigate some of these risks as the system reduces the reliance on employee-assisted transactions, minimizing opportunities for unauthorized activities.
Vendor Fraud
One of the more overlooked areas of retail shrinkage is vendor fraud. To be fair, this only makes up a little more than 5% of overall shrinkage. However, vendors and suppliers can sometimes make mistakes with regard to the items they ship or the amount they charge. They can also be scheming on purpose to charge for items that aren’t delivered or send duplicate invoices. This type of shrinkage is a lot more common with big retailers that are ordering massive amounts of items and expect expensive bills. The greater the scale, the easier it is for vendors to commit fraud in small ways, creating shrinkage that can be tough to detect.
Administrative Errors
Unfortunately, retailers only have themselves to blame for some types of shrinkage. Close to 20% of shrinkage comes as a result of administrative errors, including ones that could be prevented with a little more oversight. Employees sometimes make honest mistakes when it comes to counting or sorting items, handling inventory, or bookkeeping. Retailers need to put a system in place that can double-check potential errors. It’s also possible to implement new forms of technology that can handle some of these tasks and cut down on administrative errors that lead to completely preventable forms of shrinkage. And as we move towards implementing more retail scales and the autonomous shopping revolution, this will be the way forward.
Stores with self-checkout possess an inherent advantage due to the groundbreaking technology powering these systems. Not only can self-checkout gather administrative data in real-time, but it also has the capability to analyze this data, empowering retailers to make informed decisions.
Operational Loss
Given some of the issues seen in the supply chain in recent years, this is another form of shrinkage that retailers need to know about. Supply chain problems can lead to not receiving items that have been paid for already. It can also result in perishable items spoiling before retailers have a chance to sell them. This ends up being wasted money for retailers - the same as having products stolen. When it comes to preventing this form of shrinkage, new technologies that can manage inventory more effectively may be able to help anticipate and make up for problems with the supply chain, preventing operational losses as much as possible.