Retail Shrinkage and What to Do About It

By: New England Loss Prevention Advisory Group  

According to the National Retail Federation retail shrink losses average over $40 billion annually and have been consistently increasing.  There are three primary drivers of these losses—external theft, internal theft and operational inefficiencies.  The top five types of retailers with the highest percent to sales losses belong to (1) fashion apparel and accessories, (2) convenience stores, (3) home, garden and auto, (4) drug stores and pharmacies, and (5) variety stores.  Their losses range from 2.43% - 1.95% —well over the US retailers average of 1.85%[1].  However, retail shrink negatively impacts businesses of all types and sizes.  The following breaks down these three major types of theft activities to allow you to best identify any issues your business might be facing and then properly allocate the resources necessary to address them.  

External theft includes opportunistic shoplifting and Organized Retail Crime (ORC), and represents about 36% of all retail shrink[2].  Opportunistic shoplifting is typically characterized as individuals stealing merchandise for personal use, whereas ORC consists of the theft of merchandise in bulk by coordinated teams for the purpose of resale on the black market or reintroduction into the stream of commerce through fraudulent returns.  The average value of merchandise involved in an ORC apprehension was $1,401.68 in 2018, while the average value involved in an opportunistic shoplifting apprehension was $89.80[3].  Unfortunately, ORC activity makes up the vast majority of external theft and continues to be on the rise.

ORC activity directly impacts retailers, consumers and the community.  First, if you don’t have it, you can’t sell it.  With ORC teams stealing in bulk, the retailer loses twice: the value of the merchandise stolen as well as the lost sale.  Second, ORC involving refund fraud creates another double hit as it results in a sales tax loss from the original sale and inaccurately inflates the retailers booked inventory, which shows as shrink during inventory reconciliation.  Lastly, there is a recent legislative trend across the country to increase the felony thresholds included in our property crimes. For example, MA just increased its threshold from $250 up to $1,200.  The bad guys know this, which improves their risk-reward formula and drives activity.  The costs lead to increased prices charged to your consumers and the proceeds of ORC activity have consistently been found to fund other criminal activity in our communities. 

Internal employee theft represents about 25% of shrink losses and the average internal apprehension case was $1,203.16[4]. The primary types of employee theft are straight theft, “Sweet Hearting” (the act of passing out unpaid product to another) and return fraud; either as an individual or in collusion with another, such as an ORC contact.  It is not uncommon for an ORC contact to leverage employees with payoffs or other methods. Consequently, proper employee screening and proper behavioral interview questions during the recruiting and hiring process is becoming an important step in protecting against internal employee theft.     

Operational losses include operational or processes inefficiencies as well as vendor and supplier fraud, which represents the balance of contribution to shrink at 39%.  Examples of this are not having or following an inventory management process. Knowing exactly what you purchased, if and how it was received, merchandised, price changed, sold and possibly returned accurately is an important systemic process to manage. The same is true for your vendor and supplier transactions. Having checks and balances within these processes is an important validation tool to prevent or quickly identify and course correct inefficiencies.   

Many retailers have dedicated resources to combat the challenge of profit deterioration. Retailers that do spend on Loss Prevention and Security focus on the purchase, implementation, deployment and maintenance of loss prevention personnel, systems and solutions to reduce shrinkage. With such a wide variety of available resources, the challenge is knowing which options are right for your business.

Yet even retailers with limited resources can take steps to protect against such losses.  Knowing how to formulate a strategy and effectively leverage those resources, which include employees, in addition to hardware and software solutions, is critical to the sustainability of any retailer.  In the end you want to provide excellent customer service, drive sales, and secure your people, property and profits. 

New England Loss Prevention Advisory Group, LLC has a team of industry experts who can advise you on assessing your risks and identifying resources. We can help you develop a program to protect your people, property and profits and help you prevent external and internal theft as well as help you improve operational efficiencies. We have years of proven Best Practices and a vast network of industry partners who can supply you with cost effective hardware and software solutions.

Please visit our website to see how we can help you with your Loss Prevention and Security needs. We have arranged a partnership with the Retailers Association of Massachusetts offering special pricing to its members. We look forward to supporting your business.

For more information visit: NELPAG.com