Reducing Retail Shrink as Easy as 1-2-3

Ray Hartjen
Ray Hartjen
Director, Marketing

Loss Prevention remains a critical function in retail, with shrinkage now accountable for 1.5 percent of total sales. With a few critical LP tactics though, brands can mitigate risks and recover costs.

Note: This article was originally published on the Comm-Works blog on January 19, 2018.

In an era of retail when many brands fight through razor-thin margins and poor financial performance, it’s rather amazing that among all the articles and conversations touting the shopper-led retail revolution and the need to revitalize the retail industry, one retailing topic and function routinely gets downplayed – Loss Prevention.

Think Loss Prevention isn’t critical to the success of the retailing enterprise?

Think again.

Loss Prevention is a crucial as retail shrinkage means BIG business to retailers of all segments. According to both the Global Retail Theft Barometer and the National Retail Federation, inventory shrink – the difference between the revenue a store should have received and the amount actually received – amounts to almost $50 billion annually for U.S. retailers, or nearly 1.5 percent of sales.

With tighter and tighter margins, how many retail enterprises can afford to give up one and a half points right off the top, before they even get set to compete against other stores and brands in the marketplace? In this new retail reality, Loss Prevention professionals have more responsibility – and more opportunity to positively impact the business – than ever before. However, at the same time, they must do so facing the constraints of smaller budgets and fewer organizational resources.

First things first – Identify your primary sources of shrink

Before you combat shrinkage, you must first determine its root causes and then prioritize in terms of return on investment.

Most retail inventory shrinkage is primarily caused by theft, both from employees and non-employees alike. However, other causes include vendor and supplier fraud, process and accounting errors, pricing mistakes and ineffective inventory management.

In the United States, theft is by far the biggest cause of shrinkage and financial loss, with the biggest single source being theft not from shoplifters, but rather from dishonest employees, who account for over $18 billion in losses (shoplifters, on their own accord, are a $16 billion threat).

However, retailers are affected quite differently by shrinkage, and it’s necessary for a business to carefully audit and determine its greatest needs. For example, theft is a huge opportunity for improvement with both discounters and department stores, but discounters’ attention should be internal while department stores would serve well to focus externally. Home improvement stores, on the other hand, have much more to gain from curing administrative and other non-crime losses then from theft.

3 Loss Prevention counter measures to minimize exposure

While execution certainly isn’t easy, the steps to minimize Loss Prevention risk are as straightforward as 1-2-3:

  1. Activate Loss Prevention modules on retail analytics platforms
  2. Integrate inventory management systems
  3. Train your staff 

Activate Loss Prevention modules

A comprehensive retail analytics platform includes Loss Prevention modules, expanding overall solution capabilities well beyond simple traffic counting and other Store Operations, Marketing and Merchandising functions. As a result, it replaces several single-point solutions – Loss Prevention included – and reduces both capital and operational expenditures, leading to an increased ROI.

The entire C-suite loves to hear that.

Cutting edge Loss Prevention modules include advanced video management, POS exception reporting, in-store “dwells” around high-risk or high-value merchandise, security event monitoring and more. When first deployed, Loss Prevention modules from advanced analytics engines can help reduce theft by up to 75 percent. More importantly, the built-in platform tools allow Loss Prevention professionals to quickly and easily take action, eliminating the need for time consuming and costly data acquisition and case investigation.

Integrate your inventory management systems

An inventory management system (IMS) is a combination of hardware – bar code scanners, RFID and electronic article surveillance (EAS) tags and the like – and software, and allows a retailer to accurately track inventory levels, orders, deliveries, and when tied to POS systems, sales. Not only will an IMS help in Loss Prevention efforts, it also creates a more efficient supply chain process, lowering inventory carrying costs and freeing up precious working capital.

Train your staff

With so much loss exposure related to the human element, an effectively and properly trained staff returns immediate dividends. First, communicate a newfound emphasis on eliminating theft and train employees on not only how to spot shoplifting threats, but also how to best respond. Secondly, install practices, processes and policies – like security cameras and a bag check at the employee entrance – that let employees know they are also under scrutiny. Finally, investigate and fully prosecute/discipline all cases, establishing a new “normal” for ongoing operations.

Retail is undergoing tumultuous change in an increasingly competitive environment, and profitability for many brands has rather quickly eroded. Emphasizing a few relatively simple Loss Prevention practices is a quick way to protect margins and turn your attention back to shopper experience and competitive differentiation. 

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