Causes of Shrinkage in the Retail Sector

In the previous article, we have already understood the concept of shrinkage. We now know how shrinkage is calculated and are also aware of the financial impact that it has on retailers.

It is a known fact that shrinkage cannot be reduced to zero. It has to be brought under control. Retailers have been streamlining their operations and have started extensively using technology in order to bring shrinkage under control.

In this article, we will have a closer look at the causes of shrinkage. This is because it would not be possible to control shrinkage without truly understanding the root cause.

1. Shoplifting: When we think of shrinkage, shoplifting is the first issue that comes to mind. However, it needs to be understood that shoplifting is not the only cause. It does continue to be a significant cause and accounts for over one third of all shrinkage that takes place in the United States.

   Shoplifting has also seen an upward trend in the recent past. This is happening despite the fact that retailers have been implementing technological solutions in order to prevent such theft. It also needs to be understood that a lot of the times shoplifters aren’t working alone. Instead, they operate as a gang which often colludes with employees.

   Retailers can organize their stores better, use better surveillance systems and train their employees to reduce the quantum of shoplifting.

2. Employee Theft: Sometimes employees collude with external parties in order to enable shoplifting. However, many times, employees themselves are the ones who are doing the theft.

   Employee theft can take a number of forms. On the one end, there is an extreme case of employees stealing merchandise from warehouses or other storage units. On the other hand, there is a relatively mild case of employees misusing their employee discount or failing to properly check the inventory being sold to their friends or family.

   Skimming of the cash drawer is also fairly common and is usually done in small amounts. Retailers need to have stronger background checks in order to ensure that they hire the right personnel along with better surveillance of the employee-only areas of the store.

   Employee theft may seem like a small problem but retailers across United States have reported losing close to $50 billion per annum only because of employee theft.

3. Vendor Fraud: Vendor fraud is a relatively small cause of shrinkage. Only about 5% of all retail shrinkage in the United States can be attributed to vendor fraud. This is largely because of the fact that retailers across United States and even across the world are more likely to deal with reputed vendors. Retailers generally undertake detailed background checks before they authorize a vendor to deal with them.

   Vendor fraud generally takes place in the form of incorrectly delivered inventory. However, they could also involve tampering of checks and other payments. Retailers have been able to successfully mitigate the risks of vendor fraud by increasing the use of technology. The usage of barcoding and electronic payments have enabled retailers to reduce the quantum of vendor fraud.

4. Return Fraud: Retailers across the United States and across the world have also been victims to return fraud in the recent past. There are various forms of return fraud which take place in the United States. These include returning stolen merchandise, returning merchandise which was purchased with counterfeit money, returning used merchandise etc.

   Return fraud has been evolving over the years. It is difficult for retailers to curb this type of fraud since they want to provide a fair return policy for genuine customers. Retailers have created stricter and more intelligent return policies. Also, retailers have started asking for some form of identification while issuing returns. This helps them to track the alleged fraudster in case a fraud is detected in the future.

5. Administrative Errors: It needs to be understood that all the shrinkage which happens in the retail sector does not happen intentionally. A lot of times, employees are not wilfully involved in fraud. However, it is their negligence which ends up creating administrative errors that finally result in shrinkage and lost revenue. There are mistakes such as mislabelling products which end up creating a situation where retailers end up selling products for less than their worth.

   Also, there are other situations wherein retail staff accidently markdown and give discounts on the wrong products. Such administrative errors are accidental by their very nature. Retailers need to put in place a process to prevent these administrative errors from taking place.

6. Expiration: Last but not the least, many times retail stores lose stock and money because they are not able to either sell or return the product before it expires.

   There are many vendors who may not accept unexpired products back. As a result, retailers have no option to return those products and may have to bear the financial liability. This problem can be completely resolved by implementing an automated system which creates return orders for stock which is nearing the expiration date.

The growing menace of shrinkage in the retail sector has to be acknowledged before a resolution is sought out. It is for this reason that it is necessary to carefully study the root cause of the problem.