Inventory shrink costs retailers across the globe billions of dollars every year. That’s billions—with a B. In fact, losses amount to nearly $100 billion annually in the United States alone. Retail shrink is a genuine concern. This is a serious problem that goes well beyond a missing sweater, a damaged package, or a youngster shoplifting bubble gum. It’s a real and growing threat to profit margins and company survival.
In simple terms, retail shrinkage or “shrink” refers to the difference between inventory levels that a retail company is supposed to have on hand based on their books as compared to the actual inventory on hand when verified by the retailer. This reduction or loss of inventory is primarily due to factors such as shoplifting, organized retail crime, employee theft, human or paperwork errors, vendor fraud, and other related losses. Shrink can lead to the downfall of a retail enterprise, directly eating into the lifeline of profit that keeps the company in business.
Profits Drive Success, Not Just Sales
So, what does that mean to the average store manager? For most in retail management, sales are everything. Sales drive the business. When we look to measure the overall success of the business, we look to sales first. When we try to establish business trends and product success, we look to sales. When we look to measure the success of a store manager, we start by looking at sales. Sales create the revenue that pays for everything else. Sales pay our salary and keep the lights on. Sales buy new merchandise and keep the retail cycle alive. Most certainly, there are other factors that will come into play, but when measuring success and failure, the buck stops here.
However, the ultimate goal of any retail business is to show a profit. While sales may provide the barometer for profits, it is ultimately profit that will determine the success or failure of the business. Profit margins are precisely where we have the greatest opportunity to impact the success of the business. In a business driven by the power of sales, often too little attention is given to the kryptonite that is retail shrink. Retail shrink is, in fact, lost profits. Successful retail planning is measured by the ability to maximize profits, limit losses, and improve efficiencies.
Shrink Is an Outcome
Of course, theft, fraud, and other crimes contribute to retail shrink. Few would argue the devastating impact that criminal activity can have on a retail store. While we may not be able to control criminal intent, we are also not helpless victims falling prey to a nemesis beyond our control. There are some very simple and very manageable steps that can be taken to limit theft and other retail crimes and put a dent in the ultimate outcome—lost profits.
Safety is also a primary concern. We don’t have to put ourselves, our teams, or our customers at risk. We just have to be smart, organized, open-minded, and diligent. What should come as no surprise is that all of these same steps will also have a direct and immediate impact on the sales performance of the store.
What are some of the factors that lead to shrink problems in retail stores? Rather than looking at issues beyond our control, let’s focus on fundamental influences that are well within our power to manage.
10 High-Shrink Indicators
Below are ten common characteristics of high-shrink retail stores. While not every one of these characteristics needs to be present to indicate a potential shrink problem, the presence of multiple concerns are reliable high-shrink indicators in the retail environment.
- Unsatisfactory Customer Service. This one should come as no surprise—good customer service practices are a core value for any retail business. In fact, good customer service doesn’t go out of style no matter what you’re selling. Approaching and greeting customers, making eye contact, offering assistance, and other positive practices that help to effectively enhance the customer experience will also deter dishonest activities. Dishonest customers wish to conceal their activities and mask their intentions, and an alert and conscientious sales associate is a thief’s worst enemy. By the same respect, if your business becomes known for poor customer service, you can expect several things to happen—and none of them are good for your business. Loyal customers leave, new customers stay away, the reputation of the business suffers, sales decline, and thieves thrive.
- Poor Operational Controls. Following company procedures and adhering to operational guidelines keeps stores running smoothly and efficiently. This includes physical security guidelines, but also refers to other operational standards like properly completing required paperwork and documentation. By following these operational controls, we also demonstrate command and order, eliminating many mistakes—and opportunities that result in retail losses. A store atmosphere that illustrates such control will limit errors, provide checks and balances that may correct missteps before they become an issue, and can also be intimidating to those that might otherwise engage in dishonest activity, internally and externally.
- A General Lack of Store Cleanliness. A largely unappreciated aspect of maintaining a retail business, good housekeeping practices send a clear message to customers regarding service levels and commitment to excellence. A clean, neat, well-maintained store eliminates many opportunities for merchandise to be damaged, lost, or stolen; avoids many potential safety hazards; and establishes an attitude of caring, respect, and control that can be intimidating to the potentially dishonest individual. In contrast, research shows that customers firmly believe that dirty floors, spills or stains, unpleasant odors, dirty shopping carts, unclean restrooms, and other cleanliness issues have a direct and negative influence on their shopping decisions. These factors speak volumes about store leadership and overall employee performance, practically inviting many of the other characteristics on this list.
- Substandard Merchandising Practices. One of the most effective and proactive tools on retail selling floors is strong merchandising. A strong presentation coupled with proper and effective use of store fixtures and displays will increase merchandise sales and draw in more customers thus eliminating many opportunities for dishonest customers to conceal their activities, increase associate exposure to the area, and offer improved visual indicators when product is missing. Conversely, areas that are poorly merchandised and appear in disarray provide additional opportunities for theft, damage, and other losses.
- Ineffective Hiring Practices. Hiring the right people is a key component in the success of any organization. When management teams practice their due diligence during the hiring process, they can eliminate many potential issues and reinforce the positive aspects of their workforce. However, when they don’t follow through or skip important steps; don’t properly recognize or interpret information provided on an application or resume; and don’t ask the right questions during the interview process, it can lead to bad hires that have lasting effects on the performance of the store and morale of the entire team.
- Cluttered Stockrooms. There are many different hazards associated with cluttered and unkempt stockrooms. Improper storage can lead to safety concerns such as unsafe or top-heavy stacking, tripping hazards, chemical hazards, damaged merchandise, broken equipment, obstructed aisles and fire exits, inadequate lighting, inadequate storage space, and other dangerous or improper conditions. From a loss prevention perspective, this can also result in poor merchandise accountability, product availability concerns, and increased opportunities for theft and other safety issues.
- Unattended and Untidy Fitting Rooms. The fitting room is a very important part of the clothing purchase process and should never be an afterthought in a retail store. In fact, statistics show that most final decisions on apparel purchases are made as customers try on various clothing options in the fitting room. Fitting rooms should be comfortable for customers and have plenty of mirrors that are properly secured and sealed around the frame. Fitting rooms that are poorly lit, cluttered, and generally lacking employee attention will discourage honest customers while opening doors for theft and other issues.
- Poor Attention to Details. In retail, seeing the big picture is clearly important—but attention to detail is what ultimately keeps us successful. Attention to detail is the level of care, accuracy, and thoroughness applied to a particular task. It will include traits such as focus, preparation, planning, practice, communication, listening, and diligence. When we skip steps and overlook important details, bad things will eventually result. Overlooking details, failing to complete tasks on time, providing document approvals without seeing the appropriate steps (pencil-whipping), and similar issues will quickly lead to poor performance.
- Unmotivated or Uninspired Employees. Rewarding employees for stellar performance and providing progressive counseling for those that aren’t performing to expectations can help us maintain a strong, efficient, and satisfied business team. We want all employees to have a sense of pride in their jobs, their company, and their performance. By the same respect, behavioral issues, poor performance, and lack of motivation will not only disrupt the work setting—it lowers the bar for other employees. Bad habits can spread like a virus through the workforce, leading to multiple workplace concerns including shrink issues.
- Closed Minds. Closed minds close doors. Effective loss prevention efforts require an interactive perspective that searches for the most effective ways to maximize profits while keeping our stores safe and secure. Changing our perspective and approach, understanding how these concepts complement the business model, and effectively communicating will help build partnerships; creating an atmosphere of cooperation that helps improve sales, lower shrink, and enhance profits. The fact is, no one of us is as smart as all of us—and it takes open minds and collective efforts to put it all together.
Of course, this is by no means a complete list, and sharp minds can probably list another dozen or so similar influences that will directly impact high-shrink retail stores. But taking a closer look at these and other challenges, opportunities, practices, and concerns in the stores can have a direct and immediate impact on shrink performance. There will always be issues that are beyond our control. However, the wisest approach is to appropriately manage those that are within our power to oversee.
Take a Closer Look
When it comes to identifying the primary causes of shrink in every retail store, it’s easy to point a finger at shoplifting, fraud, and other retail crimes that contribute to retail losses. These are real threats that demand our focus and attention. However, this only tells part of a more complicated story, and every retail leader has an obligation to their business to take a closer look.
Rather than looking beyond our four walls to find answers, it can be just as important to turn around and take a closer look inside those same walls. A simple overview of our ten characteristics points to a clear trend that has a direct impact on both retail shrink and overall retail success—poor management practices.
True leaders are willing to tell the whole story, look at how they can make improvements to the plot, and come up with a better ending. How many of these characteristics exist in your stores? Maybe it’s time to take a closer look.