How to Calculate Shrinkage in Retail
Understanding how to calculate shrinkage in retail is a fundamental but critical concept within the loss prevention profession as well as throughout the retail industry. Ultimately, retail shrink directly results in lost profits, and can have a dramatic impact on the success of the retail enterprise.
Let’s begin by establishing a simple definition. The term “retail shrink” or “retail shrinkage” refers to the difference between the amount of merchandise (or inventory) that the retail company owns on its books, and the results of a physical count of the merchandise. The terms are interchangeable and carry the same meaning. Simply stated, it represents the difference between the optimal sales income that could be realized for all of the products that our company has purchased and the actual income that is realized after all of the different forms of loss have been accounted for. Read the full article.
Beyond Shrinkage: Introducing Total Retail Loss
A major new report published by the Retail Industry Leaders Association (RILA) puts forward a dramatically different way of thinking about the problem of retail loss and how it might be defined and measured in the future.
There is little consensus on what constitutes “loss” within the retail world nor how it should be measured. The terms “shrinkage” and “shortage” have been loosely applied to encapsulate some of the areas that generate loss, but they are not terms enjoying a clear and agreed-upon definition across the sector. Equally, measuring losses at retail prices is probably the most common method adopted to capture the scale of the problem, but again, it is not without its critics. While the term “shrinkage” has been used for probably the last hundred years of retailing, there continues to be wide variance on what is included and excluded when this term is used, with some retailers using it to describe only those losses captured through identified discrepancies in inventory counts, while others add in additional types of loss recognized through other forms of recording practices.
A major new report published by the Retail Industry Leaders Association (RILA) puts forward a dramatically different way of thinking about the problem of retail loss and how it might be defined and measured in the future.
There is little consensus on what constitutes “loss” within the retail world nor how it should be measured. The terms “shrinkage” and “shortage” have been loosely applied to encapsulate some of the areas that generate loss, but they are not terms enjoying a clear and agreed-upon definition across the sector. Equally, measuring losses at retail prices is probably the most common method adopted to capture the scale of the problem, but again, it is not without its critics. While the term “shrinkage” has been used for probably the last hundred years of retailing, there continues to be wide variance on what is included and excluded when this term is used, with some retailers using it to describe only those losses captured through identified discrepancies in inventory counts, while others add in additional types of loss recognized through other forms of recording practices. Read the full article.
Big Retail Inventory Losses Require Perspective
Retail inventory losses are a fact of life in retail. When maintained at acceptable levels, they are simply the cost of doing business, much like payroll and other operating expenses. However, when shortage begins to inexplicably trend upward, whether on a store-by-store basis, or even across a chain, it becomes imperative to view the problem in a proper perspective in order to identify and correct the cause.
Even if not readily apparent, large retail inventory losses arising in multiple locations may be synonymous with a single large problem that affects a population of stores. This can include systemic anomalies or actual wide-scale theft. This may seem like stating the obvious. However, many companies and even seasoned loss prevention professionals “think too small” when attempting to explain and resolve a spike in retail shortage. Read the full article.
Rethinking Loss Prevention and Shrink Management
The pace of change in the retail industry has accelerated dramatically over the past few years. The move to online shopping, emergence of mobile retail, and use of social media as part of the “daily fabric of shopping”—three of the disruptive forces highlighted in PwC’s Total Retail 2015: Retailers and the Age of Disruption published in February 2015—are among the factors making it more difficult to prevent, detect, and manage loss and shrink.
Most retailers have adopted omni-channel strategies to meet consumers’ demand to browse or buy whenever and wherever they choose. But enabling everything from mobile POS to in-store pickup of online purchases has made inventory management and product logistics far more difficult. The complex new retail environment is increasing a variety of risks, including the risks of internal and external theft, paperwork and operational errors, system issues, and vendor fraud.
The retail industry is struggling to manage the emerging risks it faces. As the industry transitions from bricks and mortar to “bricks and clicks,” the capabilities of existing systems are being stretched thin, and many retailers have not fully integrated the new technology required to manage loss and shrink effectively in an omni-channel world.
To better understand the current state and emerging challenges of the retail industry, in the summer of 2015 PwC conducted an online survey of loss prevention (LP) professionals within US-based retail organizations, including big box stores, specialty retailers, department stores, grocery chains, and drug stores. The survey results, highlighted in this article, suggest a need for many retailers to rethink their LP strategies, organizations, and practices. Among other things, retailers must embrace formal root-cause analysis and the use of data analytics to remain competitive in a dynamic, increasingly risky environment. Read the full article.
Predictive Data Analytics
In the 2015 US Retail Fraud Survey, retailers across the country identified analytics and monitoring as the number one area of need. With the average US retailer experiencing shrinkage at a level comprising 1.3 percent of total sales (resulting in an annual $60 billion loss industry-wide), it’s no wonder that businesses are looking to analytics and big data to help limit this loss.
Given this increased focus on analytics, for the 2016 Retail Industry Leaders Association (RILA) Asset Protection Conference, 7-Eleven partnered with the University of Texas Master of Science in Business Analytics (MSBA) program to better understand the relationship between inventory loss and fraudulent activity. Over the course of four months, our student group worked closely with asset protection experts at 7-Eleven to better understand the intricacies of the business model, formulate hypotheses about store-level fraudulent activity, and evaluate findings from the data analysis to make business recommendations. Read the full article.
