Across the globe, retail business models are being transformed by engaged and digitally connected consumers. Best in class retailers are optimising their physical stores by ensuring that operational controls are in place for growing problems such as retail shrinkage. “Shrink” — otherwise known as a reduction in inventory due to shoplifting, employee theft, or other errors — impacts the bottom line. Pierhouse Business Solutions is a global trusted partner, helping retailers discover new ways to control loss and leverage it as an opportunity to increase profitability. Let’s look a little closer.

What Causes Shrinkage in Retail? Shrinkage can occur at any stage in the retail cycle, but the most significant percentage of product loss is due to shoplifting and employee theft accounting for 52% between them, no surprises there then. Theft takes many forms but some are more preventable than others. Sharing blank Sale/Markdown stickers with “friends” who then write in their own preferred price being my favourite. But where’s the other 48% being lost and how much money are we talking about anyway?

An awful lot off the bottom line is the answer and the UK is the third most affected country globally. In tough times, retailers cannot afford to overlook these losses in blind pursuit of growth.

Although external sources such as shoplifting emerge as the largest cause of the issue, vendor/supplier loss, the behaviour of internal employees and administrative loss are all contributing to the problem. For retailers, this means an increasing amount of investment is required in the loss prevention function and, although budgets are generally on the rise, in most cases the proportion of sales allocated to the loss prevention function currently still stands at less than 2.00%.

Administrative Error: Paperwork Errors? Yep, administrative errors are the third most common cause of product loss, anything from accounting errors to poor inventory management. Usually, loss due to an administrative error, or ‘paper shrink,’ is unintentional or the result of carelessness, but it still accounts for more than 20 percent of retail loss. An example of this would be a product being priced differently at the till compared to the price label at the shelf edge, usually due to a failure to maintain the correct price label on the shelf. Simple pricing mistakes due to mark-ups or markdowns can cost retailers a great deal, so it’s crucial to have good, easy-to-understand systems and workflows.

Process Failures & Damage: Next up is another biggy, accounting for just over another 20%. Internal processes can be a source of retail shrinkage. Product damage due to inappropriate placement or storage adds to overall shrinkage rates for many retail establishments, mainly consumer goods. Additionally, staff responsible for rotating perishable products can inadvertently cause product loss if they’re not accurate with this task, coupled with a need to repeatedly markdown products as they reach end of use dates. Similarly, shrinkage can occur along the supply chain. Product loss due to vendor error or fraud accounts for more than 5 percent of retail shrinkage, according to NRF’s report.

The Unknown: What may be worse than understanding the causes of retail shrinkage is a complete lack of understanding. How do you know which steps to take to prevent retail shrinkage if you don’t know what’s causing it? The NRF’s annual study found that unknown losses accounted for nearly 7% of retail shrinkage. Accurate inventory management is the key to reducing administrative errors that would otherwise contribute to a higher rate of retail shrinkage and greater profit loss. If you’re not currently in control of your inventory, how it’s merchandised, priced and promoted, including transactions and how the employees are involved, it’s impossible to pinpoint when, why, and how a loss occurred. They are simply mysteries.

We can help you make significant savings across all these areas of shrinkage. A number of UK retailers are doing just that using our NetTickIT platform. To learn more and look at the case studies click here.

Source: PlanetRetail RNG and NRF.

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