Retail shrinkage is a common problem for many companies and stores, so much so that it’s almost seen as an inevitable aspect of doing business. Planning for an expected amount of shrinkage in both stock and cash may allow your business to weather the storm on your bottom line, but ultimately you're damaging your profits.
Shrinkage is the catch-all term for losses that affect your business from theft (both by employees and shoplifters), administrative mistakes, and fraudulent vendors. Preventing shrinkage in retail is not just a way to improve your profitability, it is necessary for your long-term survival as a business. The retail world is transforming and any business hoping to survive must understand why preventing shrinkage is important.
The Lasting Implications of Revenue Loss
In 2016 shrinkage cost $48.9 billion in the U.S. It may seem obvious that a loss in revenue is the number one reason you should be working on preventing shrinkage in retail, but consider the long-lasting effects of revenue loss.
The more merchandise that just walks away can mean an increase in the cost of that which remains, which in turn can affect whether or not your clients can make the purchases they need. Watch your costs go higher and you’re likely to see your clients walk right out your door.
On the extreme end, a business that cannot make profits will be unable to pay its employees, invest in R&D, or even keep on the lights. This could have the lasting consequence of reduced services or even complete bankruptcy and closure. Even if you can keep your stores open, you may have to reduce wages, creating a disinterested workforce.
Operational Nightmares
Perhaps your stores are effective at keeping shoplifters out and your incentive programs keep your employees honest. Yet every quarter you still see a percentage of your revenue disappear to retail shrinkage. It turns out your administrative and accounting systems aren’t up to the job of effectively tracking and recording inventory, assets, and income.
If you’re facing shrinkage because of administration follies, you have a problem. Sure, human error is to be expected, but if your systems are unable to bounce back and compensate then you’re facing a threat as great as a shoplifting ring targeting your stores. Not being able to trust your own systems leaves your company unsure of itself.
On top of that, if you cannot identify the problematic areas in your systems, you’ll be unable to fix any other areas of shrinkage which means even further losses.
You’re a Bronze Shield in the Steel Age
If year after year you’re facing a sizable amount of retail shrinkage, you need to reconsider if your strategies are effective. As part of this consideration, you need to look at your technology.
Perhaps you’ve been managing cash flow just as your grandmother did when she started the company years ago—but grandma didn’t have to contend with the internet and Amazon. The retail market is changing, and with it, technology needs to be updated.
Facing a high percentage of shrinkage quarter after quarter may mean that your company isn’t ready to contend in the new retail market, and if that’s so, it may be best to get out of the game on your own terms—before your losses stack up and force you out.
Preventing shrinkage in retail is important, and it's becoming even more so. It’s not just a way to minimize the loss to your revenue—it’s an important aspect of testing your company against the evolving state of retail. If you can’t decrease shrinkage due to theft, admin mistakes, and technology, it may be time to seek some help so your company is equipped to survive today’s internet retail world.
