What Is Retail Shrinkage and How Is It Affecting Your Retail Business? (Updated 2020)

    Oct 08 2020

    Topics: Retail Shrinkage

    Retail shrinkage, or shrink, is a term used in retail loss prevention. It refers to any type of loss identified as missing money or inventory that should be present but isn’t actually on hand or saleable. It can come in myriad forms, such as customer theft, damage, bookkeeping errors, internal theft, or vendor fraud. Shrinkage can affect any company, although it is most prevalent in the retail industry. 

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    The average shrink percentage is 1.44% to 2% of sales in retail. Although that might sound low, this accounts for tens of billions of dollars in losses for retailers each year.

    If you own a retail business, you must be proactive in loss prevention to reduce the effect of shrinkage and losses on profits.

    Retail Shrinkage Affects Everyone

    When business owners face considerable retail shrinkage, they must often resort to raising their prices or reducing their employee wages to account for the losses. This affects the consumers who must then pay higher prices. It affects the employees who must work for lower wages, for fewer hours, or with fewer perks and benefits. It also affects you as the business owner who is then placed at a competitive disadvantage. If this occurs, you can have more difficulty attracting and retaining high-quality employees and may lose loyal customers over the price increases.

    It is vital for retail business owners to prevent shrinkage in order to avoid these far-reaching consequences for everyone involved.

    Types and Causes of Shrinkage

    Shoplifting is the number-one source of shrinkage in the retail industry at 35.7%, according to the National Retail Federation. This not only includes customers hiding merchandise in their bags and walking out of the store without paying but also altering or swapping price tags and other methods of theft.

    The second biggest source of shrinkage is employee theft, making up 33.2% of total shrinkage. It can include pocketing cash, discount abuse, under-ringing, sweet-hearting, refund abuse, or the theft of merchandise.

    Administrative and paperwork errors make up 18.8% of the total shrinkage rate. Pricing errors due to markups or markdowns, bookkeeping mistakes, and counting, sorting, and storing errors during cash handling can cost retailers a lot of money.

    Vendor fraud is a small category of shrinkage, making up 5.8%, but it must still be considered in your loss prevention strategy if you want to prevent it. It most often occurs during the delivery and return of merchandise. Finally, 6.6% of losses have an unknown cause.

    Preventing Shrinkage with Automated Cash Management

    To combat these avoidable losses, retail business owners should consider investing in cash management solutions. Automation can allow you to increase visibility and accountability while also reducing the risk of human error. Here are just some of the solutions you should consider:

    Cash recyclers: A cash recycler that collects and dispenses currency can help you curb shrinkage by reducing the risk of human error, ensuring that every dollar is automatically accounted for at your registers, and keeping your money safely locked up. Your employees and customers may be unable to access cash when you invest in cash recycling.

    Currency counters and sorters: Currency counters and sorters take your money out of your employees’ hands. When you let these machines do all of the counting, sorting, and reporting your end-of-day sales, you give your employees fewer opportunities to steal from you. These devices can also alert you to counterfeit fraud.

    Smart safes: A smart safe offers you real-time visibility into your cash via smart cash management software. You can track and monitor the movement of your cash at all times. Further, smart safes require unique PINs for access. This keeps a record of all employees who have accessed your cash and when, which increases accountability, creates an audit trail, and reduces shrinkage. 

    A fully integrated cash management solution that is incorporated within your POS system can help you increase accountability, so if a suspicious situation arises, you’ll know exactly where to look. When your employees know that their every move is being watched when they’re handling your money, they’ll think twice before stealing. A fully integrated cash management system can enable individual logins with personal identification numbers as well as automatic deposit validation, money reconciliation, and storage into cassettes that can only be removed by management or armored car services.

    Retail business owners who rely on technology as part of their loss prevention strategy see a lower overall shrinkage percentage than those who don’t.

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    Andrea Lombardi

    Andrea Lombardi

    Andrea joined the CashTech team upon its inception in 2003. Learning the business from the ground up, she now utilizes her expertise in account management, planning, and negotiation while managing the daily operations of CashTech’s sales, marketing, and logistics departments. Andrea holds a bachelor’s degree from the University of Western Ontario. She enjoys travelling and has a passion for personal fitness, including obtaining her kettlebell certification. Andrea lives in Toronto with her husband and two young sons.

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