Retail Shoplifting

What is Inventory Shrinkage and How To Stop It?

U.S. Retailers deal with $46.8 billion in annual losses from inventory shrinkage

Read Time:  5 Min

Inventory is the lifeblood of retailers. It represents the investment made by the company and the source of future income. In an ideal world, retailers would sell all of the inventory they have purchased. In reality, things happen to inventory. More specifically, inventory shrinkage happens. Simply put, inventory shrinkage is the loss of inventory. While the bad news is that inventory shrinkage can come from many sources, there is good news. There are steps retailers can take to curb it in the future.

What is Inventory Shrinkage and How Bad Is It?

According to a 2018 survey conducted by the National Retail Federation (NRF), annual losses due to inventory shrinkage totaled $46.8 billion for U.S. retailers. This amounts to 1.33% of industry-wide sales. For every $100 a retailer makes in sales, they are forced to throw $1.33 of that revenue away. With price competition from online retailers at an all-time high, brick and mortar retailers cannot afford to take such a hit on their margins. Especially if the source of loss can be addressed. 

Sources of Inventory Shrinkage

Shoplifting

According to the NRF survey, shoplifting is the largest contributor to inventory shrinkage. Defined as the act of stealing merchandise, shoplifting can also occur when a customer tampers with the price tag or the packaging to purchase the item at a reduced price.

Returns fraud

Also a significant reason for shrinkage, returns fraud accounts for $18.4 billion in annual losses. Returns fraud takes place when an individual returns an item they did not purchase. They either return stolen merchandise, or they take the item off of the shelf and bring it to customer service to process a return. 

Employee theft

Employees have many opportunities to steal from their employer: they can simply walk out with inventory or cash, or they can process fraudulent transactions. For example, an employee working the cash register can fail to ring up all of the items in a friend’s order, or they can process fraudulent returns.

Damage and spoilage

All too familiar to grocers is the spoilage of perishable products. Damage to inventory can happen to retailers in any industry. Items can be damaged in transport to the store or when store shelves are being stocked. 

Vendor fraud

This occurs when a vendor or supplier invoices a retailer for more inventory than they actually supplied. For example, a vendor sends an invoice for 100 units, but they actually only supplied 90. This can go undetected in each instance, but it can add up over time, resulting in significant losses for the retailer.

Administrative error

Also known as paper shrink, administrative error can occur when logging and tracking inventory. Human error typically causes this type of inventory shrinkage, as inventory can be improperly counted, labeled, or input into an inventory management system.

Organized retail crime

Organized retail crime (ORC) occurs when two or more persons are involved. This can include a two-person plot to steal merchandise, as well as theft and fraud as part of an organized enterprise.

How to Stop Inventory Shrinkage?

While inventory shrinkage will always be a part of every retailer’s reality, solutions do exist to prevent shrinkage from happening and detect it when it’s in progress. These solutions stem from changes in company policies and upgrades in technology.

Policies & procedures

Simple organizational changes can go a long way. For example, in a presentation by the Loss Prevention Resource Council, 44% of shoplifters who were interviewed reported that an employee paying attention to them would have deterred them from committing theft. Examples of changes to store policies can include:

  • Signage & store layout
    • Don’t put valuable, pocket-sized items in locations that tempt shoplifters. And if your store has a surveillance system, signage can remind the would-be shoplifter.
  • Hiring practices
    • With employee theft a significant problem, it might be worth doing an extra reference check to verify why they left their previous employer. All within your company policies and labor laws, of course.
  • Customer service
    • In the example above, having a member of your staff offering help could deter theft. It also improves the experience for your good customers.
  • Loss prevention staff
    • While loss prevention professionals are not cheap, having someone on staff who is responsible for protecting assets is a worthwhile investment. This employee is in charge of creating policies and training staff, among others.

Technology

  • Inventory management
    • A good inventory management system will reduce paper shrink, especially if it automates processes that a human is responsible for. Even a modest reduction in inventory shrinkage from administrative error would justify the cost of an inventory management platform.
  • Security system
    • There are many components to a security and surveillance system. A network of CCTV cameras can put eyes on your store. Adding electronic article surveillance tags to merchandise of a certain value can trigger an alarm when an item is leaving the store.
  • IDWare Profit
    • IDWare Profit is a loss prevention solution from IDScan.net. It reduces returns fraud by tracking the returns behavior of customers. It triggers a manager review before returns can be completed for customers who make excessive and suspicious returns.

Unfortunately, retail losses from inventory shrinkage will always exist. However, when retailers make changes to their policies and investments in technology, they can control some of these losses. The $46.8 billion in losses is not a foregone conclusion, and it does not have to be the reality of the retail industry.

IDScan.net is a leading developer of identity verification and information gathering technologies and offers many solutions for the retail industry. Visit Booth #203 at NRF 2020, or click here to learn more about IDWare Profit.


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