What is shrinkage and how can it affect retailers?

Retail can be an unpredictable industry, no matter what it is you’re selling or where you are selling it. Running a shop requires a lot of skill and knowledge. You have to be a people person, creative, analytical and organised.

Despite best efforts to keep this all in check, there will always be a certain margin of loss that all retail businesses must account for. This is known as shrinkage.

It can occur in a retail business for a number of reasons. However, any loss that can be contributed to human intervention or error should be classed as shrinkage.

Although it can be a tricky thing to manage, there are some basic and cost-effective measures you can implement to reduce your shrinkage rates. Read this article to find out what you can do.

Most common cause of shrinkage

The average shrinkage rate for retail businesses in the UK is 1.1% of annual turnover which includes both known and unknown shrinkage. This is according to Checkpoint Systems, a leading solution provider for loss prevention and merchandise visibility.

Although 1.1% may sound like a somewhat negligible figure, it equates to a tremendous £7.86bn nationally.

Alongside this, the same report also cites that the most common cause of shrinkage within UK retail businesses is shoplifting, followed by robberies and burglaries.

It’s possible to reduce shrinkage, which occurs in different scenarios. Below, we look at three: using security, positioning fragile products in the right locations and using payment systems.

1. Using security to reduce shrinkage

With the most common cause of shrinkage being shoplifting and other kinds of theft, any retail business should at least have the bare basics when it comes to in-store security.

A CCTV system should be the first port of call when looking to reduce shrinkage in store, if you don’t already have one installed. With the advent of modern technology, CCTV systems have since ameliorated from the pricey, labour intensive and specialised systems that require a dedicated space within you store to operate from.

Modern CCTV systems are often relatively easy to install and don’t require a monitoring room. Wi-Fi enablement is a common feature, meaning your mobile phone or tablet can be used as a mobile and convenient monitoring station for viewing no matter where you are.

Alongside their ease of use, modern CCTV systems are readily available from most big retailers in the UK, meaning that there’s no need for a lengthy consultation and pricey set-up costs from installation companies.

Although CCTV is useful for identifying shoplifters and recovering stolen goods where possible, it can also serve as a visual deterrent for thieves. Potential thieves may likely be deterred by visible CCTV systems with the accompanying signage that notifies customers and would-be thieves.

As well as CCTV, physical security can also be a highly effective deterrent when properly used. For example, employing a dedicated security guard in peak selling periods where theft typically goes up may help reduce the chances of shoplifting from occurring by a considerable margin.

2. Avoiding breakages

Reducing breakability is also a key area that you should focus on in your small retail business. As you know, a lot of commonplace merchandise that’s sold on the high street is quite fragile and breakable: porcelain and china, glass, electronics. The list goes on.

Coincidentally, these fragile types of products typically carry some of the heftiest prices from suppliers, so being written off due to breakage could leave a noticeable dent in your margins.

Therefore, it’s important to ensure that when merchandising these products in your store, you take their safety as your number one priority.

For example, keeping glass out of the reach of children will ensure that they don’t mistakenly grab and drop them, causing a breakage and a loss. So keeping the more fragile products on the mid to high shelves should keep them less prone to being dropped.

Electronics should be kept securely, ideally behind the counter where only your staff have access to them. Not only does this reduce the chances of them being dropped and broken, but also has a side effect of them being less likely to be stolen.

As well as fragile goods, if you sell clothes or other fabrics, you could consider the option of enforcing a no food or drink policy in your store. This will help reduce the risk of this kind of merchandise becoming damaged and unsaleable.

However, despite how well you merchandise and place stock on the shop floor, there is always the chance customers will knock and bump into your shelves, causing items to fall off and possibly break.

So, perhaps think about upgrading your shelving units. Heavier, better quality shelving units won’t be as prone to bumps, further ensuring your merchandise stays unbroken and in place.

3. Using payment systems to reduce errors

Another potential cause of shrinkage within retail businesses is around human and administrative errors. Incorrect stock count, for example, will set stock management off on the back foot and contribute to shrinkage.

Human errors can also occur at the checkout. If your business is using a standalone card terminal, known as an unintegrated electronic point of sale (ePOS), then human error can occur when manually pressing in values to be paid.

It’s very possible that staff may enter prices that are too low, which will then in turn increase the shrinkage rate.

To combat this, consider investing in an integrated ePOS system. The immediate benefit of this is that the risk of human error is greatly decreased, as your till communicates the value of the sale to the card machine, as opposed to the till operator.

This creates fewer opportunities for human errors and in return reduces the shrinkage rate.

Conclusion on retailers reducing shrinkage

Shrinkage can be a serious detriment to any retail business, especially a smaller one. By taking preventative measures to ensure that it is reduced at every possibility, you will ultimately be running a more efficient and effective business.