Inventory shrinkage is a costly problem that can greatly affect an organization’s bottom line. The average inventory shrink percentage in the retail industry amounts to about 2 percent of sales worldwide, representing an $100 billion annual loss for retailers, according to the Sensormatic Global Shrink Index.
Inventory shrinkage can be attributed to several different sources. Understand the different causes of shrinkage in retail and what you can do to prevent loss at your organization.
Shoplifting
Shoplifting is the number one cause of inventory shrinkage in retail. According to the National Retail Federation, it accounts for about 36 percent of annual losses in the U.S.
Customer theft can take many forms, including:
- Concealment
- Altering or swapping price tags
- Paying with counterfeit money
- Transferring products from one package to another
Shoplifters can steal items ranging from $1 to thousands of dollars. They may work alone or in a group and may strike once or come back every week.
In addition to security cameras and digitized tags that set off alarms, employee training awareness, and great customer service are some of the best ways to deter customer theft.
Return Fraud
Return fraud is often hard to spot but can result in significant losses. It can take several forms, such as:
- Returning stolen, used, or exchanged merchandise
- Using counterfeit receipts to return merchandise
- Returning merchandise purchased with counterfeit money
It’s important to have a solid return and exchange policy in place that requires a receipt and valid ID for returns as well as training employees how to flag fraudulent return behavior.
Employee Theft
Employee theft is the second biggest source of inventory shrinkage in retail. Internal theft happens when company workers steal or misappropriate funds or goods. It can take many forms, including:
- Merchandise theft. Yes, employees can shoplift, too.
- Refund abuse, or when an associate rings up fake returns.
- Issuing fraudulent gift cards or using gift card balances for their own purchases.
- Sweethearting, sometimes called “pass-offs,” which is when an employee purposefully fails to ring up all of a friend’s items.
- Skimming off the cash drawer. This is usually done in small amounts at a time but can add up to big losses.
- Credit card abuse, or when an employee steals customer credit cards for fraudulent purchases.
Preventing employee theft starts at the hiring process. It’s important to thoroughly vet candidates by conducting background checks and speaking with references to ensure you’re bringing the right people into your organization. But preventing employee theft doesn’t stop there. Creating a positive culture within your organization that builds employee morale can help associates feel more invested in the company’s success, and as a result, less inclined to steal.
Administrative Error
Not all inventory loss is malicious or illegal. Accidental administrative and paperwork errors, sometimes called “paper shrink,” is the third leading cause of inventory shrinkage. Mistakes like mislabeling, incorrect markdowns, and accounting errors can lead to merchandise being sold for less or refunded for more than it should.
Whether associates are conducting inventory audits, using the price gun, or processing returns, it’s important to make sure all procedures and changes are properly communicated throughout your organization.
Vendor Fraud
Vendor fraud is responsible for the smallest share of inventory shrinkage, accounting for about 6 percent of losses. Vendor fraud occurs when outside vendors come into a store to stock and monitor inventory. These vendors could fail to provide as many units as invoiced or steal other products within the store. To minimize these losses, it’s important to have a proactive relationship with your vendors to ensure you’re being billed for the correct shipments.
What’s Your Loss Prevention Strategy?
Retailers across the globe are susceptible to inventory shrinkage. What measures are you taking to prevent loss at your organization?
HS Brands’ loss preventions services are designed to provide cost-effective, results-driven solutions for retailers, restaurants, and franchises. We’ll work with you to build a complete loss prevention program—from audits to program and policy development—to meet your goals and protect your brand.
In addition to loss prevention, HS Brands offers mystery shopping and royalty assurance services to provide holistic assessment and verification of your expectations.
Contact HS Brands today to see how we can prevent inventory shrinkage at your organization.
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Raymond Esposito
Director of Business Development & Marketing
HS Brands Global
Raymond Esposito has over 28 years of loss prevention experience, working within the department store, specialty, and grocery segments of retail. He has developed loss prevention programs for over 125 retailers in the U.S., Canada, and the United Kingdom. He holds a bachelor’s degree in psychology from the University of Connecticut and is an expert witness.
At HS Brands Global we believe that every company needs the four corners of brand protection. Our Brand Shield programs help measure standards and compliance, protect against theft and loss, monitor customer experience, and verify programs and processes.
