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Each year UK retailers lose more than £10bn to shrinkage and tackling this loss is far from straightforward. How should retailers define shrinkage in the first place? How can they calculate an acceptable shrinkage percentage? And what is the most effective stock loss action plan to protect their bottom line?

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The importance of shrinkage management

Managing shrinkage in retail can be a highly complex balancing act. It’s why after years of debate and discussion the industry is yet to agree upon a single shared definition of what shrinkage encapsulates.
That’s because, many argue, it goes far beyond simply eliminating loss or minimising theft. Yes, successfully managing shrinkage in stores requires protecting stock against any material losses to its value, but it also requires retailers to ensure they realise all potential value of the same stock. The difficulty is that these two dimensions can sometimes be in direct odds with one another.
The balancing act between the two can be summed up perfectly by the introduction of self-selection in grocery stores. After seeing the success of self-serve Piggly Wiggly stores in the US, Lord Sainsbury returned to the UK to convert the chain’s Croydon store to this model in 1950. From there the concept of consumers browsing stores and filling their own baskets boomed. At the same time this shift exposed stores to far greater rates of shrinkage via theft of inventory and damage.

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The model survived though because it created a better shopping environment, converting more visits to higher value sales and cheaper to operate, thereby helping retailers realise more of the potential value in their stock. In short, grocers accepted actual loss, in order to avoid potential loss elsewhere.

This same strategic approach has accompanied self-scanning tills and the greater availability of fresh produce – both which expose stores to greater shrinkage via theft, damage and waste but which generate proportionately greater value via a more seamless, convenient shopping experience.

It’s important to understand from the outset therefore that reducing shrinkage in retail requires a constant and careful balance of these two dimensions. Any effective stock loss prevention strategy must aim to reduce loss to the lowest possible levels without impacting the overall shopping and purchasing experience, i.e. without sacrificing any potential value.

Gather the right data and expertise

Measurement, collation and comparison should be the starting points for any retailer looking to improve their own stock loss prevention strategy and this measurement should extend across all the various causes and contributors. That includes those that lead to partial loss of value, such as stock damage, quality that fails to meet customer expectations or inaccurate forecasting resulting in markdowns, and also those that lead to elimination of all value from stock. Theft of inventory is often given the highest profile here – with £700m stolen from UK retailers in 2018, according to the BRC – but waste is also a major contributor in grocery, in particular across short-shelf life fresh produce and bakery.

Europe’s ECR recommends that retailers measure all these types of loss, at SKU or product Ievel, but also by individual store or area to identify the most vulnerable types of products and routes into retail. An overall stock take and look at shrinkage should be undertaken at least twice per year, the working group adds, though it will of course require integration into daily processes too.

Once gathered, this data can be shared between retailers in order to get a clear and accurate view on acceptable levels of shrinkage, and also to understand where prevention strategies can be most effectively applied. Calculating shrinkage rates as a percentage of turnover is one of the most common ways of doing this, allowing retailers to facilitate comparison without sharing commercially sensitive figures. Doing so allowed a 2019 study across UK grocers to come up with an average shrinkage rate of 2% across all stores.

Armed with a clearer view of both their individual levels of shrinkage and where this sits within an industry context, retailers should be able to build up a picture of where their shrink reduction efforts are most needed.

Written by Paul Boyle

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