Retail Shrink and the Complexities of Known and Unknown Loss in 2022Retail
Retailers have long struggled to minimize shrink. The term itself has been around for more than 150 years, but in that time, the ways that we buy and sell have changed drastically. As new technologies, formats, and digital shopping options gain popularity, is shrink enough to protect dwindling profits?
At a time of tightening margins and new ways of shopping, it may be time to broaden the ways in which we think about shrink and loss.
What is Retail Shrink?
In simplest terms, retail shrink or shrinkage refers to any unknown or unaccounted for loss of inventory. It is the difference between the optimal sales profit from the expected inventory and the actual profit earned from sold goods.
Damages on the other hand refer to any loss of inventory that can be explained, including returned, broken, or damaged items. While shrink and damages may overlap slightly, it often makes sense to differentiate the two for reporting purposes (more on that later).
How to Calculate Shrink
Retail Shrink Value = (Optimal retail value of products) – (Actual retail value of products)
Retail Shrink Percentage = (Retail Shrink Value) / (Optimal retail value of products)
For instance, if a retailer bought $1,000 worth of goods, but could only sell $975, shrink would be:
Shrink Value: $1,000 - $975 = $25
Shrink Rate: $25 / $1,000 = 2.5%
However, because of this broad definition of shrink, categorization is often confusing and relies on catch-all phrases that can lack clarity. Over the years, some forms of loss have been “hard-baked” into retail as an acceptable cost of doing business. Acceptable shrink rates often fall between 1-2%, with the average for all retailers being about 1.6% in 2020, costing the entire industry about $61.7 billion annually according to the National Retail Security Survey.
Is it Time to Move Beyond Shrink?
In 2016, Professor Adrian Beck, in association with the Retail Industry Leaders Association (RILA) released a report criticizing the concept of shrink as a measure of loss, and proposing a new concept called “Total Retail Loss.” The report is titled Beyond Shrinkage, Introducing Total Retail Loss, and was followed up in 2020 with “Total Retail Loss 2.0: Moving Beyond the Theory”.
Some of the criticism and limitations of shrink outlined in the report include:
- There is no agreed definition of what constitutes shrink.
- Most published estimates of shrink are based primarily on measures of unknown loss where the root cause is unidentifiable.
- The focus of most definitions of shrink typically relates only to the loss of merchandise.
- In most surveys the measurement of shrink is requested at the store level—the retail supply chain rarely features.
- There is relatively little consensus on how to shrink should be measured although most surveys collect information at retail prices.
- Expressing shrink as a percentage of total sales is the most commonly used method to illustrate the scale of the problem.
- The categorization of shrink is confusing and often relies on catchall phrases that lack firm definitions or seem incapable of capturing the various types of risks associated with an increasingly complex retail environment.
- The terms “retail crime” and “shrink/shrinkage” are sometimes used interchangeably with the former including the costs of responding to losses, while the latter may or may not be based on known and unknown losses.
Total Retail Loss Reveals Unique Insights
Total Retail Loss (TRL) is a concept that helps retailers understand existing and future risks and make targeted investments to improve their bottom line.
Some of the high-level benefits include:
- Better manage retail complexity: shrink no longer reflects and properly conveys the scale, nature, and impact of retail losses, particularly as the retail environment becomes more dynamic.
- Improve transparency and accountability: all forms of loss are captured, reducing opportunities for some to be hidden within the business.
- Create new opportunities: by adopting a more systematic approach to defining “loss” under a single typology, new profit-enhancing opportunities will be created.
- Maximize the Loss Prevention (LP) Team’s potential: LP Teams have developed impressive problem-solving skills – see what a difference they can make when they are given a broader palette of losses to address.
- Make good business choices: evaluating retail investments needs high-quality data on both sales and all possible losses to avoid unprofitable cross-functional trade-offs. Total Retail Loss can help your business make the right choices.
Why Shrink Still Matters
The concept of shrink isn’t going anywhere. The Total Retail Loss framework isn’t going to replace shrink, but it can help to align loss prevention, asset protection, and other retail leaders on what is and isn’t considered shrink. Retailers must clearly define shrink as referring to unknown inventory loss and create a clear distinction between that and the broader concept of retail loss in their loss prevention strategies.
Today’s advances in analytics, AI/ML, video tracking and recognition, inventory, and sensor technologies, can help retailers better categorize different types of loss, limiting - but not eliminating - the number of unknown losses that occur.
Recently, Agilence teamed up with Loss Prevention Magazine on a research report aimed at measuring the changing perceptions and value of Loss Prevention teams. Responses were collected from a hundred LP professionals at every level, operating in various industries. Download your free copy of the full report today to see the results.
Read more about Shrink here.
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