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From stockroom to boardroom: combating the $100 billion retail shrink crisis

EY Americas

Multidisciplinary professional services organization

5 minute read 26 Feb 2024

With shrink’s rapid upward trajectory, retailers must take a data-driven approach to move beyond broad assumption and measure areas where losses actually occur.

In brief
  • In an industry where margins and profitability are already under pressure, the rise in retail shrink requires a strategic, enterprise-wide approach.
  • Retailers must develop their shrink profile to classify the various types of loss at a granular level and provide better insights into underlying causes.
  • New technologies and predictive modeling tools make a holistic data-driven model that pinpoints individual origins of shrink not just possible, but pragmatic.

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If you’ve paid attention to recent retailer earnings reports, you have undoubtedly heard the phrase retail shrink cited as a key factor contributing to margin erosion and poor earnings performance. Shrink is the industry term for inventory loss often attributed to theft and shoplifting, damage or errors. Once simply considered a cost of doing business, retail shrinkage resulted in profit losses exceeding a staggering $100 billion¹ in 2022.

 

What’s more problematic, the trend of shrink appears to be far from reversing course, with losses more than doubling over the past five years.²,³ In an industry where margins and profitability are already under significant pressure, the rise in retail shrinkage is capturing the attention of all levels within retail organizations; executives are signaling a crisis and investors are taking note. Despite recognition of the growing problem, retailers, in many cases, are struggling to devise a comprehensive approach to regain control over the current situation. The lack of a clear strategy to combat escalating shrinkage, nor a demonstrated confidence in understanding the discrete sources of inventory loss, is a troubling sign, suggesting that shrink losses will remain at heightened levels in the absence of a strategic, enterprise-wide approach.

 

Beyond shoplifting: Sources of retail shrink

Recent headlines are dominated by stories of customer theft and shoplifting, often attributed to rising consumer financial hardship. While these issues are undoubtedly contributing to the growing problem, it’s essential to recognize that shrink’s origins extend far beyond customer shoplifting. Shrink encompasses all types of loss during the conversion of inventory to cash; it occurs up and down the value chain — from freight to distribution to store — and from multiple, trusted stakeholders, including employees, customers and third parties. Given this, the most effective way to answer the complex, multidimensional issue of shrinkage is to diagnose and then remedy its sources.

 

To form a comprehensive picture of shrink, retailers must first take a step back and take stock of each of the sources and drivers within their organization. Organizations should think about the types of shrink — where it occurs, whether it is caused by internal or external parties, if it’s intentional harm such as fraud or theft, or if it’s unintentional loss such as accidents and errors. Through this exercise, retailers will develop their shrink profile, a way to classify the various types of loss at a granular level that can then provide better insights into underlying causes.

You can’t manage retail shrinkage if you can’t measure it

Moving beyond broad assumptions of where inventory loss is likely coming from, retailers should undertake a data-driven approach to measure the areas where losses are actually occurring as doing so enables the deployment of targeted mitigation techniques with the greatest potential impact. Given that brands are distinct, with unique product offerings, geographic footprints, market dynamics, operational systems, data landscapes, etc., the root causes of shrink vary widely, often necessitating tailored solutions working in concert to effectively address the challenge.

Without specific insight into the numerous sources of shrink for their business, retailers are left to leverage a disconnected network of siloed, off-the-shelf shrink solutions that often have custom purposes. This patchwork of solutions is not clearly and deliberately linked to the underlying root causes, leading to diminishing effectiveness across an enterprise issue and limited transparency into a tool’s return on investment. Frequently employed tactics of today are often blunt instruments that may help reduce shrinkage, yet they may also result in unintended consequences. For example, select retailers are testing private label–only stores since it is a working supposition that national brands are more desirable for resale by organized retail crime groups. Shifting a high-shrink store to private label only may in fact reduce shrink in that location, but it also may drive paying customers to nearby competitors or the brand’s other local stores, converting a loss problem into a possible sales and customer loyalty problem. With a unified view from multiple data sources retailers already have at the ready, a retailer could not only pinpoint the national brands most frequently stolen, but also could collectively mine point-of-sale transaction data and employee schedules, along with unstructured data, such as camera footage to glean insights as to the time of day when intentional harm is most prevalent and the customer and employee traffic patterns around the most frequently stolen goods.

Putting more context around the problem through the lens of aggregated data allows for more precise solutions, such as moving, removing, replacing or locking specific products; identifying bad actors; increased coverage at specific times; or modified hours. With all of the new technologies available and predictive modeling tools to assist in decision-making, a holistic data-driven model that pulls information from across the organization to pinpoint individual origins of shrink is not just possible, its pragmatic.

Rethinking retail shrink by connecting the dots

The closer you get to diagnosing the distinct root cause issues at a granular level, the more precise and targeted your mitigation techniques can be, which translates into less disruption to the customer experience and less costly investments in extreme countermeasures. When EY teams work with clients on the complex problem of shrink, we first leverage structured and unstructured data that already exists across the organization and look at it in new ways.

Our recommended approach includes these four critical steps:


This article originally appeared on Fortune.com https://fortune.com/2024/01/09/why-retail-100-billion-shrink-crisis-may-shoplifting/

This article was co-authored by Jennifer Fagan, EY Retail Partner and Katie Kyle, EY Forensic & Integrity Services Partner. Additional contributors include Brian Wolfe, Ryan Suntich and Ryan Collins.

Summary 

The heightened loss from retail shrink requires a strategic holistic approach based on a thorough understanding of the discrete sources of inventory loss. Only then can mitigation techniques, working in concert with each other and actively monitored for effectiveness, be employed to make a meaningful difference in reducing shrink.

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EY Americas

Multidisciplinary professional services organization

Related topics

Transforming retail
Consumer Products

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