Many retailers are under the misapprehension that because the shrinkage in their business is represented by a relatively small percentage they are performing satisfactorily. Where shrinkage is concerned, small percentages can represent huge dollar losses. 3% of sales does not seem like much but when you consider a store turning over $10 million per annum, that's $300,000 per annum either lost, missing or unaccounted for.
What could you do with that kind of money? Fund a refurbishment or expansion? Implement an investment buying program to make more profit? Put your kids through private school and have enough left over for a holiday? What ever you decide to do, by managing your shrinkage better than or within industry average benchmarks, you will provide a massive injection to your bottom line.
A costly problem
Shrinkage is costing the retail industry well over $150 million per annum in lost profits at store level. The problem is not limited to any particular sector within the retail industry - every retail business is susceptible and experiencing some form of shrinkage. Typically in the fast moving consumer goods sector i.e. groceries, general merchandise and alcohol, larger stores have lower shrinkage levels averaging at 1.75% of sales.
This is because they generally have a more structured infrastructure based on better systems and a more complex organisational structure. Larger stores often have a management team with a reporting hierarchy where department manager's performance assessment is based on key performance indicators, of which shrinkage as a percentage of their department's sales is one.
The problem is much worse in smaller stores, with some reporting levels as high as 5% with an average of 3%. In many cases the owner of a smaller store is also the manager of the store, the head of each department, the buyer and the scanning controller. Consequently their time is spread very thinly.
Retailers in this predicament should consider using a professional adviser to help them develop an action plan to implement better operational practices. The action plan would need to identify immediate goals, resources required such as money, people and time, and finally allocate tasks to responsible people.
What can a store owner do to alleviate shrinkage?
Whilst there are many physical changes that must be implemented at store level, retailers first need to get their head around a mindset of "if you can't measure it, you can't control it". It is estimated that less than 15% of retailers keep a perpetual inventory i.e. at any time an accurate stock valuation can be retrieved from their POS system.
Without an opening and closing stock valuation for the period you are measuring, you are unable to measure your unknown shrinkage. Being able to value your stock is not only essential in calculating the cost of shrinkage, but critical for the calculation of stock turn rates, vital if a store is to manage working capital and cash flow.
The first place to start if you are looking to start keeping the inventory of your store is your POS Vendor. They will be able to teach you the intricacies of keeping a stock inventory in their system. Once you have your head around the operation of stock control using your POS system you will need to conduct a stocktake.
Provided it is carried out with care and attention to detail ensuring accurate stock counts, a stocktake is the only way of accurately valuing your stock. Most retailers perform a stocktake on or around 30 June for taxation purposes.
Know where you stand
One of the biggest mistakes made is that most retailers use the sales reports from their POS system as the definitive method to monitor the performance of their business. POS systems do not calculate gross profit the same way that your accountant does when preparing your Profit and Loss Statement.
The gross profit expressed on a Department Sales report for example, only takes into account the quantity of each item sold at current sell price less current cost. Where in that equation does shrinkage come into consideration? Retailers need to calculate the cost of shrinkage in order to get a true result of gross profit.
Once you have a system in place to record the value of your stock, the process is a reconciliation between the Gross Profit reported by the POS system and your Accounting Gross Profit i.e. Sales less Cost of Goods Sold (opening stock plus purchases less closing stock). We use simple templates to assist us to make the calculation and express the shrinkage as a percentage of sales.
Shrinkage falls into two categories - known and unknown.
Stores should record all known shrinkage either through their POS system or in a Shrinkage Book. This would include waste, stock out of date or marked to clear, breakages, empty packets, till overs and unders etc.
Known shrinkage is basically any stock that you are aware of that needs to be written off. When you subtract your known shrinkage from your total shrinkage you are left with your unknown shrinkage. That is the stock that you have lost but were unaware of the loss when it occurred. Unknown shrinkage is often the result of theft, waste concealed by employees, pricing errors that weren't picked up etc.
Once you've measured your shrinkage, you can do something about controlling it.
By understanding the factors affecting shrinkage and utilizing our best practice checklists, you can identify where gross profit is leaking from your business and put processes in place to plug the gaps.
Some of the factors that contribute to shrinkage include theft by customers and staff, inconsistent pricing practices, absence or infrequent stocktaking, as well as damage to goods as a result of poor handling and ordering practices. Once the value of your shrinkage has been quantified and factors causing your shrinkage problem identified, then physical systems need to be implemented to rectify or reduce the problem.
For example, if it is identified that there is a theft problem in the store, store security would need to be addressed. This could include installing security cameras or revising where the cameras are placed. The store may have to be rearranged or relayed to relocate high risk stock to areas visible to staff. An electronic surveillance system such as Checkpoint where radio frequency tags are attached to items and set off an alarm when detected on exit may prove to be a worthwhile investment.
Instant benefits
For managers and owners, shrinkage is a very attractive area to address as the benefits flow straight to the bottom line. The store should be benchmarked to identify the gravity of the issue. It isn't wise for a retailer to be satisfied with their shrinkage value without establishing whether their peers are suffering the same losses.
The best practice operators have achieved their low shrinkage levels by implementing stock management systems, which are compatible to their existing POS systems, allowing for sales based computer generated ordering, regular rolling stock-takes on high-risk items, and stock management procedures. They support these systems with staff training, job descriptions and assigning responsibility to selected staff, thus delivering tangible benefits to the store owner.
Just some of these benefits include improved cash flow from reduced stock levels, as a result of ordering of stock consistent with sales demand, reduced theft by making high risk items more visible to staff, and providing an early detection of pilferage through instant stock management reporting. This type of improvement enables the retailer to then direct their resources into other areas, such as improving their store layout and design. Shrinkage efficient stores are most likely to survive and thrive in a competitive market.