Estimated to be a $94.5 billion global problem¹, retail shrink poses a huge challenge for retailers worldwide, regardless of their size. From theft to markdown errors to inconsistent stock counts, there are many factors that contribute to inventory shrinkage - and these can vary considerably from store to store. 

The impact of store location and physical layout cannot be overstated. In high crime areas, loss prevention strategies might focus on reducing blind spots ideal for shoplifters to operate. This can include additional security measures like surveillance cameras, putting products behind locked cabinets, or adding anti-theft devices to products. 

In areas where spoilage might be high, waste prevention strategies might focus on improving the visibility of high-waste products to increase the chance these items are purchased. 

However, simply looking at store locations and layouts is not enough. On average, 40%² of retail shrink goes unidentified. Unless the causes of shrink can be determined, reducing it can feel like an impossible task for retailers to solve.

Many are turning to new technologies in order to better identify and prevent grocery shrink. With AI and machine learning tools, retailers are able to pinpoint the root causes of shrink and make informed choices about the solutions needed to resolve it. 

Look beyond known retail shrink to get the whole picture

The loss of inventory within retail businesses are preventable, but continue affecting profits and overall efficiency. Typically, theft is the primary cause of inventory shrinkage¹ and a shared focus area for retailers. But, if estate-wide shrinkage is to be reduced long-term, it’s important to look beyond theft to get a clear view of the whole picture.

Understanding the drivers of retail shrink

Understanding the causes of retail shrink and effective strategies to mitigate it are essential to making a positive impact on your inventory planning and management. And, in the end, your bottom line. 

As many retailers will attest to, this isn’t easy, but within this blog, we explore some of the common causes that often go unidentified, and offer solutions on how to tackle them. 

Poor expiration management

Reducing the number of expired products that go to waste each year is vital for retailers’ ESG strategies and is crucial to reducing shrinkage. Many retailers simply don’t have the technology they need to take a more timely, profit-driven approach to their expiring products.

Retailers that are ahead of the curve are incorporating technologies that alert store associates to near-expiring products. This helps shift from labor-intensive processes, where associates search for expired products and often mis-record them, to a process that prompts to where exactly action is needed, at the push of a button. 

If retailers can take these steps and better identify near-expiring items, it opens a world of opportunity make the most out of their markdown processes as well.

Margin-sapping static markdowns are a major culprit for grocery waste and shrinkage. Add in smart dynamic pricing technology, and products are suddenly more likely to be purchased at price points that are more attractive. With data-led technology, retailers can quickly gain a real-time approach that enables stores to optimize the entire markdown process from start to finish. 

Supply chain errors

Supply mishaps can heavily contribute to inventory shrinkage, from goods getting damaged in transit to receiving a palette of products in error - or not receiving it at all. An estimated 4% of goods are damaged or lost during delivery routes, and 47.4%¹ of retailers report theft between their stores and distribution centers. 

Errors at the supply point of entry to the store can cause major challenges to inventory systems. They create poor-quality inventory records or, worse, an inaccurate inventory altogether. 

Getting inventory accuracy right from the outset is crucial to in-store processes. One missing delivery recorded incorrectly, and suddenly, you’re dealing with on-shelf availability issues from phantom inventory that doesn’t exist on the premises. 

These types of invisible shrink issues can be solved by investing in scalable technology that provides estate-wide inventory visibility and helps identify shrink caused by supply mishaps. 

Process errors

Human mishaps account for 9% of identified shrink¹, but the problem is pervasive in unidentified shrink. Whether due to miscounting of products, items accidentally damaged and not recorded correctly, or replenishing products under the wrong inventory record - a plethora of process errors can result in shrinkage.

Identifying and correcting process errors becomes possible when your inventory systems can detect and correct inaccurate inventory records. To solve this challenge, retailers are looking to incorporate predictive analytics into their inventory management systems to tell them when an inventory record might be wrong, when it happened, and why. 

This not only enables them to correct their inventory records automatically but also prevents additional process errors from taking place. Implementing these AI and machine-learning systems reduces time spent on costly manual audits, improves data input into forecasting and replenishment systems, and improves the overall balance of demand and supply in stores. 

Theft

Well, we can’t ignore theft. The problem is, after all, a large part of grocery shrink, with 37% down to external theft, and 29% caused by employee theft or fraud¹. Factors such as increased inflation and cost of living strongly contribute to theft motivations, with organized retail crime playing an increasing role. 

Advanced inventory technologies allow retailers to identify trends and patterns of theft faster and implement loss prevention measures that more appropriately address the issues. For example, looking at the physical layout of the store and implementing anti-theft devices on the highest-risk items is a common approach. Others are also looking at how much inventory is stocked in certain stores altogether or removing repeat problem products from their range entirely. 

Solutions rooted in AI and machine learning technology

As the retail landscape evolves, an increasing number of leading retailers are turning to the power of technology to address the pervasive issue of shrink. While 40% of unknown grocery shrink is a barrier for many to improve inventory optimization, those who find the right data-led solution can not only categorize the root causes of shrinkage estate-wide but also embed the key operational changes needed to resolve it.

Use cognitive technology to master your inventory management.

At Retail Insight, we’ve developed a cutting-edge platform built using cognitive technology. By blending our expert knowledge of the retail industry with advanced mathematics and cutting-edge machine learning, our solution, InventoryInsight, automatically identifies and corrects inventory inaccuracies. 

It analyzes data patterns, pinpoints areas of concern, provides actionable insights, and uses AI-driven root cause analysis and reporting to help you mitigate shrink - both estate-wide and at individual stores. The power of our inventory solution lies in its flexibility, enabling retailers to customize their inventory correction approach, whether that be full automation or a level of manual compliance controls - delivering the best of both worlds. 

Our solution empowers retailers of all sizes to proactively optimize their inventory management, accuracy, availability, and forecasting to take action against shrink before it hits your bottom line.

Shrink is a complex issue with multiple root causes. At Retail Insight, we combine and transform your data to provide a single source of the truth, eliminating ambiguity and delivering real-time, actionable insights you can use to reduce retail shrinkage at scale.

Find out more about our unique product platform and take control of your retail operations. 

References

¹ https://nrf.com/research/national-retail-security-survey-2022 

² https://www.mckinsey.com/industries/retail/our-insights/the-art-and-science-of-reducing-retail-shrink