Reducing shrinkage in retail: Getting to the root causes

According to the National Retail Federation, shrinkage cost U.S. retailers $94.5 billion in 2022. That’s a staggering amount of money — but the reality is that shrinkage doesn’t just put a dent in retailers’ bottom line. It also has a powerful negative impact on customer experience, employee morale and productivity, and even a retailer’s reputation.

It’s estimated that shoplifting, fraudulent returns, and other external factors account for 35% to 45% of direct losses from shrinkage in retail, while another 30% to 40% is due to internal factors such as employee theft or discount abuse.

Startlingly, the entire remainder — between 15% and 25%, potentially reflecting almost $24 billion a year in direct losses — is due to operational errors such as pricing errors, administrative mistakes, and inventory inaccuracies.

Reasonably enough, many companies pay more attention to the first two causal factors, but that often leads them to neglect the role of inefficiencies and other operational issues in driving shrinkage. That’s a problem, because operational factors are especially important when it comes to the indirect, knock-on impacts.

How shrinkage hurts retailers

High rates of retail shrinkage inflict a double blow: degrading the customer experience and tarnishing brand image.

When products go missing, customers encounter out-of-stock situations more frequently, forcing them to take their business elsewhere. Such occurrences not only erode sales, but also harm the company’s reputation.

Meanwhile, muscular anti-theft measures — such as security tags, store detectives, and bag searches — can deter theft, but they also alienate customers. With rates of retail theft on the rise, store leaders are increasingly turning to locked product displays — a move designed to thwart shoplifters, but one that hurts brand image and spoils the shopping experience.

To safeguard their reputation, retailers must adopt a more streamlined approach to shrinkage without losing their customers’ trust.

Shrinkage also inevitably leads to suspicion and finger-pointing among employees, even if the problems are actually due to external factors.

Security measures to beat shrinkage can prove unpleasant and burdensome for employees, and the time taken to deal with the problem — or new loss-prevention procedures — detract from the time employees could otherwise be spending serving customers and driving sales.

To tackle shrinkage effectively, retailers need to mitigate not just their direct financial losses, but also the downstream impact of shrinkage on customers, employees, and their brand. That requires a holistic loss prevention strategy that effectively addresses all three causes of shrinkage — external theft, internal fraud, and operational errors.

Loss prevention strategy: A holistic approach to reducing shrinkage in retail

Fortunately, new digital workplace technologies bring this kind of joined-up loss prevention strategy within reach. While most strategies seek to arrest shrinkage at the point of loss — by clamping down on criminal or fraudulent behavior — bringing digital workplace tech into the mix lets retailers take a true end-to-end approach.

With integrated detection and mitigation strategies that touch all areas of the value chain, store leaders can achieve a higher level of safety and security compliance, track incidents more accurately, and adopt a more forensic, data-driven approach.

This holistic strategy provides four key benefits for retailers when it comes to shrinkage in retail:

1. A single source of truth. Digital technology enables retailers to build a single source of truth for inventory tracking worldwide. With end-to-end visibility from the time inventory arrives at a store to the moment it leaves with a customer, retailers gain unified operational control and transparency. This global view of inventory and operations is key to minimizing retail shrinkage across all channels.
2. Smarter data analytics. Based on the data flowing into and through their digital workplace infrastructure, retailers can use advanced analytics to spot patterns and anomalies that might indicate operational shortcomings or problems such as theft and fraud. With these insights, retailers can create targeted strategies to nip problems in the bud without unduly impacting employees or customers.
3. Ongoing training and education. By providing training and fostering employee development, companies can give them the knowledge and skills needed to halt shrinkage. Moreover, retailers can make employees true partners in the push for loss prevention — while also engaging them to effectively support customers and drive reputational gains, limiting the harm done when shrinkage does occur.
4. Continuous improvement and collaboration. A digital workplace strategy helps retailers to improve on an ongoing basis. While product tags or security cameras can drive a one-off reduction in losses, a workplace strategy gives retailers the tools to continually review, audit, and adjust their processes — while also leveraging feedback from employees to identify weaknesses and develop better solutions.

Motivated, empowered employees → less shrinkage

The key thread running through this approach is that when you bring a digital workplace solution into the mix, you’re choosing to simultaneously trust and empower your employees, while also investing in a better experience for your customers.

That’s a dramatic upgrade over traditional, punitive loss-prevention strategies, which tend to simultaneously erode the customer experience, and leave employees feeling like they’re under suspicion.

We all know that employees who feel frustrated, demoralized, and undervalued are far more likely to overlook theft and fraud, be tempted to commit fraud themselves, or simply get careless and make mistakes – after all, a positive employee experience has a big impact on business outcomes.

Investing in your team and leveraging digital technologies to empower everyone, from management to frontline teams, to do their job better is a smart way to manage loss prevention — and to dramatically curb the impact of shrinkage on retailers.