Store of the Future   //   November 27, 2023

Beyond theft, inventory management issues plague retail shrink

Shrink has become a major topic in retail, and has been a frequently used buzzword on earnings calls over the past year.

Retail shrink refers to the overall loss of inventory due to a variety of factors – which include employee theft, shoplifting, administrative or cashier error, damaged goods, and vendor fraud, among others. But there’s been an outsized focus on this term as more retailers claim organized theft in particular is increasing their shrink rates.

Retailers like Macy’s, Home Depot, Walgreens, Target and Walmart have pointed to organized theft at their stores as a culprit for growing shrink. According to NRF’s 2023 National Retail Security Survey, it found that the average shrink rate in 2022 increased to 1.6%, up from 1.4% in 2021. This percentage of shrink represents $112.1 billion in losses, but is reportedly in line with figures from 2019 and 2020. 

More than a year since theft problems ramped up, a number of retailers are still trying to find ways to minimize shrink. In the most drastic cases, some retailers are resorting to closing stores. Last year, Target executives said the spike in theft cost the retailer $400 million. This year Target said theft-related losses are stabilizing, but in September announced the closing of nine stores due to safety concerns. Meanwhile, at the end of October, Nike permanently closed one of its historic Portland locations, citing a spike in stolen Nike merchandise.

While retail theft is part of the ongoing shrink problems, industry watchers aren’t convinced it’s the only thing contributing to losses. Consultants and executives say shrink is a multifacated problem, and one that requires retailers to invest in multiple long term solutions to combat the issue.

How overall shrinkage impacts retailers

Shrink has been baked into retailers’ business model for decades, explained EY retail partner Jen Fagan said. As such, shareholders and industry execs have come to expect it to hover at around 1.5%. But in the past few years, inventory management has become challenging for retailers – especially amid excess merchandise and missing demand forecasts.  

“The conversations we’re having with retailers is to understand where shrink is coming from,” said Fagan. “They have an idea, but it is not exact.” Fagan said the first step to diagnosing retail shrink problems is to break down shrink into segments — there is external shrink and internal shrink, and underneath it there are more granular buckets. For instance, “paper shrink” refers to gaps in inventory that can’t be attributed to theft or fraud, but miscounting inventory or shipment mistakes. “That’s something we’re being asked to look into from retailers,” Fagan said.

Fagan said that for the time being, issues that are out of the retailer’s control are currently being dealt with by industry organizations and new government policies. But retailers can stand to better control their internal operations by investing in long term tools and tactics. 

Approaches to combating the problem

There has been a spike in loss prevention tactics, like high-tech security and locking up products — in some cases, even lower-price toiletries like toothpaste and deodorant. The latter strategy, in particular, has received pushback from customers for making the shopping experience unnecessarily difficult. It’s difficult to say how effective these solutions are, Fagan said, as that can depend on a number of factors like the store’s geography and physical format. 

Adding these so-called theft barriers can sometimes be an effective deterrent, but it also make for an unpleasant store run, Karthik Easwar, associate professor of marketing at the McDonough School of Business at Georgetown University, previously told Modern Retail. These physical methods can also be costly for retailers. “Once you start saying we’re going to put band-aid [solutions] on, it’s going to create pain points, flaw points, things of that sort,” he said.

One of the top loss prevention solutions includes upgrading inventory management systems to gain greater visibility into a retailer’s shrink, Fagan said. While many retailers have updated their data systems in recent years, she said that not everyone is quite there yet. 

Some of the most drastic measures major companies have taken — like rolling out locked product cases, can be helpful, according to Fagan, but are not always the most effective way to prevent shrinkage. “Sometimes these security measures are punishing to your most loyal customers,” said Fagan.

Another option is investing in theft-prevention technology. Wade Jubrey, an associate partner in the consumer practice at Kearney, said tech solutions range from surveillance tools, both hidden and visible, and AI-powered video analytics that can detect suspicious behaviors in real time. 

This technology can be combined with RFID tags and readers to give retailers better inventory visibility — which, in turn, can cut down on shrink. RFID, or radio-frequency identification, purports to help retailers more accurately manage inventory through the use of radio waves. RFID tags help retailers identify and locate an item, track its movement and detect its presence or absence in a store — helping determine when and which SKUs are stolen, as well as the quantities.

Earlier this month, H&M said it’s in the process of replacing the plastic security tags on its clothing items with small RFID chips. According to the company, employees have found the traditional security tags can be easily detachable. 

“RFID tags offer an inexpensive and flexible solution for inventory management and double as loss prevention tools,” Jubrey said.

There are other security measures that go beyond locks, Fagan said, like installing fixtures with high visibility for employees and moving high-value items to the front of the store. “In some cases, retailers are moving to private labels only because they’re harder to resell than branded products,” she said.

Overall, Fagan said, the top recommendation for retailers is to pinpoint where exactly shrinkage is happening along their supply chain. And to remember that today, more than ever, retailers have more technology and data insights tools to reduce shrink.

“Many are thinking of the issue as one big bucket of external theft,” Fagan said. “But I’d rather know before we go to all those measures.”