Shrink refers to the existing value of inventory the store technically owns but that can’t be sold. Find out the principal causes of shrink and tips to reduce it.
Shrinkage in retail and especially in grocery stores is very common and comes in many forms; internal theft and fraud, markdowns or even human errors. Those who are in the grocery store industry can testify that shrink is one of the major causes of profit loss, which makes supermarkets some of the businesses with the lowest profit margins.
Inventory shrinkage or shrink refers to the existing value of inventory the store technically owns but that can’t be sold. Many grocery store managers end up dealing with hefty losses because they are either ordering the wrong amount of products, the wrong products or facing other issues such as theft. Thankfully, there are key ways grocery stores can reduce shrink.
What is shrink in a grocery store?
Shrink or inventory shrinkage in a grocery store is the difference between the profits that should have been made and those that were actually made. It involves the loss of product inventory for one reason or another.
Supermarket or grocery store shrinkage is much higher than the average loss rate in retail stores. In 2013, a study conducted by the University of Florida found that supermarkets experience 2.5 per cent shrinkage against only 1.1 per cent for all retailers. In reality, shrink in grocery stores generally falls into 2 categories: operational problems and theft. However, the fact that supermarkets deal with products that can often expire or perish also influences the shrinkage rate.
What are the main causes of shrink?
In the retail industry, each store one has its own issues and root causes. But generally speaking, grocery store managers tend to see shoplifting and theft as the biggest cause of shrink followed by food spoilage and inadequate store operations and procedures.
To combat this shrinkage problem and set up loss prevention strategies, managers require an in-depth insight into the actual causes of shrinkage. To get this information, they should schedule on-site visits and spend some time there to figure out how things work (gemba walk is a great way to do this).
Operational factors
Shrink in a grocery store can be caused by multiple operational factors including bad ordering, bad merchandising, displaying of products and more. In 2012, a study by The Retail Control Group showed that these factors can cause up to two thirds of all shrinkage.
Bad ordering which results from improper inventory count is the leading operational cause, followed by poor production and cashier errors. Also, products not being properly displayed cause them to expire before they are sold to potential buyers. Adding to that, products left in the back of shelves or receiving and handling damaged goods commonly contribute to shrinkage.
Theft factors – Shoplifting
Theft factors such as shoplifting, return fraud and other dishonest behavior, account for more than 30 percent of grocery stores shrinkage. The main theft factors are shoplifting, theft by employees and vendor theft. According to the National Retail Federation, employee theft accounts for more than 40% of shrink. This behavior often results from crime of opportunity and greed rather than need. That’s why it’s important to set up some control measures in order to prevent it and minimize its impact on the supermarket’s profit.
In regard to shoplifting, it usually targets general merchandise rather than food products or perishables because they are much harder to conceal and steal. To prevent that, some measures must be taken such as installing electronic security systems and hiring security officers.
Administrative errors
Paperwork inaccuracies can cause huge losses. In fact, differences between physical inventory and inventory numbers in your software can cause up to 12 percent of all shrink. These discrepancies come from erroneous pricing or counting, misdirected shipments or loading dock mistakes.
Moreover, the system may have difficulties showing items in high local demand or bestsellers, which is an opportunity cost that can affect your sales and margins. You can combat these administrative errors by setting up a more sophisticated and efficient computer system that does a better job monitoring, updating and analyzing inventory.
Vendor fraud
One of the dishonest behaviors that causes shrink is vendor fraud. It occurs when a vendor claims that he has shipped the order when he/she hasn’t. In a lot of cases, the vendor is not responsible for the fraud but rather the employees in charge of taking the merchandise. To make sure that this doesn’t occur, train your staff so that they know exactly how to manage deliveries and pay attention to the delivery dates so that you don’t have too many shipments at once.
The impact of shrinkage in a grocery store
Lost revenue and management distraction
The products that get lost in shrinkage result in a loss of revenue. Every time a product gets expired or stolen, you lose the chance to make money. It impacts your revenues and increases your costs because you generate no profit for these items. As a result, the management team has to spend a lot of time and effort focusing on solving this issue rather than on value-added business development projects.
Impact on organizational trust
Shrink problems that come from employee theft can impact the internal trust and culture of a business. When drastic measures are put in place to prevent it such as bag and coat checkpoints, this creates a certain barrier between managers and employees which can negatively affect the overall environment in the workplace.
Service impact
If shoplifting is what’s causing your shrinkage, you may warn your employees of it but it could result in a sort of hostility towards customers. And more importantly, if you choose to implement extreme security measures, this could affect your customer service and dissuade clients from coming to your store.
How can shrinkage be reduced?
Reducing shrink even just a little bit can greatly improve your profit and gross margin. By implementing strategies to combat it such as better inventory counting, improved ordering processes, better staff training… you can help minimize losses from inventory shrinkage.
Here are 6 ways to reduce shrink in a grocery store:
1. Do a gemba walk
The word Gemba is a Japanese term that means “the real place”. It refers to the place in a work environment where value is added. When we say that we are going to the Gemba (Gemba Walk) we indicate the action of going to observe processes and asking questions in order to implement a culture of continuous improvement. Many grocery stores and other businesses leverage technology such as a gemba walk app to find areas of improvement and optimize inventory management.
2. Revamp your ordering system
As perishable items sit on grocery store shelves, each passing day increases the chance of shrink. A reevaluation of the ordering system can make a big difference. Indeed, understanding the demand and especially not overestimating it can save you a lot of shrinkage.
Fact-based ordering and sophisticated ordering systems take into consideration current stocks as well as anticipated sales and demand, which can help you determine just the right amount of items to order or produce on a daily, weekly or monthly basis. This can help you minimize shrink and increase the availability of fresh products.
Dynamic pricing (changing prices multiple times throughout the day) can optimize the sale of perishable products. Also, when you order new items that have never been sold in the store, make sure to only order a small quantity at first to see how the product performs initially and to avoid risking any losses due to shrink.
3. Cashiers and floor team training
A well-trained cashier, with good knowledge of both merchandise and point of sale (POS system), is key to reducing inventory errors. In contrast, a poorly trained cashier who cannot differentiate between the cheapest and the most expensive products (such as organic vs. regular fruits and vegetables), or who cannot find the right product on the POS system screen, is more prone to enter wrong merchandise codes, which can affect the inventory levels and the sale margin that the store makes.
When it comes to floor teams, it’s important to tell them about the shrinkage issue and to actively train them so that they contribute to reducing the shrinkage rate. Your staff should have in-depth knowledge on ordering procedures and customer service and should have access to the necessary tools to manage perishables more efficiently.
If you’re dealing with employee theft, you should consider improving your hiring practices to conduct background checks and ask the right interview questions in order to avoid hiring employees with a propensity to steal. You should also display your policies regarding employee theft and hand them out to new hires in the store.
4. Shoplifting deterrents
Shoplifting is one of the main causes of shrinkage so it’s important to implement measures to combat it. There are many ways to protect your store from shoplifters. You can install electronic security systems, hire additional security officers, and keep self-stocking employees in aisles… or you can mitigate your risks by keeping the store well lit, lowering shelf height, installing mirrors to monitor blind spots and use a more open floor design to make it more difficult for shoplifters to steal. Additionally, you can display your store’s shoplifting policies in plain view for customers.
5. Self-checkout monitoring
Self-checkout points are a potential source of waste for supermarkets, both with honest and dishonest customers. Customers who use self-checkout counters are prone to making the same kinds of mistakes that poorly trained cashiers would. If the customer is dishonest, the risk of inadvertent errors is compounded by the possibility that they intentionally enter the cheapest item code, instead of the correct one, or that they do not invoice part of the merchandise that they carry. These types of losses can be reduced through the selection of employees with experience and knowledge of both the merchandise and the point of sale.
6. Overripe produce resolution
A manager must master overripe produce in order to minimize shrink losses. There are two scenarios here, if the manager notices that a product is past its optimal sell date but is still marketable, a price reduction of 25 to 50 % may encourage sales that otherwise would not have been made. This helps the store recover some of the costs instead of throwing the products away. However, if the manager notices that certain perishables such as fruit, vegetables, dairy… are starting to show signs of overmaturity, he can choose to send them to the store’s cooking service or bakery for them to be used.
Another idea to reduce shrink is to offer up products that are nearing their expiration dates as free samples. By doing that, customers may be able to discover new products that they haven’t tried before and be more open to buying them the next time they come to the grocery store.
7. Displaying products correctly
Merchandising and displaying products correctly is something every grocery store should take into consideration when managing their stores. A store may have great potential to sell but it may be placing the products in the wrong place.
You may want to use several types of display in the same store over a certain period of time before in order to decide which ones are more successful than others. For example, some grocery store managers find that displaying unique items in a designated area helps attract the customer’s curiosity more, while others find that blending sections together creates more opportunities for customers to discover new products.