In the context of retail, loss prevention refers to the measures that a company takes to prevent theft or loss of inventory. Loss prevention measures include installing security cameras, regular inventory checks, and training employees to recognize and avert potential theft. Loss prevention is an integral part of managing a retail business, as theft and loss can significantly impact a company's bottom line.

What is Shrinkage?

Shrinkage is a term used in the retail industry to refer to the loss of inventory that is not due to selling to customers. Shrinkage includes losses occasioned by theft, damage, and errors in the inventory tracking system. Shrinkage can significantly impact a retailer's bottom line, so companies must implement measures to prevent it and regularly monitor their inventory levels.

Types of Inventory Shrinkage

Some of the common types of inventory shrinkage include the following:

  • Shoplifting or theft.
  • Return fraud.
  • Employee theft.
  • Administrative error.
  • Vendor fraud.
  • Unattributed loss.

Let us look at each type in detail.

  1. Shoplifting or Theft

Shoplifting, also known as theft, occurs when an individual steals items from a store without paying for them. It is a common inventory shrinkage avenue that can be costly for businesses. A survey by Jack L. Hayes International, Inc. conducted in 2020 shows shoplifting cases increased in value by 13%.

Businesses need to take steps to prevent shoplifting and to minimize losses from this type of theft since shoplifting accounts for 35% of annual retail losses, the single largest share of retail shrinkage.

Some ways to prevent shoplifting include:

  • Having visible security cameras and signs warning against theft.
  • Using security mirrors to monitor blind spots.
  • Placing high-value items in locked cases or behind the counter.
  • Having employees greet customers and watch for suspicious behavior.
  • Using security tags or alarms on products.
  • Using a loss prevention team or security guards to monitor the store.
  • If a shoplifter is caught, the business can press charges, and the shoplifter could face legal consequences. However, it is essential to handle the situation carefully and avoid confrontations that could potentially turn violent.
  • Deliberate store organization — This refers to organizing a store in a way that makes it easy for customers to find what they are looking for and encourages them to make purchases. The organization includes arranging products by category, placing popular items at eye level, and using signs and labels to help customers navigate the store. A well-organized store can also make it easier for employees to keep track of inventory and prevent shrinkage.

  1. Return Fraud

Return fraud occurs when customers try to return stolen or previously used items for a refund or store credit. They return items not purchased at the store with fake receipts or use altered or expired return policies to obtain a refund.

Return fraud can be costly for businesses, as it results in a loss of the product and the refunded amount. It can also lead to abuse of return policies and damage the store's reputation. Fortunately, return frauds account for 6% of the returns per the National Retail Federation’s 2020 data.

Businesses can implement measures including to prevent return fraud:

  • Verifying the customer's identity and the original purchase.
  • Checking the condition of the returned item.
  • Using electronic tracking systems to monitor return patterns.
  • Setting limits on the number of returns allowed or requiring a receipt for all returns.
  • Providing clear and strict return policies to customers.

Be aware of return fraud and take steps to prevent it to protect their profits and reputation.

  1. Employee Theft

Employees can steal from your store. They do so by taking cash, products, or services without permission. This is a common form of inventory shrinkage that can be damaging for businesses.

Employee theft can occur for various reasons, like financial need, personal grudges, or the opportunity to steal without being caught. It can have profound consequences for businesses, including loss of profits, damage to the company's reputation, and legal action.

Failing to address employee theft leaves you vulnerable since employee theft accounts for 90% of store losses translating to an annual loss of $50 billion.

Businesses can implement measures several measures to prevent employee theft, namely:

  • Conducting background checks and references for job applicants.
  • Providing training on ethical behavior and the consequences of theft.
  • Implementing security measures, like surveillance cameras and regular inventory audits.
  • Establishing clear policies and consequences for theft.
  • Creating a culture of trust and accountability within the company.

  1. Administrative Error

An administrative error is a mistake in record-keeping or other administrative tasks. An administrative error could refer to mistakes in recording inventory quantity, like undercounting, overcounting, or double counting.

Administrative errors can lead to inventory shrinkage, resulting in incorrect inventory levels and making it difficult for businesses to manage their stock. They can also lead to other problems, like incorrect billing, missed sales opportunities, and loss of customers.

The errors seem negligible. However, the cumulative loss cannot be ignored. Administrative errors accounted for 18.8% of the annual shrinkage in the retail space.

You can implement several measures to prevent administrative errors in inventory management, including the following:

  • Providing training to employees on proper inventory management techniques.
  • Using technology, like barcode scanners and inventory management software, to improve accuracy and efficiency.
  • Conducting regular inventory audits to check for discrepancies.
  • Establishing clear procedures for recording and reporting inventory levels.
  • Implementing a system for tracking and addressing errors when they occur.

Businesses must prevent and minimize administrative errors to maintain accurate inventory records and avoid losses.

  1. Vendor Fraud

Vendor fraud refers to defrauding a business by a vendor, like overcharging for products or services, delivering inferior or defective goods, or failing to deliver goods at all. Vendor fraud results in financial losses and damage to the company's reputation.

Your store’s reputation is key since damage to your brand ultimately destroys your financial prospects. Though not common, you should take appropriate measures to prevent vendor fraud. You can adopt some steps to prevent and deal with vendor fraud:

  • Conducting thorough research and background checks on potential vendors.
  • Communicating and documenting the terms of the contract, including payment terms and product specifications.
  • Regularly monitoring the performance of vendors and addressing any issues that arise.
  • Using technology, like electronic invoicing and payment systems, to improve accuracy and security.
  • Establishing a system for tracking and reporting vendor fraud when it occurs.

Vendor fraud accounts for 5% of retail shrinkage.

  1. Unattributed Loss

Unattributed loss, also known as mystery loss or unknown shrinkage, is a type of inventory shrinkage that cannot be explained or attributed to a specific cause. This can occur when there are discrepancies between the physical and recorded inventory, but the cause of the discrepancy cannot be determined.

Businesses can be frustrated by unattributed losses because identifying and addressing the underlying cause can be challenging. It can also be costly, resulting in financial losses and damage to the company's reputation.

Though these losses are not immediately identifiable, as with other types of shrinkage, you can adopt some policies to help you avoid the adverse impact on your bottom line. The following steps are some examples of steps you can take:

  • Conducting regular inventory audits to identify and address discrepancies.
  • Using technology, like barcode scanners and inventory management software, to improve accuracy and efficiency.
  • Implementing security measures, like surveillance cameras and access controls, to prevent theft and other forms of shrinkage.
  • Establishing clear policies and procedures for inventory management, including reporting and addressing discrepancies.
  • Investing in employee training to ensure that employees are knowledgeable and compliant with inventory management practices.

Overall, inventory shrinkage can be costly for businesses, reducing their profits and impacting their reputation. Therefore, retail stores need to take appropriate measures to prevent and minimize inventory shrinkage.

Retail Shrinkage Prevention Strategies

Retail shrinkage adversely impacts businesses as it reduces their profits and can impact their reputation. Entities can implement several strategies to prevent and minimize retail shrinkage. Some include the following:

  • Audit hiring and training practices.
  • Establishing clear policies.
  • Hire a loss prevention manager.
  • Create strong retail deterrents.
  • Consider buy-ins.
  • Improve inventory management.
  • Develop strict accounting practices.

Here is a look at each strategy in detail.

  1. Audit Hiring and Training Practices

Auditing hiring and training practices refer to evaluating and reviewing the procedures and techniques used for hiring and training employees. This approach helps identify areas for improvement and ensure that the company is effectively hiring and training employees.

To audit hiring and training practices, businesses can take several steps, such as:

  • Reviewing the current hiring and training processes, including job postings, application and interview procedures, and training programs.
  • Gathering feedback from employees, managers, and other stakeholders on the effectiveness of the current processes.
  • Analyzing the performance of existing employees to identify any areas that require additional training.
  • Comparing the company's hiring and training practices with industry standards and best practices.
  • Identifying any potential areas for improvement and implementing changes as needed.

Regular audits of hiring and training practices can help businesses ensure that they are hiring and training employees effectively, leading to better performance and productivity.

  1. Establishing Clear Policies

You need clear policies and enforcement measures to address shrinkage in your store. You can establish clear policies by:

Identify the Causes of Shrinkage

The business should identify the common shrinkage causes, like theft, damage, administrative errors, and expired products, to determine the most appropriate policies to implement.

Develop a Shrinkage Prevention Plan

The prevention plan should outline the specific measures that the business will take to prevent and minimize shrinkage, like implementing security measures, conducting regular inventory audits, and using technology.

Communicate the Plan to Employees

Communication is important. All employees should be aware of the shrinkage prevention plan and their role in implementing it. This can be done through training sessions, posters, and other forms of communication.

Establish Clear Policies and Procedures

The business should have clear policies and procedures in place for inventory management, including reporting and addressing discrepancies, and for dealing with incidents of theft or other forms of shrinkage.

Provide Training

Employees should be trained on the policies and procedures related to inventory management and shrinkage prevention, as well as on ethical behavior and the consequences of theft.

  1. Hire a Loss Prevention Manager

Hiring a loss prevention manager is a strategy businesses can use to prevent and minimize retail shrinkage. A loss prevention manager oversees the company's loss prevention efforts, including implementing security measures, conducting inventory audits, and training employees on shrinkage prevention.

A dedicated loss prevention manager can benefit businesses, as it allows for more focused and practical efforts to prevent shrinkage. The loss prevention manager can develop and implement strategies to prevent shrinkage, monitor the effectiveness of these strategies, and make any necessary adjustments.

However, hiring a loss prevention manager can also be costly, as it requires an additional salary and benefits. Therefore, businesses should consider the potential benefits and costs of hiring a loss prevention manager before deciding.

Outsourcing loss prevention is a viable option. There are several potential benefits of outsourcing the loss prevention management function instead of hiring in-house, including:

  • Cost savings — Outsourcing can be more cost-effective than hiring in-house employees, as the business can avoid the costs of salaries, benefits, and training.
  • Flexibility — Outsourcing allows the business to scale up or down its operations quickly and easily, as it can adjust the amount of work being outsourced based on its needs.
  • Access to specialized expertise — Outsourcing allows the business to access specialized expertise and skills that could not be available in-house, without the need to hire and train employees.
  • Improved focus and efficiency — Outsourcing non-core functions can allow the business to focus on its core competencies and improve efficiency, as it can delegate tasks to outside experts who are better equipped to handle them.

  1. Create Strong Retail Shrinkage Deterrents

A solid retail shrinkage deterrent measure or strategy effectively discourages or prevents shrinkage. Some examples of reliable retail shrinkage deterrents include:

  • Implementing security measures, like surveillance cameras and access controls, to prevent theft and damage.
  • Using visible impediments, like signs warning against theft and security cameras, to discourage potential thieves.
  • Establishing clear policies and consequences for theft and other forms of shrinkage.
  • Providing employee training on inventory management practices and ethical behavior.
  • Regularly monitoring and enforcing compliance with shrinkage prevention policies and procedures.

  1. Consider Buy-ins

Buy-ins are a retail shrinkage strategy that involves purchasing additional inventory to cover any shrinkage that could have occurred.

For example, if a business notices that there is a discrepancy between the physical inventory and the recorded inventory, they could choose to buy additional inventory to make up for any shrinkage that could have occurred.

Buy-ins can be an effective shrinkage prevention strategy, as they can help businesses maintain proper inventory levels and avoid shortages. However, they can also be costly, as the store will need to purchase additional inventory and could end up with excess stock if the shrinkage is less severe than anticipated.

Overall, buy-ins can be a helpful shrinkage prevention strategy for businesses, but they should be used carefully and in combination with other measures to prevent and minimize shrinkage.

  1. Improving Inventory Management

Improving inventory management is a strategy that businesses can use to prevent and minimize retail shrinkage. By implementing better tracking and reporting systems, training employees, and using technology, stores can improve the accuracy and efficiency of their inventory management, reducing the likelihood of shrinkage.

For example, regular inventory audits can help identify and address discrepancies between the physical and recorded inventory, preventing shrinkage due to administrative errors or theft. Technology like barcode scanners and inventory management software can also help improve accuracy and deter shrinkage.

Overall, improving inventory management is an effective strategy for preventing and minimizing retail shrinkage and protecting the business's profits and reputation.

  1. Develop Strict Accounting Practices

Having strict accounting practices can indirectly help prevent retail shrinkage in several ways.

First, strict accounting practices can help businesses prevent and detect financial fraud, like employee theft or vendor fraud. By ensuring the accuracy and integrity of the company's financial records, businesses can identify and address any discrepancies that could be caused by theft or fraud.

Second, strict accounting practices can help businesses ensure that they are accurately recording and tracking their inventory levels. This can help prevent and detect inventory shrinkage, like when there is a discrepancy between the physical and recorded inventory.

While developing strict accounting practices is not directly related to retail shrinkage, it can help businesses prevent and minimize shrinkage by ensuring the accuracy and integrity of their financial records and inventory management.

Contact a Loss Prevention Expert Near Me

While retail losses are expected, you do not have to settle for accepting a dent in your profitability through preventable avenues. You need to protect your margins at all costs. As detailed above, there are various solutions you can explore to prevent losses in your store. Additionally, hiring experts in the Los Angeles security space will give you an added advantage. The Green Knight Security team is ready to offer assistance. Call us at 844-457-8326 for all your loss prevention needs.