Strategic Shrink Reduction

Physical Security

​​Illustration by Stuart Bradford​​

Strategic Shrink Reduction
Chart: Sources of Global Retail Shrinkage

Security’s long battle against retail theft continues, and it is far from won, but some retailers are making gains. Loss prevention strategies are becoming increasingly more sophisticated, with some retailers leveraging cutting-edge technology, analytics, and an even more engaged workforce to fight thieves and stay one step ahead of always-evolving shoplifting methods.

Global shrink has declined by 4.8 percent in the last year, due in part to an increased focus on loss prevention measures, according to a recent study of retail theft across the world. The report, The Global Retail Theft Barometer 2013-2014, examined the cost of merchandise theft in the global retail industry in 24 countries spread throughout Asia, Europe, North America, and South America.

What’s driving the progress? One major factor is increased investment in loss prevention programs. The study found clear correlations between how much a country’s retail industry spent on loss prevention and the retail loss rate in that country. Countries with the best shrink reduction rates had spent the most on preventive countermeasures, while those with the highest losses spent the least on prevention.

This is a lesson that some retailers in the United States could benefit from, says Ernie Deyle, former vice president of loss prevention for CVS/Caremark who now leads the shrink reduction and margin recovery practice for SD Retail Consulting. Deyle says that when he does “triage” work in the field, some stores consider loss prevention an expense area, a place where they minimize spending in hopes of minimizing costs. So the idea that loss prevention is actually a competitive asset area is “usually overlooked,” often to the detriment of the store’s financial bottom line. “When you control loss, you improve your profit,” says Deyle, who helped conduct the study in conjunction with The Smart Cube, a research and analytics firm. 

However, simply spending more money on prevention is not the sole answer to the problem, Deyle adds. The report found that the most effective loss prevention programs are multifaceted: they often combine the strategic use of technology and physical security measures with data analytics.

For example, a multifaceted program might employ electronic article surveillance (EAS). EAS devices have been shown to be among the most effective of retail security technologies, the report found. But relying on one tactic or device, even one as effective as EAS, is “like putting up a gate with no fence,” Deyle says. 

Instead, multifaceted loss prevention programs may couple an EAS system with a merchandising plan that covers product placement strategies to avoid theft. The merchandising plan might use analytics on loss data to determine things like what shelves are most vulnerable to theft, which items are most likely to be stolen, and when peak theft occurs. Product placement strategies might include the best arrangements and facings for items to minimize theft, Deyle explains. For example, arranging products in a way that takes longer to lift them off the shelf can deter some shoplifters. “They want quick in, quick out, without being noticed,” Deyle says. 

Moreover, loss prevention plans should be constantly evolving. Shoplifters who are foiled will change their practices accordingly, so retailers need to continually change their tactics as well. “It’s about being strategically positioned,” Deyle says. “You need to stay ahead of the curve.” 

While the 4.8 percent global shrink decline is encouraging, retail shrink still costs an estimated $128 billion worldwide, evidence that theft is still a serious problem for the industry, according to the report. The loss is the equivalent of 1.29 percent of sales in each of the 24 countries examined in the study. The annual cost of shrink to households, as passed on from retailers, ranges from $74 to $541, depending on the country. 

Roughly two-thirds of shrinkage worldwide (slightly more than 65 percent) is due to shoplifting, followed by employee theft. In most countries (16 of 24), shoplifting is the biggest cause of shrinkage, but this can vary. For example, in the United States, employee theft ranked first at 43 percent, with shoplifting next at 37 percent. In Norway, a low shrinkage country, administrative losses are the major source of shrinkage.

Comparatively, shrinkage rates across the 24 countries in the report range from 0.83 percent to 1.7 percent. Mexico recorded the highest rate—1.7 percent—followed by China with 1.53 percent. The lowest shrinkage rates were in Japan, Norway, the United Kingdom, and Turkey. 

In the United States alone, retail theft costs $42 billion annually, equal to an average of $403 per household. Shoplifters and dishonest employees most commonly target products that are easy to conceal and then resell.  Some of the most frequently pilfered items include mobile phones, spirits, fashion accessories and jewelry, makeup products, and computer tablets.  

Almost all types of U.S. retail stores were hit by employee theft and shoplifting, but the most affected were U.S. discounters, with losses equaling 2.78 percent of sales; pharmacies/drugstores, 2.16 percent; and supermarkets/grocery retailers, 1.38 percent. These three types of stores witnessed the highest shrink rates because of the widespread prevalence of organized retail crime combined with relatively lower loss prevention spending, according to the report. 

While retailers are making progress with sophisticated loss prevention programs, another recent report points the way toward an alternate means of reducing retail shrinkage—by improving the engagement level of the workforce. 

This report, Making the Link: the Role of Employee Engagement in Controlling Retail Losses, surveyed more than 200,000 staff members in 1,570 stores under three European retail chains. Employee engagement was measured across 18 factors, such as “staff believe their ideas and suggestions are taken seriously” and “staff feel appreciated and valued.” Four indicators of retail loss were examined: shrinkage, waste, cash loss, and lost sales driven by out-of-stock merchandise. The report was conducted by ECR Europe’s Shrinkage and On-Shelf Availability Group, with support from the University of Leicester. 

The study found that 15 of the 18 employee engagement factors influenced store loss. It also found that the stores that had the highest loss rate could significantly reduce that rate with a more engaged workforce. The report “graphically highlights the difference that engaged and valued staff can make to retail profitability—not just by providing excellent customer service, but also through a reduction in the many and varied losses retailers experience,” write the authors of the report. (For more on employee engagement best practices, see “The Disengagement Dilemma” on page 52).  

Like the previous report, Making the Link also found that managers played a pivotal role in keeping employees engaged. To heighten engagement levels and reduce loss, the authors recommended that managers provide more opportunities for staff development, keep staff informed about the organization, solicit staff ideas, and make sure that staff have satisfying, manageable roles. 

“For all the advances in technology and analytics, the importance of employees must not be minimized,” the authors write. “Retailing is fundamentally about people—principally the customer but also the employees tasked to service their needs.”