Shrink Expands

​Cutting investment in security, without sound strategic reasons, results in greater losses. It’s one of the canons of the industry, and it has proven to be true in the retail sector, according to new research and expert opinion.

Shrink—comprising shoplifting, employee or supplier fraud, and administrative errors—increased in the United States to 1.97 percent of sales during 2014-2015, up from 1.28 percent of sales in 2013-2014, according to the most recent Global Retail Theft Barometer report. This increase of approximately 0.7 percentage points is substantial, as it represents a bit more than one-third of the new total shrink percentage. The data is based upon responses from retailers who participated in the study both years. 

“Loss became much more dramatic for retailers,” 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 helped conduct the study in conjunction with The Smart Cube, a research and analytics firm.

The same trend held true worldwide. Global shrink rose to 1.42 percent of sales in 2014-2015, up from 0.94 percent the year previous, according to the study. “It was a jump not as dramatic as what the U.S. saw, but a jump nonetheless. That was significant,” Deyle says. And shrink increased in three of the four regions of the globe that the study examined. 

Why the increase in shrink? The root cause lies in the economically challenging environment for retailers, Deyle says. While the U.S. economy continues to grow and add jobs, and unemployment has ticked down, other economic indicators point to limited purchasing power for many. Approximately 47.6 million Americans are on food stamps, upwards of 100 million are unemployed, and 51 percent earn less than $30,000 a year. Moreover, while corporate profits have risen, wages have stayed flat for many.

Economic conditions have also tightened worldwide. One example is the decline in growth of emerging retail markets like China, whose rapid economic expansion earlier in the decade has now slowed. In Europe, austerity policies have led to recession-like conditions in many countries. 

These trends, Deyle says, have spurred a kind of closed-wallet syndrome among consumers, many of whom are restricting themselves to “need to have” purchases, and holding back on “want to have.” 

“When those stresses happen, retailers react,” Deyle says. Some retailers have simply not survived the stresses; roughly 9,500 closed shop in the United States in the last 15 months, he says. Of those that have survived, many have implemented contingency plans to tighten their budgets, such as a “haircut” budget cut consisting of a 10 percent reduction across all departments, including loss prevention. The overall loss prevention spending by U.S. retailers who participated in the barometer study the last two years went down by a margin of 0.50 percent of total sales.

And another report, the latest National Retail Security Survey, found that 62 percent of respondents plan on either maintaining or cutting their loss prevention budgets for 2016. The study was conducted by the National Retail Federation (NRF) and the University of Florida.

But cutting loss prevention spending often turns out to be penny wise but pound foolish, Deyle says: “It’s stepping over a dollar to pick up a penny.” Data from previous surveys has made the correlation pretty clear—when prevention spending is reduced, losses increase, and thus eclipse the money saved. But at many retail operations, the loss prevention department is not viewed as a revenue generating one, and so it is frequently not shielded from cuts, despite the correlation, Deyle explains. 

And it’s not just retailers who pay the price when losses increase. According to the theft barometer report, the annual cost of shrink that is passed on from retailers and absorbed by U.S. shoppers averaged $615 per household. 

However, reduced investment in loss prevention is not the only reason shrink still plagues the industry, the report found. There is also the escalating problem of organized retail crime (ORC), which continues to be a major obstacle. Thieves continue to be drawn to retail theft because it offers the promise of easy resale of stolen merchandise through online sites, the barometer report found. And there is a continuing general perception of shoplifting as a low-risk victimless crime, especially if the store is a corporate giant. 

While partnerships with police and technical loss prevention tools have had a positive effect in fighting shrink, organized retail crime has proven to be an intractable enemy. According to a third report, the NRF’s 11th annual Organized Retail Crime Survey, which polled 67 senior retail loss prevention executives, nearly all (97 percent) retailers surveyed report that they have been a victim of ORC in the past year, up from 88 percent who said so the year prior. The survey also found that more retailers this year have seen an increase in ORC activity at their own company (84.9 percent versus 60.3 percent last year).

“Though we are encouraged by the partnerships forged with law enforcement over the years and advances in technology that will help deter a crime before it happens, criminals continue to thwart much of the progress retailers have made thus far,” NRF Vice President of Loss Prevention Bob Moraca, CPP, said when the survey was released. 

Retail outlets in the United States are fighting another security problem—employee theft. 

While shoplifting was the biggest cause of retail shrink in 18 of the 24 countries surveyed in the barometer report, in the United States employee theft ranked first at 45 percent, with shoplifting next at 36 percent. Primary reasons for employee theft include weak preemployment screening procedures; reduced employee supervision; a greater reliance on part-time workers, especially during the peak winter holiday season when theft is highest; and the ease of selling stolen merchandise, according to the barometer report.

Still, despite the reduction in some loss prevention budgets, retailers by and large are still investing in at least some loss prevention solutions. The most common loss prevention components are camera surveillance (used by 83 percent of respondents in the barometer report), alarm monitoring (78 percent), and security guards (63 percent). The most common merchandise protection solutions include electronic article surveillance (68 percent), protective packaging (41 percent), and advanced inventory control tactics (27 percent).

In Deyle’s view, with greater use and development of sophisticated IT tools like analytics, loss prevention in the future may become a more data-and-analysis-based endeavor where positive results can be sustained by a relatively limited dollar investment. 

“IT keeps you ahead of the curve on the causes, so you can be smart in deploying the resources to maximize the value proposition,” Deyle says.