How to calculate a retail store true shrinkage level

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I was invited to consult a retailer in the Far East recently. Prior to my visit, I had already provided retail loss prevention training to executives from this company. During our training session, when I asked them their shrinkage figure, I was told a figure that was way below the 2010 Retail Global Barometer Report of 1.36. For me this came as a surprise. How can a company from the other side of the world be doing better than the likes of Walt-Mart and Tesco; two of the most profitable retailers in the world?

Now, you can imagine my excitement when I was invited to this company. On one hand I was glad that I had the opportunity to learn from this company with a spectacular shrinkage record but I was also apprehensive. What help could I give to a company that had a shrinkage level blow the best retailers in the world.

I arrived that morning, headed for my hotel and did not even have time to sleep just swallowed a loaf of bread and I was whisked away to the first store. As I was shown around the first store, I was impressed with the level of organisation in the store. Goods were well displayed and neatly stacked and the store was surprisingly cleaner than I expected for that part of the world.

I asked the store manager what he thought his shrinkage issues were, he gave me a laundry list of symptoms instead of root causes. This was not a surprise; it is always the case with many retailers that they focus on the symptoms of their shrinkage problem instead of the root causes.

He spoke about the hottest spot and hottest products in his store as we walked along. We completed the store tour and went into the back room, that too appeared surprisingly better organised than I expected. Then I requested that we went to the perishable department. I was informed that they had no perishable shrinkage. Why is that so? I enquired.¬† “All of our products are bought fresh” I was told. It sounded a plausible explanation to me at that instant. I thanked the manager for his time and we left. In the next store we went through similar process and I took note as I walked along. In this store I was also told that they had no perishable shrinkage.

I began to get a bit concerned but I kept my concerns to myself. When we completed the tour for the day, and we sat to have our lunch, puzzled by the idea of a supermarket not having perishable shrinkage, I asked one of the managers to explain to me this deal of not having perishable  shrinkage. Fortunately for me he was British and a formerTesco employee. He explained to me that they used a different method of perishable shrinkage calculation which made it look as if there was no perishable shrinkage.

Perishable accounts for about 8% of a supermarket’s shrinkage. Therefore, by not reporting their perishable shrinkage, they were already miscalculating their shrinkage level by 8%. I asked myself what else they wouldn’t be adding to their shrinkage number. Upon close examination I discovered that shrinkage relating to supply chain, distribution centre and goods-in-transit where also not added to the figures. And to make matters worse, their shrinkage was calculated using the true cost method instead of the retail value method obscuring almost 30% from the figure.

Many retailers including many multi-nationals in the West are calculating their shrinkage in the same manner thereby obscuring the real figure. Getting shrinkage figures right is crucial for the survival of retail ventures because shrinkage is basically profit. Anytime a shoplifter walks out of a retail store with a candy they are basically walking away with the retailer’s profit.

An accurate shrinkage calculation must take into account the following:

  • Known loss resulting from damage, expiration, administrative and accounting errors etc.
  • Unknown loss resulting from shoplifting, employee theft, vendor theft etc.
  • It must also take into account shrinkage resulting from supply chain: distribution centre, goods-in-transit etc.

Before I made the discovery in the company, all the middle managers were pleased with themselves grinning from ear to ear. However, when I explained what could be their true shrinkage level with the addition of all the other components, the grin seems to automatically disappear from their faces. Every retailer needs to check their shrinkage using the above formula because by maintaining the status quo, they might be grinning too soon.