Loss prevention and shrinkage – Reducing the impact on retail, both online and offline

When you sell online, your profits come based on selling your stock for more than you paid for it (the price of the saleshould cover the cost of buying the product, shipping the product, paying staff, sales tax and other expenses, of course, but it also pays you, and allows you to look at growing the business). When we say ‘growing your business’, we’re talking about a number of things, of course, including:

Of course, for this to work, you need to be selling all of the stock you buy, to get a full return. In reality, this is rarely the case.

What is shrinkage?

Shrinkage, or shrink rate, are terms used to refer to reference the act, and the amount, of loss to your business because you aren’t selling all of your stock at the expected average value. The US National Retail Security Survey 2019 reported that the average shrink rate in retail is 1.38% of sales – Remaining fairly consistently around that level since 2014. That’s a pretty small number, correct?

1.38% of US retail sales adds up to approximately $50.6 billion in 2018. That shows that these numbers add up, and it is worth getting on top of shrinkage as much as possible to reduce that loss, and improve the returns and opportunities for your business.

What are the main causes of shrinkage?

Shrinkage affects different businesses in different ways, depending on how you work, whether you sell on or offline, and what you sell. Each business, and each team is different. Sometimes it’s dishonest customers, sometimes its careless staff or contractors/partners. Sometimes it’s employees. But it’s important to remember that you can minimise it, but you’re unlikely to totally eliminate it.

An important component of your business is your team – their ethos, and their belief in your business, so that they will support you and help you to avoid pitfalls. You can’t be everywhere at once, so if they buy in and feel invested in growing the business to improve their lot, they will help you to find problems or fixes you were not even aware of.

Shoplifting

If you have one or more retail stores, then you are likely to be aware of the potential for loss through shoplifting. For retail business, it’s the leading cause of shrinkage, but it’s not just about people putting items in their pockets, or otherwise concealing products to avoid paying for them.

Shoplifting can also include the adjustment, swapping or otherwise damaging of price labels to pay less than the value of the product(s).It can even involve opening boxes and swapping the contents, or adding things into it (small, high value items are especially vulnerable to this if not tagged or in larger ‘display box’ that has a tag included, to preclude theft. Boxes should be sealed, and they should be checked before selling them. If the seal is damaged, you can check he box contents, or put it aside and offer to fetch a sealed one.

Employee theft

Employees are trusted to help you run your business, and to look after your stock. Unfortunately, that same trust is what make it possible for them to betray you.

Employee theft make sup approximately 30% of shrinkage, in fact. Internal theft can take many forms.

The obvious concern, of course, is the classic image of an employee slipping something into their pocket or bag as they leave, or taking money from a till.

But there are many other opportunities for an employee to affect your business negatively – Mostly on purpose or maliciously, but not always.

Another common issue that falls under the heading of employee theft comes down to, in essence, fraud on behalf of an accomplice:

Ultimately, these problems can be dealt with in a number of ways. How you choose to will set the tone of your business and how it grows.

Return fraud

Return fraud affects online and offline businesses in different ways, but in essence it’s about returning items to you for refund or exchange that were not bought from you in the first place.

In retail, this is usually accompanied by a request for a cash refund, and may be stolen goods – they can be pretty brazen! Alternatively, they may have bought the item with a stolen credit card before trying to return for cash.

This is why many stores will only refund to the original purchase method or store credit. It’s also why it may be an idea to implement a policy of checking and retaining information about IDs for returns above a token value, in case the original transaction turns out to be fraudulent. It discourages people attempting, but you must be sure that your staff are applying this policy to everyone, including friends – It only takes one slip! And make sure you tie records of refunds to the original sale so that if there is a fraudulent transaction, that the details can be passed on for the investigation. If someone’s been caught, they can’t come back and do it again!

It’s also good to ensure people with the authority to accept returns and offer refunds know how to look out for counterfeits, if you’re selling branded goods, just in case.

Another version of this fraud comes down to the concept of ‘Returning a broken item’ – This is more common with appliances or machinery spares/parts. Someone buys an item, but wants to return it because it’s broken or not fit for purpose – They swap the original they bought for one they already have that’s worn out, for a ‘free’ change/upgrade. Always record serial numbers where possible, especially for high value goods, and check them to make sure they match. For consumables and spares, such as for garden machinery, always open the box if they ask for a refund because they changed their mind, to make sure the right item is in there, and that it’s the item they were sent. Again, keep records connected, and consider taking ID – You’d be surprised how many people might change their mind again when they realise you’re checking!

Online, such fraud is a bigger issue, as many marketplaces have been known to take the side of the customer, so ensure you keep good records of what you sent and what you received if you want to make a case against the refund being authorised, or at least to try and get the customer account banned. It’s not a fix, but it makes life harder for the fraudsters. Where high value items are involved, don’t be afraid to report it to the police, either – If you have addresses and payment details, etc., then you might be able to get a positive result and resolution – though not necessarily payment.

Returns due to poor description or customer failing to read/understand what they bought

Alongside the problem of returns fraud, online and distance sellers have issue with return of opened items because either the seller didn’t describe the item very well (This is one of the reasons good, clear photos are important).

This reminds us that it’s vital to put as much information into the listing, and use all the item specifics you can to ensure when the customer searches and filters the listings they are not able to claim an error on our part. If there’s a complaint that something is missing or unclear, revise your listing or site immediately to avoid it happening again.

In addition to concerns over the listing and why the original sale occurred, there is also the concern when a customer orders the item, receives it, but wants to return it because they don’t understand how to use it. This comes down to packaging design, and the thought and effort that was put into the out of box experience. If you’re DropShipping, then it’s out of your control directly, but you can give feedback. Ultimately, if a significant number of customers can’t understand how to use the product when it arrives, then the product and its packaging need to be reviewed. Poor reviews follow, making it a harder sale in the long term.

Administrative error

It’s not an understatement to point out that as your business grows, the volume of work involved in keeping track of stock, orders and customers increases exponentially – More suppliers, more products, more staff, more orders from more marketplaces and websites. It becomes increasingly difficult to keep track of everything without the support of a good team and a good system used properly. It affects businesses of all sizes – Only recently Ted Baker announced that they were having to write off a massive amount of stock due to counting issues (an ‘overstatement of inventory’) – First it was estimated as £25m, but this was later escalated to a confirmed £58m. That’s a lot of shirts!

Losses can build up from simple things, like not properly recording and writing off damaged stock, or not properly counting stock during a stock take, so your stock valuation is artificially high and you don’t know accurately what your losses and shrinkage areand when they occurred, for example. Estimates are that just over 20% of shrinkage and losses can be tracked back to administrative errors.

Accounting errors can be costly too – Rounding numbers incorrectly, allocating things to the wrong accounts – do you audit your books regularly, and do formal training for people that work with your financials? Do you use accounting software to help avoid common errors and keep track of changes in regulations and rules?

Remember, if you don’t track the amounts and location of stock you have, you may find yourself thinking you have run out and getting penalties for not being able to fulfil an order. If you then order more stock, only to leave ‘orphaned’ stock sitting in a dusty corner, you may find that you need to sell the remaining items at a reduced price, affecting your expected returns and your cash flow.

Also, keep track of the orders you dispatch carefully. If you send an order out twice, you may trouble getting your property back for the duplicate, wiping out your profits for that and several other orders, not to mention the possibility of receiving bad feedback to affect your business. If you send out the wrong item you might also get bad feedback, or have supplied an item of higher value.

Perishable goods and expiry dates

If you’re selling perishable goods, like food or dietary supplements, which have a ‘sell by’ or ‘best before’ date, then it’s also important to ensure that you track these dates, and take action to ensure they are sold before they reach that date – Special offers, advertisements, bundle deals or sales for example. Their value is either zero, or very low after the best before date, and shouldn’t be sold after the ‘best before’.

This also means that your staff should be trained and checked to ensure they rotate stock – Dispatching the items with the closest date first to avoid wastage. If people are in a hurry, they may put the newest dates at the front, and create a problem later on for your stock value and waste figures.

Fashion and seasons

When selling clothes and accessories, especially from designer brands, or sportswear for golf, skiing etc., then your product lines may devalue substantially once their season has passed. You can look at alternative options to dispose of stock that didn’t sell, such as selling in other countries where they are still ‘in season’, whether directly or selling them on in bulk to another seller – the longer it takes, the lower the stock’s value compared to the value at their peak.

Vendor fraud

Vendor fraud is a difficult issue, and thankfully relatively rare. It occurs when you’re short-changed by your supplier. It may not be on purpose, but if you paid for 300 widgets, and you think you have 300, but you only count 250, then you’ve come up short and need the balance to be made up.

Alternatively, it might be that you don’t get the right items – You ordered 1,000 10-packs, but only receive 5-packs, for example. You ordered 500 black, and get a pallet of mixed colours (But all the outer packs are black). So many permutations are possible if a mistake is made.

It might even be that some of them are damaged (before dispatch or in transit?). Therefore it’s vital that your team check and account for all your deliveries – If you can catch damages at delivery and before signing for them, the supplier can claim the cost from the courier.

If you come up short, or have incorrect items, the vendor can make a supplemental delivery or offer credit. But if you don’t know there is an issue with a delivery, then your stock levels and value will be compromised – You might even inadvertently send out the wrong item!

This doesn’t always hold true, as some companies deal with handmade goods or other materials that have estimated amounts delivered, but these are rare. In those cases, until the delivery arrives you cannot be entirely sure how many will arrive, though there is usually a minimum expected number. In that case, your final cost per item depends on the number you get! Only if the number is below the minimum do you contact the supplier to query the delivery.

Shipping issues

When dispatching your products to your customers, it’s good to keep track of failures and other issues, such as damages or incorrect delivery addresses. While most logistic companies and postal services are reliable, losses do occur, so ensure you claim all that is covered and any replacements you send out are paid for.

In addition, don’t forget to be alert to fraud. It’s know unknown for customers to claim their package was not delivered. Many providers offer delivery confirmation and pictures to confirm the location, as a more cost effective alternative to a fully tracked and signed for service. Being able to provide confirmation will protect you from automatic refunds by payment providers or marketplaces, leaving you out of pocket. Some customers may claim that their item was damaged in delivery and ask for a partial or full refund – Make sure your shipping provider covers the value of the item in their service definition should such a claim be made.

Stock damage

It’s important to record any damaged and unsalvageable stock, in order to keep your stock levels accurate and to ensure your forecasts and expectations are adjusted. If an item is still saleable as B-Stock, make sure it’s moved, reclassified and repriced appropriately. Check the laws and rules covering such items and your responsibilities.

Ensure your staff are properly trained, and don’t operate equipment like forklifts without proper training, and ensure that accidents are recorded so you can identify people that either require retraining, or discipline as appropriate.

It’s not unreasonable to expect your staff should be careful handling your stock. The counterpoint to this is to remember to make sure you put enough staff on for the volume of work they are doing, however.

Buildings and fittings

In addition, it’s also worth remembering that damage isn’t always because of people (directly). Are you checking and maintaining your premises regularly? Do you invest in pest control?

Damp and vermin can do a lot of damage to packaging and the products themselves, especially if you sell food or clothing. A rat can gnaw through a steel pipe, so a cardboard box isn’t going to get in its way. Is the roof and guttering in good repair and checked regularly? Is it your responsibility to maintain the building, or your landlord’s and have you confirmed timescales for addressing problems when they are reported?

Prevention is better than a cure – Or a bill.

In addition to the integrity of your building, you need to make sure that you’re laying out the building and your stock well. Are you correctly spreading out the weight of your products across racking and shelving units? Overloaded shelving can collapse and cause injuries to your team, as well as damaging the stock, and potentially other racking, too.

Is there enough room between the shelves for your staff to move when picking, packing or restocking shelves? You don’t want your stock getting bashed and dented, or dropped after all. If you store and move products on pallets, then are your staff checking that the pallets are in good repair.

Unknown causes

Ultimately, there will be some losses you can’t identify the cause for – Whether it’s a broken item hidden away, a missing item that might not have been delivered, or might have been stolen, right down to a stock value figure that is higher than your actual stock because of rounding errors between systems, or because of the system calculating and rounding up values from fractions. It’s a fact of life that a small percentage of issues will be unknown, so you can only asses and Address the things you know about!

Badly damaged stock

Nevertheless, there are still accidents, and so you’ll still occasionally need to deal with badly damaged stock. For the stock which is unsellable, or in very bad condition, or the other options mentioned here, do you have insurance that will cover the loss – what instances are you covered for? And, for smaller claims, will the value of the claim exceed the increase in your premiums? It’s a balancing act, but it’s important to take precautions and minimise the chance of losses that could compromise the sustainability of your business.

How does shrinkage affect online businesses differently?

This affects all businesses that sell products to some degree or another – Online businesses and suppliers are less exposed to problems involving the public directly, such as shoplifting, while they are more exposed to issues with shipping, returns (due to Distance Selling Regulations), deliveries and fraud.

Most businesses have to worry about accounting for loss in-house through physical damage, except for the sellers that use DropShipping, where the supplier assumes more of the risk for potential loss directly, and this will be reflected in their cost to the seller. While you might only read the appropriate parts of this article that affect you directly, the whole article, and all the sections together, may help you to appreciate the potential issues that your suppliers may be affected by. They may also help you to bear in mind potential vulnerabilities as your business grows.

Don’t forget other downsides to frequent returns or other issues – lost sales from bad reviews, poorer visibility in marketplace searches, possibly losing your account. Also, PayPal forces customers with lots of complaints and refunds to set aside increasing amounts of money to cover possible claims, and they do that without asking you, by setting aside some of your balance and preventing you from withdrawing it. Therefore an increase in disputes directly affects your ability to buy your next lot of stock from the proceeds of your sales.

What do we mean when we refer to loss prevention?

Loss prevention is a term that covers a wide range of measures you, as a business owner, might take to address actual or potential issues to improve your businesses performance. Some are directly aimed towards preventing potential issues, some are improvements in general practice to reduce the likelihood of issues, others are focussed on improving the morale and performance of your team to avoid mistakes and encourage them to be part of the solution.

How can you improve your business’ profits through loss prevention?

Loss prevention describes a whole range of measures across many areas, focussed on reducing shrinkage and improving the effectiveness of your team and your business. Ultimately it comes down to reducing the ability of people to remove or damage your stock, which in turn reduces your ability to make the expected return on your purchases.

The more stock you lose without being able to sell it, either directly or through damage, the more burden to pay for the original purchase and running costs on the profits from the remaining stock.

Retail businesses

Obviously, CCTV in the shop helps to reduce shrinkage and loss, not just by recording people’s actions, but by being sited in a visible manner to act as a deterrent – but it must be combined with careful layout in your store to avoid blindspots – Ideally all areas should be covered by more than one camera from different angles and directions. Ensure that displays and shelves aren’t moved to obscure vision, or overfilled/stacked against on the ends of aisles to also obscure views.

An option you can employ to varying levels is to implement checks or authorisation when applying discounts for the majority of staff, and picking trusted supervisors as the team grows to delegate this authority to. Obviously, this can slow down service, but ensures verification of the use of discounts.

High value goods can be tagged, and gates installed to alert when people try to leave – Smaller items can be put into cages or boxes to make them less portable and harder to hide. There is a large cost involved in both of these solutions, and there is the concern that thieves CAN source tools for removing tags through marketplaces like Wish and Alibaba.

It’s important to emphasise the importance of training your staff, and recruiting/scheduling enough staff – There is nothing a shoplifter fears more than friendly, attentive staff. They can watch out for attempts to block cameras, create blindspots, and intervene politely to avoid issues. They can also catch people swapping labels, changing packaging or tampering with shelf edge labels or security tags, for example.

Staff can be trained to watch forcommon criminal behaviours and tricks– and what do if they want to raise the alarm. In addition, if multiple staff are in the area and one of them is doing something incorrectly, deliberately or otherwise, then the other staff member(s) can point this out and correct, protecting you.

Staff should also be trained to correctly label products, and to watch out for issues with pricing on shelves and products being swapped, and removing expired ‘sale’ labels – In many countries the law forces you as the retailer to honour the cost on the label/shelf if lower than the actual price.

You can audit CCTV footage of checkout areas for randomly selected sample of times when discounts were applied, or if a concern was raised about a transaction to see what happened, who was involved, etc. knowing that this occurs reminds your team that if there is an issue, it is likely to be caught, so they should own up to it. This is time intensive, of course, so it’s worth considering how frequently this is needed.

Online sellers

Some countries are known to have unusually high loss rates for parcels that pass through their postal services, so use tracked and insured services in those areas and chase as appropriate in order to ensure delivery, or at least get compensated for ‘lost’ packages.

In addition, monitor the performance of your delivery partners to see if you need to raise queries, or find an alternative provider. And look out for ‘frequent flyers’, where the same person or household make frequent return or replacement requests, especially fraudulent ones. Look into measures to identify and ban/refund them without risking the dispatch of goods.

Look into a good software system to help you to improve your processes. There are a number of different options available to you that will connect to your selling channels to download orders, help to print labels, reduce picking error and keep stick levels up to date on the channel. Many will also help you manage returns and exchanges. They’re a good investment and because they track the actions taken, and help to manage the process, they can allow your workers to focus on areas outside of the basic process of dispatch. This frees them to ensure that waste is reduced, train new staff and reduce or avoid damage and track stock wastage to allow you to identify sources and causes. Websites like Tamebay offer guides to leading multichannel and warehouse management systems, such as Linnworks.

Common solutions for all sellers

You can take punitive measures in order to suppress common employee fraud – double-checking or cross-checking the efforts of the team, randomly searching people when they leave work, and adding CCTV coverage in the warehouse. This is all about making it hard for things to be concealed and removed without being noticed, of course. The primary value in these measures is to make people think twice about even trying. It’s secondary to catch them actually stealing, because they will likely have been foolish enough to take a big chance.

Implemented clumsily, or heavily, however, CCTV in the staff areas and extensive searches can be crippling for morale and performance, and can make it clear that the staff aren’t trusted. It will make it hard for them to feel invested in the business, to support and assist you fully, but it also makes it clear that bad actions have consequences.

It could be argued that you should be able to trust your staff to raise a red flag about issues, and to then look into things fairly. Try not to take action until you can prove that:

Trust goes in both directions, though. If your staff can’t trust you to be fair and honest in your dealings with them, and fear the outcome of reporting issues (Or learn they can manipulate you into getting rid of people they don’t like), then your team will tend to shrink and /or have high turnover. It’s worth remembering that your team is an investment, and they will pay you back in the long run. Management should be prepared to support staff when they query things, or raise issues – whether internally, with other staff, or with customers.

When hiring staff, it’s the first opportunity to avoid bringing bad apples into your team. Check references, and check their CV – do the dates line up? Are there any mysterious gaps? Have they worked somewhere that you know someone, and did they overlap? What can you learn about them? Is their CV too good to be true?

When you meet a prospective employee, will they look you in the eye when you talk to them? Avoidance of eye contact is a common indicator of deceptive behaviour. Are they defensive about questions, or do they engage in conversation? How well will they interact with their colleagues? How will they interact and get on with customers? The moment you hire someone, you’re investing in them. Don’t make a bad investment if you can avoid it, as it will affect the rest of your business and team.

To repeat, though – training and developing your staff will mean that they are able to see that they are trusted, and they have prospects to grow. This will increase their loyalty, and reduce the temptation to take foolish chances. By looking after and trusting them, your team will be invested in your business too. They’ll help you to find the bad apples that you miss.

Handling returns and retaining value

When items are returned, train your staff to not just accept them, or write them off, either. Ensure your staff check the same item has been returned that they bought (Check serial numbers, model numbers, wear etc. Look for signs it may be counterfeit, especially clothing and bags). Ensure it hasn’t been damaged by user error, and know the applicable law that cover what you must or must not take responsibility for. If suspicious, offer store credit or an exchange rather than a refund – Especially don’t offer cash refunds if a credit or debit card was used to pay.

No receipt but an own brand product? Is it stolen? Offer store credit and watch the customer’s reaction. If it’s an attempt to get cash from you for an item that is stolen or fake, they will likely change their mind and make an excuse to leave. Look out for them to come back again to try the same thing.

And when you accept returns, don’t write them off. Have someone evaluate and check them, see if they can be resold a reduced value – B-grade stock, incomplete, used and unwanted, it’s not illegal to sell it on if you specifically tell the customer that it’s damaged, incomplete, etc. in detail~(use photos) – and recover at least some of the cost. It’s not good business to write off a potential sale, just manage your losses and get the value you can. Not sellable? Keep it for spares – You might be able to combine two or three items of the same brand to one good one that you can sell! But keep an eye on the time and staff cost vs the losses and money gained back from returned goods and B-grade stock.