8 Efficient Ways to Reduce Shrinkage in Retail

Shrinkage is a serious problem affecting the retail industry today — and no, I don’t mean the shrinkage that occurs when you put your new clothes in the dryer. 

Will Kenton, an investing and economy expert, defines shrinkage as “the loss of inventory that can be attributed to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage, and cashier error.” 

In short, shrinkage is the difference between what you recorded for the company inventory on the balance sheet and what the actual inventory is.

When shrinkage is high it means low profitability because a loss of inventory means a loss of profit on items that should have been sold. 

So how are experts in the retail industry tackling this shrinkage issue to ensure profits are high? We’ve done some investigating and spoken to some of the world’s leading retail companies to understand how they combat shrinkage on a daily basis.

One of the biggest causes of shrinkage is employee and customer theft. Confirm employees have access to company policies and the employee handbook at all times. In doing so, you can ensure employees clearly understand the company policy on employee theft. 

For example, you can include what the consequences are if an employee is found to have stolen something. If an employee understands there will be clear consequences to theft of any kind; whether it be monetary, actual goods, or intellectual property, they are less likely to want to go against these policies.  

But how can you make an employee handbook with employee theft policies available to your employees at all times? An employee management app, such as Connecteam, gives your employees 24/7 access to the employee handbook directly on their mobile devices. In addition, you can ensure employees have read the employee theft policy by requiring them to submit a digital read & sign form after they’ve completed reading through the policy. 

You can also use an employee training app to train new and existing employees on how they can prevent customer theft.

There’s another way you can reduce shrinkage in retail and reduce theft, and that’s by training all new and current employees on how to prevent customer theft and shoplifting awareness. 

Make sure employees are aware of all the different types of criminal scams, like a client returning items without receipts or a child distracting sales clerks while someone is stealing merchandise. Is there a way they can deter thieves before a crime has been committed? Yes! And with the proper training, your employees will feel confident enough to handle those situations when they arise. In addition, you need to have plans and procedures in place for your employees to follow if they suspect someone has stolen something. 

In order to quickly and efficiently train staff on theft prevention, you should implement an employee management software. With an employee management software like Connecteam, you can easily and quickly create fully customizable training courses with videos, images, and links to external articles. 

Effortlessly monitor an employee’s progress through the training material with real-time oversight and notifications. Create customizable quizzes with real-time data to ensure employees have retained the knowledge gained from the theft prevention training. 

Employee management software can also be used to reduce human error by automating and digitizing nearly every aspect of daily operations in the retail industry. By reducing human errors you simultaneously reduce shrinkage in retail. 

Another huge factor that impacts shrinkage in retail is the human factor. We’re all human and we all make mistakes from time to time, but frequent human error leads to lost inventory or miscounted money in the register. 

So how can you reduce human error and standardize daily operations? With daily checklists, your employees will know exactly what needs to be done when arriving at work. Additionally, after completing all checklists and tasks, you can require employees to submit an “end of day report”. By doing so, you hold employees accountable for their tasks. Managers will be able to know what tasks were completed, what issues they faced during the workday, and how employees overcome these challenges. 

You can also use reporting as another tool to reduce shrinkage in retail. Create a damage report so employees can report any inventory that has been damaged by an employee or client. By implementing these reports you increase employee accountability and can reduce the amount of damaged or broken items. 

Being able to reduce human errors with daily checklists, tasks, and damage reporting can greatly reduce inventory loss and by digitizing these tasks you can increase management oversight and employee productivity. 

With an employee management software, like Connecteam, employees no longer have to carry around heavy binders filled with paper forms, checklists, and reports. Employees can now submit completed checklists, tasks, and inventory damage reports directly through their mobile devices. Furthermore, management can require employees to electronically sign any checklist, form, or report to further increase employee accountability and reduce human errors. 

Frequent inventory auditing gives managers a better understanding of how much actual inventory is there versus what has been reported. Megan O’Brien notes, “audits confirm not only the quantity of inventory but also its quality and condition — and identify any instances of theft, damage or misplacement”.

By conducting frequent inventory audits, your employees will understand the importance of that inventory to the business’ success and bottom line. Furthermore, management can conduct more frequent, even daily, inventory audits on smaller amounts of inventory to keep employees on their toes. This type of audit is called “cycle counting” and it’s a great way to stay on top of inventory on a regular daily basis. 

This is really a no-brainer. Signs are an easy and cost-effective way to deter thieves and even employees who may consider stealing. Although not totally effective at stopping thieves from stealing, Vector Security notes, “you can combine security signage with other forms of security and protection for a well-rounded security plan”.

That being said, if you don’t already have video surveillance in place at your retail business then it’s definitely worth investing in one. With video surveillance you will be fully “aware of what’s happening in your store. With the help of recorded footage, you can also identify who stole from your business and give authorities a starting point for their investigation”. By setting up video surveillance, your employees will also be less likely to steal as they are aware they are being watched and monitored. 

There are several other types of surveillance as well that can reduce shrinkage in retail. For example, strategically placed mirrors so employees can watch suspicious characters or door alarms to prevent customers from taking items out of the store without paying for them.  

We understand how overwhelming all these tasks can become for one business owner or retail store manager. That’s why hiring a loss prevention manager to take control of all these tasks can greatly assist in the implementation of all these tools and strategies. 

Loss prevention managers have the experience, training, and knowledge, and “they typically formulate plans regarding customer and employee safety, emergency procedures, difficult customers and lost children. Those who work for large retail chains might create plans for every store in the chain and modify policies based on location, store layout and history of loss”.

Hiring a loss prevention manager is a simple and effective way to reduce the stress on management so they can focus on other more important tasks. You will be able to rest easy knowing that there is someone purely dedicated to reducing retail shrinkage. 

Errors can also be made by vendors. Although we like to think that human error doesn’t occur and people are totally honest, it’s not always true. It’s really important to not only double-check but triple-check all vendor documentation and paperwork to make sure everything is accounted for and in proper order and condition. 

The Balance Small Business reports “that most vendor fraud occurs when outside vendors come into a store to stock inventory”. Don’t be a victim of vendor fraud. In order to reduce vendor fraud you should…

• Check all items that have been delivered are correct
• Ensure pricing matches the paperwork and is all correct
• Make sure no items are damaged or broken 
• Ensure food or perishable items are within date

That being said, always make sure to triple-check paperwork and invoices to ensure there are no mistakes, errors, or discrepancies in inventory. 

Employee management software can be used to assist managers in quickly implementing these tips. All-in-one employee management software can reduce day-to-day friction and streamline daily operations so employees and managers can focus on the bigger picture—increasing sales, reducing shrinkage, and daily operational tasks. They’re also a great way to manage employees in the retail industry because retail employees are rarely behind a desk and constantly on the go. 

With an all-in-one employee management software, such as Connecteam, managers can reduce day-to-day friction and reduce shrinkage in retail in the follow ways:

• Improve your retail business’ internal communication with an employee directory and in-app chat. Send targeted 1:1 messages or reach an entire team in just seconds. If a suspicious character has been noticed by an employee, they can instantly send a message to the entire team to increase awareness.  
• Train and onboard new employees all directly from their mobile devices. Set up fully customizable courses with images, videos, and links. Require employees to take a quiz at the end of the training course to ensure they’ve retained the information. You can even create a one-of-a-kind theft prevention training course for new and existing employees to gain more knowledge on how to spot and deter thieves. 
• Daily tasks and checklists ensure that employees know exactly what to do when arriving to work. This reduces human error and can greatly reduce inventory loss and shrinkage. 
• Digital reports and forms is an easy and simple way for retail employees to report broken or stolen items. Employees can include pictures or videos for more efficient reporting. Reports can be exported for actionable data insights. For example, managers can have a better understanding if certain employees are prone to breaking items.

Not all employee management software is created equal. In fact, Connecteam checks all of the above boxes and then some! 

Common Inventory Shrinkage In Retail Types

There are several common types of inventory shrinkage in the retail industry. According to NRF, the most common type of shrinkage is “shoplifting [and it] has again surpassed employee theft as the leading cause of shrink for the fourth year in a row. Still, simple shoplifting continues to drop, down to 35.7% from its 2016 high of 39.3%”. 

But there are other common types of inventory shrinkage that retail industry businesses owners must be aware of.

• Shoplifting
• Employee theft
• Items that are broken in the store 
• Perishable items out of date
• Vendor fraud
• Receiving damaged items from vendors
• Human error 
• Return Fraud 

The Last Word on Shrinkage in Retail 

While it’s nearly impossible to eradicate retail shrinkage completely, it is definitely possible to reduce it. 

Shrink Reduction Strategies 

• Clarifying company policies
• Train employees on theft prevention
• Reduce human errors with checklists and reporting
• Frequent inventory audits
• Video surveillance
• Hire a loss prevention manager
• Triple-check your vendors

All of the above are effective shrink reduction strategies that you can implement to greatly reduce shrinkage in your retail business. 

And if we break down those shrink reduction strategies even more, it becomes that much easier to reduce shrinkage in retail.

Make sure employees are clear about the consequences of theft and make sure they are accountable for their actions. Additionally, train them on how to spot common scams and thieves. You can train employees and reduce human error with the use of an employee management software to digitize and simplify daily operations and inventory reporting. 

Frequent inventory audits keep employees on their toes and should be done on a daily basis to reduce shrinkage and inventory loss. 

Video surveillance, mirrors, and signage are a great way to deter thieves and employees alike from stealing inventory. It also provides management with peace of mind, as they know their store is being monitored 24/7. 

Lastly, by hiring a loss prevention manager you can trust that someone with the expertise and knowledge can implement strategies to reduce loss prevention and increase retail store security.