In simple terms, retail shrinkage is the difference in the value of stocks as per books and the value of actual stock at the store on any given date.

While some of the issues are beyond the control of the retailers, the subject of shrinkage is within the control to a great extent. This is particularly important to large grocery chains who can’t afford to have sophisticated RFIDs and sensors considering the nature of products being sold predominantly.

There is no other better time than now to look at this critical subject with lot more seriousness and priority as it is the right time for consolidation. In other words, it is about building a sustainable business – chase for revenue and profits is the mantra and not chase for valuation.

As per reports published by a few other journals, the total retail shrinkage in India in 2008 was reported as anywhere between three per cent to four per cent on sales and this percentage itself is double the ones the western counterparts report. If we consider only the grocery chains, the shrinkages and pilferages would be even higher.

SHRINKAGE – CAUSES:

Shrinkages at the stores could be on account of any one or combination of the following-

 Process Lapse:

There could be a number of lapses that lead to shrinkages at the stores. Some of the main ones could be –

• Lesser Receipts at the stores against what is transferred out of the Distribution Centre.  

• Where receipts are not verified 100 per cent on receipt, this cannot be ruled out

• Understatement / accounting of damages at the stores

• Stores may have a tendency to understate the damages including handling damages that are destroyed at the stores itself. This will result in shrinkages for those SKUs which were not removed from the books as damaged stocks. 

• Understatement / accounting of dump of fruits and vegetables

• Understatement of dump is quite common as it reflects the operational efficiency of the store; such under accounted products get reported as shrinkages when stocks are verified.

• Non updation of manual bills into POS

• Delayed or non accounting of returns made to the DC / Vendors from the stores

• Non-updation of consumer promotions in the system leading to manual intervention at the POS

• Other cases which warrant manual intervention at the POS as manual intervention may result in wrong billing too.

As we notice from the above, some process lapses contribute to real shrinkages while others amount to reporting of artificial shrinkages. 

System Lapses: 

• Poor quality of scanners or stickers and duplicate SKU code would force manual intervention at the POS. Manual intervention may also amount to errors and contribute to shrinkages

• Other system lapses due to which book stocks are reported wrongly

Vendor Fraud:

This cannot be ruled out. Short supply by the vendor as against the quantity in the GRN would certainly amount to shrinkages at the Warehouse / DC itself. Moreover, any such malpractice adapted by DSPs (direct supplies to stores) would also amount to shrinkages.

Employee Fraud:

This is one of the common means of fraud causing shrinkages. The following could be a few types of malpractices–

• Improper Invoicing – either billing lesser quantity / non billing of certain products/ billing products with lower prices as against actual selling price of products sold

• Theft by employees

• Frauds in the case of products exchanged by customers

• Fraudulent practice in handling home deliveries

In the US alone, almost $50 billion dollars are lost annually as per the report released by US Chamber of Commerce. As per another statistical report in the US, almost 45 per cent of the employees admitted to have stolen stocks atleast once.

Customer shop lifting:

This is yet another common problem causing shrinkages. Generally, specific products including beauty products, skin care products, razors etc are more prone to such shop lifting by customers.

It is also extremely difficult in controlling the customer theft (especially women) in apparel stores, though some measures are being taken by a few retailers based on their experience and learning.

SHRINKAGE – CORRECTIONS:

In simple terms, corrective steps taken at the right point of time would certainly help the retailers mitigate the risk to a greater extent and reduce the losses on account of shrinkage. The following could be some areas where best practices need to be deployed. 

• Having clear SOPs for operations at stores

• Ensure adherence to the SOPs

• Avoid or minimise manual intervention at the POS

• Ensure proper training to the staff 

• Educate the staff on the importance of reduction of shrinkages

The above would certainly help in minimising the shrinkages happening on account of process and system lapses. 

The following corrections / measures are required to control shrinkages happening on account of other causes 

• Proper physical verification of stocks

• Proper audit system in place at DC as well as stores including surprise verification of receipts and dispatches.

• Deployment and monitoring of CCTV at the stores

• Employees frisking

• Background check on staff

• Rotation of employees

• Other relevant measures

SHRINKAGE – CONTROLS:

While having proper SOPs and processes in place would help in addressing this subject, controls could be through various means and a combination of the following measures would certainly help in reducing the shrinkages.

•       Setting up a dedicated team – internal / external- to handle stock checks at each of the stores periodically – where initially each store is covered atleast once a month

• Creation of Stock Check Squad that would visit each store every day and verify a few SKUs on a random basis

•      The above squad would also handle a surprise verification of receipts at the Stores / DC

• Monthly / quarterly audit of the entire operations of the stores – adherence to the laid down processes

• Closely monitoring stores with huge shrinkages

• Closely monitoring and analysing category of products that contribute to huge shrinkages

The above basic control measures would help the management address this subject better – proper interaction with correct data on hand with the respective stake holders in the company would go a long way in reduction of shrinkages.

It is very relevant to mention here that a proper organization structure is required to address this important subject.

RECOMMENDATION:

It is highly recommended that retailers in India work together with an association like RAI and address this issue. The immediate need is to create, maintain and share the negative data base of employees involved in theft and other malafide practices. Such a measure when put in place would send the right signals to all concerned.  

WRAPPING –UP: 

Retailing is such an interesting industry as you directly interact with the customers. It is all about many RIGHTS @ RETAIL – Right place, Right Cost, Right Products, Right Price, Right People and Right Processes! Where you buy on credit at a good discounted price and sell for cash with good margins, Retailing is a good business to be in.

Having said this, there are definitely some external factors that may affect the business including huge rentals, power deficit, lower foot fall, falling incomes, economic slowdown etc. While some of these are external and cannot be controlled, SHRINKAGES and PILFERAGES could certainly be controlled.

A good retailer will certainly attempt to do it before shrinkages shrink the business.