If you're looking to run a successful business, keeping track of shrinkage is crucial. Even if you're not in an industry with a relatively low profit margin, like grocery stores, it doesn't take much shrinkage to significantly cut into your profitability and potentially threaten the health of your business. When it comes to industry standards, there is so single "standard" amount of annual shrinkage that will apply to every business. However, there are a few averages recorded by industry researchers – so learn how you stack up.
Research from the National Retail Federation tracks shrinkage in retail and also tracks statistics related to loss prevention. Its 2017 National Retail Security Survey reports that retailers experienced an average of 1.44 percent inventory shrinking in 2017, up slightly from 1.38 percent in both 2016 and 2015.
However, that overall average doesn't tell the whole story. Only 9 percent of the businesses surveyed actually had a shrinkage rate close to the overall average (between 1.25 and 1.49 percent), with most businesses significantly higher or lower. Almost half of the businesses surveyed – 42.3 percent – had an inventory shrinkage of 0.99 percent or lower, while 23.1 percent of businesses had an inventory shrinkage of 2 percent or more.
This indicates that, while the overall average is somewhere in the middle, most businesses actually do significantly worse (or significantly better) than average. If you're doing loss prevention well, your business should be significantly below the overall average.
Not surprisingly, shoplifting and external loss are key factors in inventory shrinkage. While external loss was down in 2017 – accounting for 36.5 percent of overall shrinkage, compared to 39.3 percent in 2016 – it's still the biggest reason for shrinkage.
Coming in second is employee theft. It accounted for 30 percent of overall shrinkage in 2017 – a big drop from 35.8 percent in 2016, but still significant. Other factors affect shrinkage as well. Administrator or paperwork error accounted for 21.3 percent of inventory shrink, while vendor fraud or error explains 5.4 percent. The remaining 6.8 percent of inventory shrinkage was from unknown losses, the NRSS reports.
If the shrinkage in your business's inventory is significantly higher than the industry average, consider allocating more of your budget to loss prevention. Retailers spent an average of 0.40 percent of sales on security and loss prevention, reports the NRSS, so the investment to reduce shrinkage shouldn't take much out of your bottom line – not to mention, it should pay for itself.
Employee training is crucial for preventing shoplifting, explains RGIS Security, a firm that provides security services to retailers. Training your employees to recognize signs of likely shoplifters and requiring employees to greet customers in the store can help cut down on shoplifting. Employee screening can help you reduce employee theft, and auditing can identify pricing errors that would otherwise contribute to shrinkage from paperwork errors.
Ultimately, though, the best solution is the one that's tailored to your business – so consulting a security firm should net you the best customized solution.