Turning retail shrinkage from challenge to opportunity.
The concept of ‘retail shrinkage’ – the loss of product from causes other than sales – is seemingly innocuous, but in reality, it describes an epidemic problem, caused by not only administrative errors, but also shoplifting and employee theft. These three factors are costing retailers in the United Kingdom losses of approximately £8 billion a year, more than in any other European country. And retail shrinkage shows no signs of slowing down: it has already increased 33 percent since 2018, and shoplifting was up by a startling 25 percent year-on-year in 2023.
With these figures, it is not surprising that retail shrinkage is quickly becoming one of the top concerns for industry leaders. However, while the problem is clear, what to do about it is less so.
Retail shrinkage is not a straightforward issue, and it negatively impacts both the top and bottom lines of the industry. There is good news though: there are ways in which retailers can tackle offenders and reduce losses.
Getting to grips with the complexity of retail shrinkage
The UK’s retail sector is made up of a variety of businesses, each with its specific challenges. However, retail shrinkage affects everyone, and over the last year has risen up the agenda in terms of importance. It is a multi-layered challenge that requires deep understanding if it is to be tackled. The reasons behind its growth fall into an ever-growing array of causes, from process and control failures to external and internal theft, damage, and waste.
These sources of retail shrinkage are currently being compounded by several other factors. Perhaps the most obvious is economic headwinds, as inflation and the cost-of-living crisis put both retailers and consumers under financial pressure, affecting shrinkage rates and security investments.
But there are also other contributory factors at play, both internal and external to retailers. Within the industry, there are some ineffective loss prevention strategies, as retailers with outdated or inadequate approaches struggle to keep pace with changes such as shoplifters’ evolving tactics. And the adoption of new checkout technologies can have unintended consequences. For example, the rise of self-service checkout and ‘shop & go’ capabilities, which can introduce new vulnerabilities and offer guilt-free and more convenient ways of shoplifting.
Meanwhile, we’re also seeing the effects of factors from outside the industry. One is the UK Government’s Anti-Social Behaviour, Crime and Policing Act 2014, under which shoplifting below a value of £200 was re-categorized as anti-social behavior, meaning offenders are more likely to be fined without a court appearance – thus reducing the perceived risks. Another is the rise of organized crimes through social media, with social platforms introducing a new layer into organized retail crime (ORC), and shoplifters exchanging methods via blogs and posts to glamourize and promote theft.
The consequences for British retailers
Regardless of the reasons behind retail shrinkage, the bottom line is that it has a big impact on UK retailers. It has reduced collective annual turnover year-on-year 1.1 percent, a burden that mostly falls on greengrocers and supermarkets, but also specialist fashion shops and department stores.
This loss of revenue has caused some retailers to save costs through staff reductions, which can have knock-on effects on service quality, customer experience and brand reputation. And when stock runs out because of shrinkage, customers may go elsewhere. Overall, it’s estimated that UK consumers are ‘crime taxed’ an average of 6p extra on every product they buy due to shoplifting.
Alongside the effects on customers, shrinkage also impacts retailers’ operations. By causing staff to verify stock levels manually and replenish the affected shelves
on a regular basis, it can put downward pressure on operational efficiency. Additionally, dealing with damaged or expired goods contributes to waste, further affecting overall efficiency.
Shrinkage can also be associated with violence, exposing staff to risks: Reported instances of violence and abuse in UK shops have risen by around 50 percent in the past year to around 1,300 incidents a day, leaving shop workers feeling vulnerable and anxious. Finally, the higher waste and product obsolescence caused by shrinkage have a negative impact on the retail industry’s sustainability and ethical responsibility.
How to tackle retail shrinkage
One thing is obvious: retail shrinkage is a big issue for UK retailers, and it needs to be urgently addressed. Here are four ways to go about it.
- Work as a unit: introducing collaboration and industry partnerships
A united industry is better equipped to tackle shrinkage. Closer collaboration around this challenge between retailers, technology providers and industry associations fosters an environment where insights are shared, and best practices are collectively refined.
- Raising awareness: a collective responsibility
From front-line staff to senior executives, spreading awareness about the impacts of shrinkage and the role everyone can play in prioritizing actions and preventing causes, is crucial in tackling losses effectively.
- Navigating regulation: striking a balance between security and compliance
Understanding the regulatory framework surrounding retail shrinkage is imperative. Advocating for policies that strike a balance between compliance and security will help to create an environment where retailers can address shrinkage proactively without coming up against unnecessary barriers.
- Advancing technological innovation: paving the way for the future
The continued integration of cutting-edge technologies into the retail landscape with play a major role in reducing and preventing future losses from shrinkage. Artificial intelligence (AI), data analytics and advanced surveillance systems promise to make loss prevention strategies more effective and efficient. GenAI offers solutions to detect unexpected transactions, generate proactive alerts for product expiry, and help retailers forecast more accurately to optimize inventory levels. And computer vision technologies can add a further layer of security to frictionless shopping models including self-checkout and shop & go.
Establishing a solid foundation
Successfully tackling retail shrinkage requires the right policies and processes, alongside people to execute them, equipped with the appropriate technology and resources. With these foundational elements in place, the retail industry in the UK will be able to move towards a future where retail shrinkage is not only a challenge to tackle, but also an opportunity to become stronger and more resilient to future obstacles.
For a list of the sources used in this article, please contact the editor.
By Phil Matthews
www.cognizant.com
Phil Matthews is Vice President & Sector Head Retail, Consumer Goods, Travel & Hospitality at Cognizant. Cognizant engineers modern businesses. It helps clients modernize technology, reimagine processes and transform experiences so they can stay ahead in today’s fast-changing world.