Shrink Busters: How IT Is Helping Retailers Fight Theft
Losses from shrink (lost, stolen or damaged merchandise) and transaction fraud continue to haunt U.S. retailers dealing with sluggish sales. Can new tools and real-time business intelligence help IT help an industry in trouble?
"Customers and employees steal both merchandise and money, employees provide sweetheart deals for their friends and family, and missed markdowns and other clerical errors create 'paper shrink,'" Rosenblum writes in the 2007 RSR report, "Winning Trends in Loss Prevention."
Nearly three-quarters of the retailers responding to the RSR survey, regardless of industry segment, size or company performance, agreed with the statement, "We can't trust our employees."
Richard Hollinger, a professor at the University of Florida, has tracked retail industry loss prevention and security practices since 1991. His annual "National Retail Security" survey is one of the best barometers of how retailers are managing loss prevention. According to the most recent survey data obtained from 151 retailers (including nearly all of the top 100), 47 percent of inventory shrinkage, which is the most of any type of loss, is attributable to employee theft. (The other categories are shoplifting at 32 percent; administrative error at 14 percent; vendor error at 4 percent; and "unknown" error at 3 percent.)
Hollinger estimates that employee theft alone costs retailers $19 billion a year, "a staggering monetary loss to come from a single crime type," he writes in the 2006 survey results. "In fact, there is no other form of larceny that annually costs American citizens more money than employee theft."
A December 2007 Aberdeen Group survey on retail losses found that 60 percent of retailers recorded year-over-year shrink of 1.75 percent of their total sales. (Hollinger's 2006 research pegged retailer's average shrink rate at 1.57 percent of total annual sales.)
Using retailer Target as an example, it's easy to see shrink's effect on the bottom line. Target's most recently reported annual revenues were around $60 billion. If it had a theoretical shrink rate of 1.75 percent of sales, loss due to shrink would cost Target roughly $1 billion a year.
In May 2007, Wal-Mart executives disclosed that the world's biggest retailer was experiencing an increase in shrink at its U.S.-based stores, though they did not elaborate on the causes. Retail analysts have estimated Wal-Mart's annual shrink at around $3 billion, which would be a little less than 1 percent of its $349 billion in sales.
