Preventing Retail Shrink

No matter how good retailers are at product development, sales, and customer service, there are always hidden pitfalls that can undermine hard work and eat into profits. One large category of hazards facing retail merchants is known as retail shrink, which can refer to virtually anything that causes you to lose products from your inventory without compensation.

A proper strategy for dealing with retail shrink will intersect with many other areas of concern for merchants, including chargeback management. What causes retail shrinkage, and how can merchants engage in effective loss prevention efforts that protect their bottom line?

Ironically enough, retail shrinkage is a problem that just keeps growing. In 2019, losses from retail shrink hit a record high of $61.7 billion.

A lot of that is attributable to various factors that impacted brick-and-mortar retailers, but while e-commerce merchants don’t have to worry about their customers applying any literal five-finger discounts while they’re browsing, there remain plenty of ways for fraudsters to engage in “cyber-shoplifting” and other forms of fraud that can cause significant material losses to online merchants.

To prevent retail shrink, merchants need to identify where and why it is occurring within their organizations. In the case of e-commerce merchants, it is important to be able to recognize what is effectively retail shrink when it comes in nontraditional forms, such as cyber-shoplifting schemes that are based on chargeback fraud. When you know the proximate causes of your retail shrinkage problem, you can find the most immediate ways to address it.

What Is Retail Shrink?

The technical definition of shrinkage is when you have fewer physical items in stock than you have recorded in your inventory. In other words, something has caused you to lose inventory. There are several reasons why this might occur:

Shoplifting

Theft by somebody posing as a customer, also known as shoplifting, is the primary cause of retail shrinkage. In card-present environments, this takes many familiar forms, from organized theft rings who brazenly walk out of stores with stolen items in hand, to impulsive acts of concealment by otherwise loyal customers. In e-commerce, fraudulent chargebacks—also known as “friendly fraud”—must be understood as a form of cyber-shoplifting.

In these cases, the chargeback makes it as if the sale never occurred from a revenue standpoint, but the item remains in the cardholder’s possession, still missing from inventory.

Employee Theft

Employees are a frequent cause of shrinkage, either by stealing merchandise outright or by various other schemes. Online merchants may be immune to physical shoplifting, but they can still be harmed by untrustworthy employees

Return Fraud

Fraudsters have come up with many ways to obtain refunds under false pretenses, ranging from simple wardrobing fraud to complicated schemes where they create fake shipping labels in order to trick the merchant into thinking a product return has been sent. As with chargeback fraud, this can be considered shrinkage when it leaves the merchant with a loss of both revenue and inventory.

Vendor Fraud

Shrinkage can occur when vendors send out short or defective shipments or engage in other forms of fraud. This is not particularly common.

Administrative Error

Missed paperwork, data entry errors, and procedural deficiencies can lead to “paper shrinkage,” or worse, conceal actual shrinkage.

Other Losses

Shrinkage can also be caused by everyday operational errors, such as bottles getting knocked off of shelves and breaking, which must be written off as a cost of doing business. Note that losses due to fraud and chargebacks can never safely be written off.

What Is Loss Prevention?

Loss prevention is the practice of reducing shrinkage by preventing losses to inventory. In a retail context, this usually brings to mind security tags, guards checking bags at the door, and other visible shoplifting deterrents.

Theft, however, is not the only cause of retail shrinkage, and loss prevention efforts can touch on any of its various causes. Any organization dealing with significant amounts of retail shrink may find a positive value in investing in a loss prevention manager, or in contracting with specialists who can address specific areas of loss.

How Can Merchants Prevent Retail Shrink?

Theft, shoplifting, fraud, and cybercrime come in many varieties, and to fight them effectively merchants need to understand the specific threats they face and match them with the right strategies and resources. For e-commerce merchants, loss prevention requires that special attention be paid to chargebacks. Many merchants face a high rate of friendly fraud chargebacks, which can be fought and beaten if the evidence is on the merchant’s side.

Return fraud must be dealt with as part of an overall strategy that includes chargeback prevention. A generous return policy can help merchants avoid chargebacks, but it can also be abused by return fraudsters. The right approach must give each concern its appropriate weight.

Administrative error shrinkage requires a careful review of operating procedures in order to determine where the issues reside. It may be that you need to design better procedures, or it may be that more training is needed to get employees to follow the procedures that already exist.

If employee theft or vendor fraud is detected, a thorough investigation needs to be done to determine where you were vulnerable. You may need to start doing background checks, implement new internal controls like security cameras and delivery audits, or establish clearer policies around things like friends and family discounts.

Conclusion

Retail shrink and loss prevention are not just concerns for brick-and-mortar merchants. While e-commerce merchants may be immune to the primary vector for retail shrinkage, cyber-shoplifting is just as real and it can be a costly and devastating problem for merchants who let it get out of hand.

Merchants who don’t fight friendly fraud get retargeted and victimized again, leading to lost revenue, expensive fees, and rising chargeback rates that can carry severe penalties.

While payment fraud is often considered as a separate problem from retail shrink, it’s important for anyone taking a loss prevention perspective to consider how chargebacks can function as a form of theft, and how all forms of fraud contribute to the loss of inventory and revenue. A comprehensive plan for retail shrink prevention should incorporate proven strategies for fraud and chargeback management.

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