Understanding One of Commerce’s Oldest Challenges: "Shrinkage"

It is important for a business to establish what causes shrink within their organisation, which is sometimes referred to as ‘loss’ or ‘stock loss’. By understanding what causes shrink it can be understood how RFID technology can be applied to help address related issues. Many academics provide a narrow definition of shrinkage as an “unexplained loss of physical inventory.” Adrian Beck outlines his version of shrink, “The total value of all events and outcomes that negatively impact retail profitability and make no positive, identifiable and intrinsic contribution to generating income.”

Beck & Peacock consider how their theory surrounding typologies of loss are based around four categories called ‘buckets’ that make up the component parts of retail shrinkage. These buckets include External Theft, Internal Theft, Inter-Company Fraud and Process Failures. It is not uncommon for the titles of the ‘buckets’ to be referred to by different names but they are always commonly associated by similar descriptive definitions. Definitions for each of these four areas are simplified accordingly, the first two definitions being: External theft as “the unauthorised taking of goods by customers or other non-company employees”, and Internal Theft as “the unauthorised taking of goods by staff employed by the company”. As both of these definitions fall within criminal activity of theft, a legal definition can also be applied: ‘A person is guilty of theft if he / she dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it’ (Theft Act, 1968).

To understand the size of the problem you have to look at research data from likes of The Global Retail Theft Barometer and National Retail Security Survey. Although some of the largest studies of their kind completed in this area, the data obtained must be reviewed and interpreted carefully with the knowledge that some retailers simply do not record all crime that occurs within their organisation the same way. One retailer may choose to measure shrinkage differently from another retailer; one may choose to report shrinkage using the cost of their sales whilst another may report the retail price of their sales. Other variables must be taken into consideration that include where retailers report known, unknown or both shrinkage figures to arrive at their overall shrinkage result. Therefore, this has the potential to skew data significantly. 

“I have seen multiple reports and stats that vary significantly, some that have attributed losses caused by internal crimes committed by employees against their employer equating to 36.5% of the total shrinkage problem identified”, says RFKeeper Managing Director EU Gary Tattersall. External theft created the largest shrink which equated to 41.2% of the shrinkage problem globally. Inter-Company Fraud and Process Failures attribute the final 22.3%. It has been suggested that retailers lose an average of 1.38% of retail sales. Later blogs will explore how RFID will help protect your bottom line, drive sales and increase the customer experience.