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March 20, 2023

The main cause of shrinkage, and what to do about it

Article written by: The Veesion team

Why is there sometimes a difference between a retailer’s theoretical and actual turnover? By identifying the causes of the problem, retailers can effectively reduce shrinkage.


>> Case Study: How to reduce shrinkage by 50% in your store?

Shoplifting: the leading cause of retail shrinkage

As a quick reminder, shrinkage is the term used in the retail sector to describe the loss of goods. This can be calculated during stocktaking. The shrinkage rate measures the difference between the sales turnover a retail business should have made and what was actually made. This rate can be calculated using the following formula:

  • (total cost of losses / sales turnover achieved) x 100.

What causes loss of goods? Experts consider the main cause of shrinkage to be shoplifting. What exactly is shoplifting? Shoplifting refers to any act of theft of items from a store. Shoplifting is an issue for all types of retail businesses, from supermarkets to pharmacies and even small convenience stores.

It’s difficult to establish the profile of the typical shoplifter. Shoplifters can be regular or occasional shoppers. There may also be employee theft, i.e. internal theft by staff members. Types of goods often stolen include food, cosmetics and DIY items. In short, anything may be stolen by anyone from a store.

Shoplifting is an offence punishable by law. Convicted shoplifters face a prison sentence of 3 years and a fine of €45,000. Despite the harsh penalties, there was a significant rise in shoplifting in 2022 according to data from the French National Institute for Statistics & Economic Research.

Other causes of shrinkage in the retail sector

Shoplifting is not the only cause of discrepancies between the book inventory and the actual inventory. Loss of goods may also be due to other factors, and not necessarily malicious intent.

  • There may also be cash register errors. A cashier may omit or incorrectly scan an item, or the item may be incorrectly labelled. Labelling errors are common during the shelf restocking process.
  • There may also be inventory errors. These may include, for example, incorrect entries during stocktaking operations.
  • Errors in stock management may also explain shrinkage. These may be the result of administrative errors (e.g. the wrong purchase order or accounting inconsistencies).
  • Breakage is also a factor that needs to be taken into account when calculating the loss of goods. This includes any breakage during transit and shelf restocking, as well as any accidental breakage by shoppers.
  • When calculating shrinkage, any loss of goods due to expiry of products should also be included

What solutions are available to combat shoplifting?

Shoplifting is indeed the scourge of any retailer. Many retailers therefore use security systems and devices designed to prevent theft (e.g. security gates and padlocks). But comprehensive security solutions do exist. They can effectively prevent theft and thus significantly reduce a store’s shrinkage rate.

Store security staff

The use of a security system can be seen as a strategy that relies primarily on the store’s employees. This requires recruiting security agents who, in addition to monitoring the store (e.g. entry, exit and checkout), are also able to apprehend suspected thieves.

The number of security guards required depends primarily on the size of the store. It should also be remembered that the attentiveness of security agents is not infallible. Therefore, in order to optimise their efficiency, it makes sense to also invest in surveillance cameras.

A video surveillance system

Surveillance cameras are permitted in stores provided they do not intrude upon the privacy of shoppers. This means they cannot be placed just anywhere. Moreover, it’s better to place cameras in specific strategic locations rather than everywhere throughout the store. It’s essential to place cameras near checkouts, especially self-checkouts.

Certain aisles are also more sensitive than others, such as those displaying alcohol or cosmetics. It may prove worthwhile to carry out an in-depth study of your store’s shrinkage to identify the type of goods that are most lost. The video surveillance system should then be reinforced in those specific departments accordingly.

Real-time theft detection software

The final tool that should be included in any comprehensive security system is theft detection software. What is theft detection software? Theft detection software detects suspicious behaviour, such as specific body gestures and movements that indicate a shoplifter is at work.

For example, Veesion recognition software is able to recognise the body gestures associated with shoplifting in real time. All you have to do is install the software on your store’s surveillance camera system. The software has its own special algorithm that can analyse video footage to detect any gestures typically made by shoplifters. If suspicious behaviour is detected, Veesion immediately sends a push notification to the store’s security personnel. The officers can act quickly to intercept the suspected shoplifter, and confront them with the video footage to get them to return the stolen items.

Shoplifting is the main cause of shrinkage. However, there are ways to effectively combat this scourge. Security personnel can be assisted by strategically positioned cameras optimised by Artificial Intelligence.

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