What is ‘known shrinkage’ in retail?

Effective stock management is crucial in the retail sector. However, it is common for inventories to show significant discrepancies between the actual goods in stock and the expected amounts. Learn more about known shrinkage and how to address it in your business management practices.

What is 'shrinkage'?

In the retail sector, the term shrinkage refers to the difference between the theoretical quantity of goods available in stock and the actual quantity in stock.

Shrinkage can have several causes, including shoplifting, inventory errors, customer returns, delivery errors, expired or damaged products, and more.

Shrinkage impacts retailers' turnover; hence effective management of it is crucial. Excessive shrinkage leads to significant losses for the business, while minimal shrinkage may indicate poor stock management or ineffective sales strategies.

Differences between 'shrinkage' and 'known shrinkage'

There are two types of shrinkage: unknown shrinkage and known shrinkage.

Unknown shrinkage

Unknown shrinkage, also known as unknown loss or unexplained shrinkage, represents the difference between the theoretical stock of goods and the actual quantity determined during an inventory. This discrepancy lacks a precise explanation and may be caused by various factors:

• Product theft: Shoplifting or internal theft (by customers and/or staff).
• Administrative errors: Data entry mistakes, inventory inaccuracies, stock management system errors, etc.
• Supplier order preparation errors.
• Labelling and checkout mistakes.
• Damaged goods: Items that have not been removed from stock.

Known shrinkage

Known shrinkages are voluntary reductions in the value of products by a retailer. They can result from the physical deterioration of products (by staff or customers) and/or price changes. The latter is a common strategy aimed at improving stock management, attracting customers, and increasing sales.

Known shrinkages can take various forms:

• Promotions: To attract customers and increase sales.
• Sales: To sell off end-of-stock items.
• Clearance sales: To clear stocks before the shop closes for good.

If known shrinkages are not properly managed, they can negatively impact a company's profitability. Excessive promotions or a poorly controlled breakage rate (loss rate), for example, can reduce the company's margins. This is why retailers need to closely monitor known shrinkages.

How can you reduce your known shrinkage rate?

Maintain inventory control

• Avoid overstocking or understocking to ensure high stock turnover.

Track breakage

• Record daily breakage using a computer system. This includes products abandoned on shelves by customers and damaged items.

Verify deliveries

• Supervise deliveries to ensure that products comply with orders.
• Note any products that are missing, damaged, broken, or close to their use-by date.

Make informed purchases

• Ensure that the volume of products ordered aligns with sales potential;
• Use IT tools to manage orders effectively. Establish a minimum stock level and ensure theoretical stock matches actual stock;
• Consider the calendar, including school holidays, public holidays, and seasons;
• Take into account consumption patterns (e.g., a Tuesday is less busy than a Saturday, and the last week of the month is less favourable for purchases);
• Monitor weather conditions, as some products are more sensitive to climate changes;
• Consider product prices and adjust orders based on promotions, discounts, and sales.

Optimise shelf layout

• Position items most likely to be stolen in well-monitored areas (e.g., close to checkouts or within CCTV camera range in supermarkets);
• Optimise merchandising by highlighting certain items;
• Do not remove products from shelves too early;
• Manage unsold products and items approaching their sell-by date by implementing price reductions

Set competitive prices

• Ensure a coherent pricing policy by comparing with competitors and analyzing your own margins.

Cater to customer preferences

• Understand your customers' habits and preferences to build loyalty by stocking products they like.