In this blog I’m going to talk about how stock disappears in retail businesses and what you can do about it.

Your till system probably produces nice gross profit reports showing that Product Sales – Product Cost = Product Gross Profit. You might rely on that number as an accurate indicator of actual gross profit made. It isn’t.

It ignores all the other ways stock (and thus profit) can leak out the door – collectively termed “shrinkage”.

Shrinkage is a reduction in stock due to shoplifting, employee theft, or other errors.

If you run any sort of retail business, franchise or otherwise, then shrinkage should be a major preoccupation for you.

Estimates vary, but most sources estimate average shrinkage to be around 2% of sales. Doesn’t sound much, but in the context of the sort of profits most retailers make, it’s significant.

If your shop does £1m in sales at a gross margin of 50%, then losing potential sales of £1m x 2% = £20,000 actually costs you £20,000 x 50% = £10,000. That’s money you have spent on stock which has then disappeared.

There are four major sources of stock shrinkage in retail: shoplifting, employee theft, paperwork errors, and supplier fraud.

1. Shoplifting accounts for 40% of retail shrinkage. Shoplifting can be kids stuffing sweets in their pockets, but it also covers things like altering or swapping price tags, and moving items from one container to another.

CCTV and digitised tags that set off alarms can help reduce the losses, but until human nature undergoes a massive evolutionary shift, shoplifting will always be a problem.

2. Employee theft accounts for 37% of retail shrinkage. That’s a depressing statistic, especially for small retailers where the owner might like to bask in the illusion that it’s all one big happy family.

Employee theft can be straight stock pilferage or nicking from the till or can be slightly more sophisticated fraud involving discounts and refunds.

Vigorous and effective stock control plays a big part in discouraging physical theft, and proper review of POS reports will help to minimise the fancier stuff. Making it obvious (in a nice way) to employees that monitoring is always going on in the background is an effective way to discourage employee theft. Prevention is better than cure.

3. Paperwork error accounts for 16% of retail shrinkage. We’re talking here about things like simple pricing mistakes due to mark-ups or markdowns, or inadequately maintained stock records.

The key here is cycle counting your stock – set up a cycle of physical counts of different stock categories, one per month. That’s far more manageable then counting everything and far more effective then doing it once a year.

Errors in the stock records/POS system will then be identified before the inventory is sold and it becomes shrinkage.

4. Supplier fraud or error accounts for 7% of retail shrinkage. We see this generally where stock is checked and monitored by the supplier – a common practice in franchised convenience stores, for example.

Relying on the accuracy or honesty of suppliers is rarely a sound business practice. Always check the paperwork to ensure everything stacks up.

Remember that even the biggest supplier ultimately relies on humans one way or another to do the work, and humans make mistakes.

So there you have it – retail shrinkage is a massive issue but far too few small retailers pay it enough attention. Get some systems in place to tackle the problem and it will pay you dividends.

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Chris Martin

Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.