Cut your losses: how to tackle retail shrinkage in 2024

ALEX GRUBER

Written by Rajvinder Uppal, Brittojegan Mariapaulraj and Amit Kumar Gupta at Cognizant

Retail shrinkage is an innocuous term for an epidemic problem: the loss of unsold inventory through shoplifting, return fraud, employee theft and admin errors. It’s estimated to cost retailers in the UK some £8 billion a year – the highest in Europe. And it’s a problem that’s increased by around 33 per cent since 2018, largely fuelled by shoplifting.

Hardly surprising then that retailers are increasingly concerned about shrinkage. But while the problem is clear, what to do about it is less so. Of course, it’s a highly nuanced issue that negatively impacts both the top and bottom lines. However, the good news is that there are opportunities for retailers to minimise the resulting losses.

A growing concern

The UK’s retail sector is a dynamic mosaic of diverse businesses, each facing its specific challenges. While retail shrinkage is just one of these, it’s an issue that has risen rapidly in the past year or so. It’s a multifaceted problem that demands a comprehensive understanding of the specific loss source to respond from an ever-expanding array of causes, ranging from external and internal theft to process/control failures, wastage, damage and a few other drivers that are harder to pin down.

These sources of retail shrinkage are currently being compounded by several other factors. Perhaps the most obvious is economic headwinds, as inflation and the cost-of-living crisis put both retailers and consumers under financial pressure, potentially affecting shrinkage rates and security investments.

But there are also other contributory factors at play such as ineffective loss prevention strategies, as retailers with outdated approaches struggle to keep pace with changes such as shoplifters’ evolving tactics. For supermarkets specifically, the adoption of new checkout technologies is having unintended consequences. The rise of the self-service checkout, for example, offer guilt-free (and more convenient) ways to shoplift.

Meanwhile, we’re also seeing the effects of factors from outside the industry. One is the UK Government’s Anti-Social Behaviour, Crime and Policing Act 20144, under which shoplifting below a value of £200 was re-categorised as anti-social behaviour, meaning offenders are more likely to be fined without a court appearance – thus reducing the perceived risks. Another is the rise of organised crimes through social media where shoplifters exchanging methods to glamourise and promote theft.

Loss adjusting  

Whatever the causes, the effect of rising retail shrinkage is haunting UK retailers for several reasons. One is the financial impact, which is to reduce the industry’s collective annual turnover by 1.1 per cent – a burden that falls mainly on supermarkets but also affects fashion retailers and boutiques.  

This loss of revenue has caused some retailers to save costs through staff reductions, which can have knock-on effects on service quality, customer experience and brand reputation. And when stock runs out because of shrinkage, customers may shop elsewhere. Overall, it’s estimated that UK consumers are ‘crime taxed’ by an average of £0.06 on every product they buy because of shoplifting.

Alongside the effects on customers, shrinkage also impacts retailers’ operations. Asking staff to verify stock levels and keep an eye on products puts a downward pressure on overall service and efficiency.

Shrinkage can also be associated with violence. Reported instances of retail abuse in the UK has risen by around 50 per cent in the past year to around 1,300 incidents a day.

Tackling the problem

An effective shrinkage management plan requires the orchestration of an ecosystem where a retailer clearly defines, communicates and executes targeted actions across the organisation. And tackling shrinkage successfully will require the right policies and processes, together with the right people to execute them – empowered with the right technology and assets. With these building blocks in place, the UK retail industry can progress towards a future where shrinkage is not merely a challenge to overcome but an opportunity for transformative growth and resilience.

Written by Rajvinder Uppal, Brittojegan Mariapaulraj and Amit Kumar Gupta at global technology solutions firm Cognizant; cognizant.com

4 ways to reduce shrinkage

1.  Collaboration

A united industry is better equipped to tackle shrinkage collectively. Closer collaboration around this challenge between retailers, technology providers and industry associations fosters an environment where insights are shared, and best practices are collectively refined.

2. Spreading awareness

From front-line staff to owners, spreading awareness about the impacts of shrinkage and the role everyone can play in prioritising actions and preventing causes is crucial in tackling losses effectively.

3. Balancing compliance and security 

Understanding the regulatory framework surrounding retail shrinkage is imperative. Advocating for policies that strike a balance between compliance and security will help to create an environment where retailers can address shrinkage proactively without coming up against unnecessary barriers.

4. Shaping the future 

The continued integration of cutting-edge technologies into the retail landscape with play a major role in reducing and preventing future losses from shrinkage. Artificial intelligence (AI), data analytics and advanced surveillance systems promise to make loss prevention strategies more effective and efficient. GenAI offers solutions to detect unexpected transactions and help retailers forecast more accurately to optimise inventory levels.