5 Retail Shrinkage Terms All Retail RDs Should Know

5 Retail Shrinkage Terms All Retail RDs Should Know

August 17, 2016
Business Skills

by RDBA Contributing Editor Amanda Rubizhevsky, MPH, NC

Knowing some terms and information about retail shrinkage will help you understand the retail business more thoroughly and be able to connect with colleagues more deeply. Unfortunately, shrinkage is an issue that needs to be considered and taken seriously. Here are five terms to know.

Retail shrinkage: the portion of your inventory that gets lost or stolen. In retail, the average shrink is about two percent of sales, costing retailers more than $44 billion in losses in 2014, according to the National Retail Federation. There are four major sources of shrink: employee theft, shoplifting, paperwork errors or operations breakdowns and supplier fraud as well as unknown reasons. How are shrink rates calculated? Here’s an example: assume the value of inventory lost during a quarter equals $10,000. Sales during the same time were $500,000. The shrinkage rate is $10,000 divided by $500,000, which equals .02 or two percent. This essentially means that for every $100 in sales, you lost $2 in value from your inventory account.

There are two main types of shrinkage, known and unknown:

Known Loss: this is loss that can be identified, quantified and explained. It can include: damage, past sell by date, breakage, perishables not sold, customer returns, markdowns, theft, etc. Examples include: bottles falling and breaking, produce that goes bad or product that does not sell for full retail. All can be identified and recorded as known loss.

Unknown Loss: this is loss that cannot be specifically identified. A prime example is a shoplifter that goes undetected. Most shoplifting, employee theft, and vendor theft create unknown shrink, leaving no clear explanation or record as to how much loss actually occurred or why the inventory count does not match the store's book inventory. Unknown loss can go undetected for weeks, months, or longer, depending on how often the company takes physical inventory.  Inventory reconciliation process can identify unknown shrink, but never its cause. 

Fresh produce shrinkage: this comes in several forms and encompasses the produce that is brought into the supermarket and is not sold for any reason, both the edible parts (because they get bruised, moldy, etc.) and inedible parts (pits, stems, peels). The shrink for produce departments was the second-highest shrink by department (after the meat department) contributing to 16 percent of total store shrink. The average total shrink for produce departments was 4.8 percent of retail sales. To give some context, the report titled, “Estimated Fresh Produce Shrink and Food Loss in U.S. Supermarkets“ found that the average annual shrink rates for 2011–2012 for individual fresh vegetables in US supermarkets varied from 2.2 percent for sweet corn to 62.9 percent for turnip greens. Average fruit shrink was in a narrower range: 4.1 percent for bananas to 43.1 percent for fresh papayas.  

Compost: What is designated for compost at retail? The tops of carrots, outer leaves of cabbage, coffee grounds, wilted lettuce, broken eggs, rotten or ugly tomatoes. Some retailers take their waste to an anaerobic digester, which uses it to create compost and bio-gas (an energy source similar to natural gas). Other retailers send their scraps directly to compost. Because food waste is smelly, heavy, and expensive to haul, some major chains (Kroger, Whole Foods Market) operate their own anaerobic digesters.