“Shrink” (the noun, not the verb) is the shorthand way of describing the gap between the amount of merchandise a business thinks it has and the amount it actually has.
In the retail food business, shrink has many causes. According to research conducted by the Food Marketing Institute and the Retail Control Group, about 36 percent of shrink is caused by theft and other “misdeeds.”
That means a clear majority of shrink is due to what the industry calls “operational” causes. That’s the kind of shrink grocery retailers and their suppliers have some control over. Larry Miller, president of Scottsdale, Arizona-based Smart Retail Solutions, whose job is to help companies establish operational best practices to limit shrink, puts it this way: “My focus isn’t on catching thieves, but on training store teams, implementing smart technologies and on profit realization.”
Operational causes of shrink include ordering, handling, cashier errors, rotation, damage, receiving, accounting, overproduction, underproduction, unsanitary production and failure to accurately plan or calculate inventory levels, according to FMI and the Retail Control Group. Inefficiences and/or errors in production planning alone account for 17 percent of all operational-caused shrink and 11 percent of all shrink.
Companies using formal production planning processes reported 6 percent lower perishable shrink than companies that don’t. Further shrink reduction – up to 14 percent – is realized by companies who reported using formal production planning methods combined with formal “known loss” recording practices.
On average, supermarket shrink loss ranges from 2.6 to 3.2 percent of retail sales, Miller says. Those numbers are “simply unacceptable” in today’s competitive markets, he adds. If stores can’t get their shrink losses under 2 percent, they need to undergo a profit improvement strategy that combines technology and best practice training to drive sales and shrink loss.
Still, shrink can be relative, says Jake Purvis, a principal in the Retail and Consumer Goods Practice division of management consultancy Oliver Wyman. Consider, for instance, a store that’s heavy on instore deli, bakery and prepared foods. By its very nature, that store is going to have higher shrink rates than a store that doesn’t have strong instore departments. In some cases, the shrink rate might even hit double digits. But Purvis says that’s not necessarily a problem.
“If you have top-of-the-line bakery, deli and prepared — the Wegmans of the world — you’re going to accept higher shrink rates because you can more than make up for it with higher margins,” Purvis says.
That said, there are still too many grocery retailers out there who can’t sustain their shrink percentages, regardless of what the particular number is, Purvis says. When shrink gets too high, Miller says, retailers have to price higher to achieve their margins. That makes it even harder to compete in an already ultra-competitive environment. “Store shrink loss has always been a big problem that robs retailers of the very blood that keeps their stores alive,” Miller says. “And today, the problem is more threatening than ever before - and it’s growing.”
A big reason for that can be traced to what Miller calls the “Amazon Effect.” As grocery shoppers gravitate more to online shopping, they feel more comfortable buying perishables without making a trip to a brick-and-mortar store. That forces many retailers to adjust their inventories in ways they haven’t before. “As product movement slows, spoilage is a natural result if it’s not purposefully abated,” Miller says. “All retailers will face the growing challenge of controlling shrink loss without hurting/controlling sales.”
Shrink is a significant problem for instore bakeries, says Jolene Frank, sales director for Innoseal Systems, whose InnoSeal Professional Sealer is a tamper-evident bag-closing system that uses a resealable tape and paper combination to seal products for a variety of industries, including instore bakery.
The InnoSeal system can help retailers cut those losses in many ways, Frank says. For one, Innoseal closures create a tight seal, helping to prolong the shelf life of instore bakery products. Innoseal seals are along tamper-evident — there’s no chance of someone taking a cookie out of a bag, resealing it and no one finding out, she says.
The system is also effective at reducing shrink in less expected ways. Putting twist ties on bags manually at the instore level, for instance, takes a lot of time. Also time-consuming, instore bakery operators tell Frank, is the process of checking product throughout the day to make sure manually-tied closures are still properly tied. If they’re not, product must be discarded. With the Innoseal system, product stays tied and significant time is saved throughout the process.
“One manager told me that after switching to our seals, she and her employees were able to spend a lot more time on the floor with customers,” instead of sealing and checking bags, Frank says. And that in itself helps prevent shrink: if employees are spending more time on the floor, there are fewer opportunities for customers to steal or tamper with product.
Shrink can occur at any of the main points along the supply chain, Purvis says. Is the equipment in the distribution center up to snuff? Have the DC workers been properly trained? Are trucks keeping product at the right temperature en route to the retailer?
“You always have to look at all of the points of decision along the supply chain,” Purvis says. And after you look at all those points, you need a single strategy that ties them all together, or as Purvis phrases it, “a single source of truth to guide all the steps.” Too often, retailers and their suppliers have a good understanding of one or a few links in the supply chain, but not the entire chain.
For many retailers, Miller says, the first step in reducing shrink is understanding that there’s actually something you can do about it. “Too many companies report shrink more than prevent it,” he says. “Stop accepting shrink loss as a cost of doing business!”
Fresh perimeter risks
Retailers who don’t proactively address operationally caused shrink loss and sales and profit erosion caused by competitive pressures will have their very survival threatened, Miller says. And the threat is most acute in the fresh perimeter. “These categories are by their very nature ‘perishable.’ Deli and bakery are particularly challenged to have excellent variety, excellent customer service and interaction and controlled shrink loss. Retailers must train their store teams to first understand best business practices assorted with inventory productivity, and second, to practice those operational practices that mitigate shrink loss.”
The failure to train store employees successfully is, with inventory control problems, the top cause of operational shrink loss, Miller says. One common error in battling shrink, he says, is to think that high-tech solutions are always the best ones. “It’s perplexing to me why retailers layer on technology — so-called BI (Business Intelligence), analytics, graphs, charts, spreadsheets — thinking that technology will solve shrink losses,” he says. “Certainly technology can help, but only if it’s used properly and consistently. Use it to actually help managers to run better stores. Too many of today’s technologies and analytics are data rich and solution poor.”
“Big data,” CAO (Computer Assisted Ordering), BI analytics programs and other technology solutions have all evolved in recent years and continue to change to fit customers’ needs, Miller says. But they are not, in themselves, solutions. They can create a false sense of security if they aren’t overseen by properly trained managers and implemented by well-trained employees. “I believe we must have a ‘people first’ culture,” he says — a culture in which “excellent people are hired, then trained, then enabled and finally held accountable.”
Purvis agrees. There are excellent technologies available to help retailers and suppliers reduce shrink — predictive analytics, for example, which leverages AI and other technologies and has been “growing by leaps and bounds” in recent years, he says. “It helps retailers have a much more robust and realistic view of demand. Shrink is just a misunderstanding of demand.”
But technology can’t be the only solution, Purvis says. Technology can’t prevent the warehouse from putting a carton of watermelon on top of a crate of tomatoes, rendering the latter unsaleable. “At the end of the day it’s still a very human business,” he says. “Technology can’t solve everything.”
To make sure all those humans are on the same page, many retailers are now partnering with their suppliers on joint forecasts and other measures to help ensure a seamless flow through the supply chain. Instead of the defensive “protect yourself” mindset, it’s a collaborative approach to moving product faster and extending shelf life.
“I’m excited to see how that trend develops,” Purvis says.