To properly understand shrink, its scope and how to fight it, the food industry first has to take a broader look at the term itself, says Larry Miller, president of Scottsdale, Arizona-based Smart Retail Solutions.

“The word ‘shrink’ actually clouds or distracts from the true position,” he says. “The better question to ask is, ‘What is causing my gross margin not to be realized?’ When you put ‘shrink’ in its own unique bucket, its operational causation is often missed. It loses its magnitude.”

Instead of helping its customers to just reduce shrink per se, Miller says, his team at Smart Retail Solutions focuses on the positive, measured results of profit optimization by preventing shrink before it happens. Retailers need to reduce the need for reactive behaviors by using a combination of smart analytics and preventative behaviors.

“Our new mantra is ‘profit realization through shrink mitigation,’ which takes in the entire supply chain,” he says. “What causes a retailer to miss its gross profit margin? That takes in all the factors. Maybe it’s not handled well and it’s not a quality problem or a traceability problem.”

Whether it’s a commissary, a foodservice distributor or a supermarket, the key to reducing shrink is inventory turns optimization, Miller says. Focus on the inventory you truly need: you may not need 30,000 SKUs, 25 types of sandwiches. Focus instead, he says, on the top sellers, the items that are in high demand and drive your business.

And be market-specific: focus on what customers want in this store. That will help you turn merchandise as quickly as you can, thus avoiding the potential for shrink.

“Profit realization is the topic,” Miller says. “When you do that, then the folks in loss prevention or asset protection become operational partners with the business leaders, the merchants, the operators. Loss prevention no longer stands alone or on the side as an old-line security department.”

Commissaries and central kitchens: potential perils of centralization

When it comes to shrink, one issue that can make commissaries, central kitchens and other off-site facilities particularly vulnerable to shrink is, ironically, one of the very things that makes them efficient and useful in the first place.

“My concern with commissaries is that it might centralize the quality, but it can de-personalize it also,” he says. “It can mean that people in the store are nothing but stocking clerks. My concern is that companies that don’t train their store teams to create the business as an experiential culture and therefore don’t train people to serve people. ‘We put it out, that’s what we do. If people buy it, they buy it.’”

Dawn Gammon, a Smart Retail Solutions partner, adds that one potential problem with the commissary/retailer model is that profitability can be “all about the commissary, not what’s happening in the store.”

“Store teams can become immune to losses. You don’t have the same ‘shrink sensibility’ as if you were producing the product yourself,” Gammon says. “You don’t have a personal connection to it, or ownership. It’s a condition to be considered every day in every store.”

That inherent problem can be mitigated, however, if the commissary or central kitchen is owned by the retailer itself, she adds.

“If the retailer actually owns the commissary, then it’s not a third party,” she says. “Then they’re both in the boat together for the profit goals of both the commissary and the store.”    

Industry leaders set the bar high

“The presence of stores like Sprouts and Lucky’s has made other supermarket operators up their game,” Miller says.

But as a whole, from the standpoint of maximizing their gross market margins, most companies are doing the same thing they did five years ago, Miller says.

shrinkage photo

“They’re trying to use tech in better ways, but a lot of the times, that tech is as distracting as it is beneficial.”

For success in growing sales and doing all the other things necessary to maximize margins, it all comes back to people, not technology, Miller says.

He offers the example of the owner of a mom-and-pop bakery shop. That baker/owner wouldn’t get involved in the business in the first place if she didn’t love it, and as a result, you can be pretty sure that she pays close attention to quality, bake time, inventory turns, how it’s displayed and many other things. For shrink mitigation, it means she produces the product that is in demand, turns quickly and has little chance of winding up reduced or in the dumpster.

“Never underestimate personalization of service,” Miller says. “I think in many cases we really miss the boat on personalization of service and CSE (customer service excellence). The guy who loves to bake gives more attention to quality, display and actually serving his customers than a 50,000-square-foot supermarket might.”

Another factor influencing shrink and the larger issue of profit margin optimization is what Miller calls the “Amazon effect,” something that applies not only to the online behemoth but to Walmart, Target, dollar stores and other non-traditional grocery channels.

The effect all of these non-traditionals have is that, by adding more and more food options to what they sell, they’re making supermarkets operate smarter to avoid profit loss due to shrink and other problems, Miller says.

“They’re stripping out center-store sales and will continue to do so,” he says. “But you can’t do that with very fresh/perishable items like bananas, ground beef or lunchmeat.”

Miller believes that supermarket operators need to get over the idea that incremental change is good enough in the Age of Amazon/Walmart, etc. It’s not enough, he says, to put out a few signs, or to reorganize the order of items in a case, displaying something on the side instead of at the front.

“Retailers need to think boldly, innovate and find ways to excite the shopping experience. There’s a lot of talk about experience. What are they going to do to excite the customer every time the customer comes in?”

A strategic approach

Forward-thinking retailers, Miller adds, take a strategic look at managing shrink and profit optimization.

That’s especially true on the perimeter, which is so crucial to the success of today’s stores due to the focus on healthy eating and shrinking of center-store. And, of course, due to the perishable nature of so much of what is sold in the perimeter, managing shrink needs to be front and center to any strategy.

“When you start talking about perimeter sales, profitable selling has to be the focus of every single person in the business from the newest employee to the most senior. Every teammate must be trained to understand and practice the concepts central to profitable selling.”

When you train your team to think about shrink not as an expense but as unrealized profit, everything changes, Miller says. When you change your everyday business culture to naturally operate in profit-centric ways, shrink comes down naturally, almost automatically.

By using a combination of augmented-intelligence software that pre-analyzes data, determines the root causes of profit loss and operational causation, Smart Retail Solutions is creating profitable selling cultures for retailers, Miller says.

“The whole store analytics system takes in all relevant data points and merges them into one business intelligence system that automatically correlates relevant factors, determines what caused the sales and/or shrink loss and what behaviors are needed to correct operating deficiencies,” he says.

There are definitely ways to beat year-over-year sales and profit metrics. When companies want to set the shrink reduction bar high for their stores, commissaries, central kitchens and other facilities that supply prepared and other foods to grocery, they just need to make some fundamental changes, Miller says.