The retail industry has a unique set of challenges from cybercriminals to individual shoplifters when developing a loss prevention plan. Recently, these threats have increased to an all-time high and account for over $61 billion in losses across the entire industry. Because of this, you are devoting more resources to prevent shoplifting and fraud in order to reduce inventory shrink.
What Is Retail Loss Prevention?
Retail loss, also commonly called inventory shrinkage, occurs when items from your inventory go missing. The majority of your inventory shrink will be from preventable losses. Learn More >
There are four main reasons for inventory shrink:
- External Theft
- Internal Theft
- Operational Error
- Damaged Merchandise
As you can see, retail loss prevention focuses on more than just theft. Some of these reasons happen accidentally, while others are quite deliberate. Each is described below in greater detail to give you a better understanding of how losses occur.
External Theft
On average, over a third of retail losses are due to external theft.
- Shoplifting
The majority of external theft is due to shoplifting. Larger companies experience more frequent rates of shoplifting than smaller ones.
There is no distinct profile for a shoplifter. They can be young or old, male or female, or from a range of ethnic backgrounds.
Shoplifters act like customers and often work in pairs. Some are bold enough to steal items when they know they’re being watched. They are also known to commit return fraud, exchanging stolen items for cash. When confronted, a tiny percentage results in dangerous situations, but you still need to know how to handle them while protecting your customers and employees.
- Product Shipments
Stolen shipments or packages off a loading dock are rare. These are often committed by organized retail crime (ORC), a ring of criminals that work within a specific area or region. These criminals will also act like customers to find security weaknesses and work as a team to create diversions.
- Vendor Fraud
Vendor scams pose as a legitimate business then disappear after they receive payment. Other forms of vendor fraud are inflated prices and bribery to gain an unfair advantage. These incidents are typically dishonest employees operating on their own.
Internal Theft
Employee theft is surprisingly common. It accounts for nearly half of all shrinkage. There are four types to look for:
- Inventory: Employees that steal from your inventory will keep it for their personal use or sell it.
- Services: Theft of services is when an employee misuses company services or asks other employees for special favors in order to avoid paying for them.
- Cash: Retail is a cash-heavy business, making it a prime target for dishonest employees to steal funds from registers, petty cash, and safes. They will also overcharge customers or intentionally fail to register a sale then pocket the money.
- Data: Theft of data includes customers’ personal information and your proprietary trade secrets. This type of theft can expose you to costly legal troubles, as well as a loss of market share due to a rise in competition.
To really get a handle on retail theft you need to examine your store layout and how it’s managed. Learn More >
Operation and Stocking Errors
On average, administrative errors account for 20% of inventory losses. Some of the most common mistakes include mislabeling merchandise, overpaying vendors, or marking products with the wrong prices. These errors are primarily due to improper training, carelessness, exhaustion, or outdated point of sale systems.
Misplaced products in the store or storeroom can also contribute to your losses. Typically, these items go unnoticed for so long they become obsolete and turn into dead stock.
Damaged Merchandise
Warehouses can be dangerous places. On average, 5% of all warehouse workers experience an injury on the job. Some of these are serious, resulting in long-term disabilities. Workers’ compensation and damaged merchandise become a significant expense.
Damaged merchandise also results in replacement costs and employee time spent receiving and shelving it. Another thing you have to consider is filing an insurance claim to cover the costs of damaged items.
Accidentally selling damaged merchandise becomes a major hassle for customers. Also, handling returns is a time-intensive transaction that requires your best customer service to regain each customer’s trust. Plus, your vendors may have a narrow window of time for returns, leaving you with a loss on your books.
A Positive Return on Your Investment
Loss prevention will not only preserve your profit but also give your customers peace of mind. Your customers will feel safe and secure knowing that their personal items and credit card information are being protected in multiple ways. Overall, you stand to gain a positive return on any investment you make toward loss prevention. Learn More >
Inventory Loss Audit
Addressing loss within your business starts with an audit of how much inventory was lost and why. An audit is one of the best tools to show historical data, as well as future impacts on your business. This will be the foundation of your retail loss prevention plan and guide you through areas that really need your attention.
Building Your Audit Checklist
When performing an audit, you should remember that each store has specific concerns that depend on location, foot traffic, and the number of employees. Your audit should examine each location individually. Then you can combine the results after it’s completed.
Here are some general categories to consider for your checklist:
- Physical Security
From the store to the warehouse, each location has multiple concerns regarding access and security. Do you have a surveillance system in place? Who has access to secured areas? Surveillance and employee access should be examined in greater detail when creating your checklist. Do you need added security, such as locked cages in the storeroom or an alarm system?
- Handling Inventory
Shipping and receiving play a big part in your operations. Errors often occur when this process is done manually. Physical inventory counts also play a significant role in managing stock levels and shrink. Another problem area when handling inventory is in the showroom. Are items properly placed and facing forward? Is there a way to report damaged merchandise?
- Managing Cash
Examining how you handle your cash goes beyond scheduling cash drops and determining who has access to the safe. Your point of sale maintains all of your data and provides accurate accounting of each transaction. This makes cash register audits easier to schedule and complete on time. Do you have restrictions or specific permission set up for employee access to the POS? This plays a significant role in limiting access to the cash drawer and safe.
- Employee Training:
Do you have a set of written policies and procedures? Employees are more apt to follow guidelines when appropriately trained. Conducting open discussions on retail loss prevention will clear up any questions or concerns that your employees may have. Some other things to consider are background checks, voiding transactions, taking returns, and customer service policies. Learn More >
Retail Loss Prevention Team / Officer
For small businesses, the responsibility of loss prevention usually falls on the owner’s shoulders (or general manager’s). Lager retailers typically have a team devoted to loss prevention, led by a loss prevention officer.
Whatever your situation may be, you can conduct an audit and implement the changes necessary to understand where your business stands. You can also hire a consultant or firm specializing in loss prevention to perform a complete audit. This may be a better option if it’s your first time doing one.
Creating a Loss Prevention Plan
Once your audit is complete, you can formulate a plan of action that addresses higher priority issues and how they will be implemented. Most of your efforts will focus on simple changes in store design or enhancements in technology to combat theft. Others may be more time-intensive and focus on operations and employee training. Combined, these can dramatically affect other areas of your business that will reduce your overall losses.
- Store Design
Retail space often comes at a premium. Because of this, every square foot needs to be utilized. However, visibility is the key to preventing shoplifters, which means your store’s design should emphasize visibility while maximizing space. Here are some tips to help you design your store layout.
Shelving – To increase sightlines, you can reduce your shelving height in the middle of the store to shoulder height. Higher shelving units should be placed against the walls. Also, you’ll want to keep displays, signs, and product shelving at least six feet away from entrances and emergency exits.
Cash Register/Checkout Counter – One easy way to improve visibility is to raise your checkout counter. Cash registers should be placed near the entrances and exits.
Displays – The ideal height of your product displays should be no higher than your chest. Limit the number of temporary displays and signs that may block visibility.
Aisles – A wider aisle offers a better view of customers. It also allows people to pass by each other with space between them. A narrow aisle makes it easier for shoplifters to work as a team, passing items to each other without being detected. Wider aisles aren’t always possible, but if you keep your shelves organized, then you’ll know when something seems out of place or missing. Always have your products facing forward and have your employees reorganize shelves while customers move throughout the store.
Mirrors – Shoplifters will look for blind spots and use them to their advantage. Installing mirrors will eliminate blind spots in corners and down narrow aisles.
- Storeroom and Warehouse
Entrances to your storeroom and warehouse should be locked at all times and require a key or keypad code. These should also be restricted to employees only. You will need to change your locks if a key is lost or never returned by a former employee. Changing access codes on a keypad is easier, making it worth the upgrade.
Organization – An organized storeroom allows employees to find things quickly, and they’ll notice if anything is out of place. Plus, an organized storeroom and warehouse will have fewer accidents and injuries. Always keep your most popular items toward the front and heavy items on or near the floor. Ladders, palette jacks, and forklifts should be maintained regularly. They should never be used if they aren’t working correctly.
Shipping & Receiving – To eliminate clutter, you can create separate spaces for receiving shipments and customer deliveries/curbside pick-up. Also, scheduling specific times for processing orders, then assigning them to individual employees will give you a log of storeroom activity.
- Employee Training
With the proper training, your employees will be more responsible and in compliance with procedures and policies. They will also have a heightened sense of awareness that allows them to detect, investigate, and resolve issues quickly while avoiding conflict. This will ensure the safety of your customers and their coworkers.
“Whistleblower” System – This gives your employees the ability to report any wrongdoing by other employees anonymously.
Stocking Shelves – Most accidents resulting in damaged merchandise can be avoided through proper training. Accidents often occur when employees are rushed or overwhelmed.
Monitoring the Store – Your employees need to learn how to spot suspicious behavior and when to report it to a manager or the authorities. The best way to monitor the store is through proactive customer service, which means greeting customers when they enter the store and checking to see if they need help.
Returns & Gift Cards – Because of new printer technology, it’s easy to commit fraud using counterfeit gift cards and returning stolen items. Training your employees on spotting these problems is essential, as well as how to deescalate a high conflict situation.
- Surveillance
Security cameras have improved with technology. They are smaller, provide higher resolution video, and capture wider angles. Placing them throughout the store, in your storeroom, and around your warehouse will keep a vigilant eye on your merchandise. Video cameras also act as a deterrent when kept out in the open and not hidden behind walls or secretly placed within a cabinet. This works for both shoplifters and dishonest employees. Learn More >
Policies and Procedures
Written policies and procedures create more situational awareness and drive proactive measures to ensure your customers’ and employees’ safety. These will guide you through some of the most challenging situations regarding theft, fraud, or damaged merchandise.
Now that your audit is complete and you have a retail loss prevention strategy in place, it’s time to develop a policies and procedures manual that defines how you plan to achieve your loss prevention goals. For small retailers, this should be a page or two with specific guidance for dealing with shoplifters, dishonest employees, and handling merchandise. There should also be a section with emergency contacts, police, fire, paramedic, and your alarm service.
Your manual should be easy to read and implement. The policies should be firm yet flexible enough to account for unique situations. And you should be able to train your employees on it within a couple of hours.
If you run a larger store with multiple locations and warehouses, you’ll have more issues to account for, necessitating additional instructions regarding each location. Your loss prevention manual can become quite extensive because it may have to cover multiple warehouses’ shipping and receiving. Keeping a log of incidents, such as theft, damaged merchandise, and workplace injuries, will give you a record of activity to analyze the procedures that work and those that need improvement. Learn More >
Analyze the Results
Retail Loss prevention is more effective when your employees are educated about policy and motivated to make it a successful program. To get them engaged with the process, you can give them insights through several reports from your POS data:
- Physical Count of Total Inventory
- POS Inventory Count
- Dead Stock
More data will come from your log of incidents. Combined, these will describe your total losses and how they were lost, so you can address areas of weakness and adjust your policies and procedures accordingly. A retail loss prevention plan should remain flexible and change over time because new threats appear almost daily.