Shrink 101
Understanding the Basics
What is Shrink?
• “Shrink” is a retail industry term used to define
losses.
• It is most often referred to in terms of a
percentage of a company or locations total sales.
• Because it is calculated to “sales” fluctuation in
either the amount lost or the
amount sold can impact a
shrink result.
Shrink 101 |© LP Innovations, Inc. 2013
How is it calculated?
• There are two methods for determining shrink.
– Retail (selling price) Value to Retail Sales
– Cost (company purchase price) of goods to cost of
2
sales
1
• The retail method is the most common, although
as long as either is used consistently it provides
the same gauge.
• To determine shrink, retailers
use a basic process and
formula.
Shrink 101 |© LP Innovations, Inc. 2013
The Shrink Calculation is…
• Book Inventory: Throughout the year (or period)
merchandise is shipped to a location. During that period
merchandise is sold, marked out or stock, transferred to
other locations or returned by customers.
• A running count is kept of these movements so that on the
day of inventory a company knows how much
merchandise “should be in a location.”
• At inventory all the items in a location are counted. This
usually involves an electronic scan of merchandise price
tickets. This information is used to determine the “actual
physical inventory of the location.
BOOK INVENTORY – ACTUAL INVENTORY = LOSS
VALUE OF LOSS ÷ TOTAL SALES = SHRINK
Shrink 101 |© LP Innovations, Inc. 2013
Shrink Calculation
• The loss number discovered is then compared
to the total sales for the period.
• The period is calculated as the day after the
last inventory until the day of the new
inventory.
• The equation is: Value of loss divided by sales.
VALUE OF LOSS ÷ SALES
Shrink 101 |© LP Innovations, Inc. 2013
Shrink Calculation
Here is an example:
• Co sent $100,000 in merchandise to a location
over the last 12 months. $25,000 was sold to
customers, $2,000 was damaged and returned
and $2,000 was transferred to another
location and $1,000 was returned after
purchase by a customer.
• Book Inventory is equal to: $100,000 - $25,000
-$2,000 - $4,000 + $1,000 = $70,000
Shrink 101 |© LP Innovations, Inc. 2013
Shrink Calculation
• Book Inventory = $70,000
• Physical Count = $50,000
– $50,000 - $70,000 = (-) $20,000
– That is $20,000 was lost during period
• Total Sales during the period = $200,000
• $20,000 divided by $200,000 = 10%
• The shrink for this location is 10% (a disaster)
Shrink 101 |© LP Innovations, Inc. 2013
What is a “good” number?
• A “good” number is subjective. As an average,
most retailers want this shrink percent to be
under 1% of sales.
• The industry average tends to be between
1.5% and 2% of sales.
• Often a good number is one that shows a 20
to 30% improvement over
the previous year.
Shrink 101 |© LP Innovations, Inc. 2013
What is the Cause?
• There are only three potential causes of loss in
the retail environment:
1
2
3
– External Theft: Customer Shoplifting or Vendor
theft
– Internal Theft: Employee Dishonesty
– Errors: Mistakes in processes like transfers, file
prices, inventory shipments that go undetected
Shrink 101 |© LP Innovations, Inc. 2013
How should I Analyze a Store?
•
•
•
•
Review its shrink history for patterns
Compare turnover to the company average
Review refunds and voids as a percent to sales
Review damages and cash shortages to company
averages
• Review the number of employee
relations issues
• Review reporting history of theft
or loss issues
Shrink 101 |© LP Innovations, Inc. 2013
The 3 Qualities of the Worst Offenders
1
2
3
High Turnover
Low Compliance – Usually reflected in audit
scores
Little or no theft activity reporting:
While this last seems paradoxial, locations that
report “no” incidents throughout the year
usually are not attending to the issues.
Shrink 101 |© LP Innovations, Inc. 2013
Should I Worry About Overages?
Yes
– An overage means that there is no clear line of
sight to the actual losses.
– An overage also means that some error occurred
in the process.
– Overages tend to “self-correct” in subsequent
inventories and thus we should analyze the
location to determine the potential self
correction.
Shrink 101 |© LP Innovations, Inc. 2013
Why is the Average File Price
Important?
• Losses tend to occur across a number of
different items and price points.
• It your “average price point” for lost items is
substantially higher or lower than the
“average of all items” it can indicate a
systemic issue.
• We are assuming that in any location, not just
all the “most expensive” items will be lost.
Shrink 101 |© LP Innovations, Inc. 2013
How do we get accurate results
• Accurate Results are built on accurate processes
through out the cycle:
 A comprehensive process of allocation and shipment
reconciliation
 Enforced policies on shipment receiving, damages,
and returns to warehouse or transfers
 An enforced policy on inventory preparation that
includes “closed” dates for changes
 An inventory count that includes sampling for
potential errors
 Transparency on the inventory “scrub” or
reconciliation process
Shrink 101 |© LP Innovations, Inc. 2013
More Information
• To learn more or to discuss specific results of your analysis:
• Contact: Solutions@LPInnovations for a free phone
consultation
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Shrink 101 |© LP Innovations, Inc. 2013