From shrink to strength: Transforming the challenge of retail shrinkage into opportunity

“Retail shrinkage” is a seemingly innocuous term for an epidemic problem: the loss of unsold retail inventory through causes such as shoplifting, employee theft and administrative errors.

It’s estimated to cost retailers in the United Kingdom some £8 billion¹ a year, the highest in Europe. And it’s a problem that’s growing fast – with UK retail shrinkage having increased by around 33% since 2018², and shoplifting up by a startling 25% year-on-year in 2023³.

Hardly surprising then that concern about retail shrinkage is also on the rise across the industry. But while the problem is clear, what to do about it is less so. Retail shrinkage is a highly nuanced issue that negatively impacts both the top and bottom lines. However, the good news is that there are opportunities for retailers to minimise and eliminate the resulting losses. In this blog, we’ll look at what these opportunities are.

Understanding shrinkage: a complex tapestry

First, some context. The UK’s retail sector is a dynamic mosaic of diverse businesses, each facing its specific challenges. While retail shrinkage is just one of these, it’s an issue that has risen rapidly up the agenda in the past year or so. It’s a multifaceted problem that demands a comprehensive understanding of the specific loss source to respond from an ever-expanding array of causes, ranging from external and internal theft to process/control failures, wastage, damage and a few other drivers that are harder to pin down.

These sources of retail shrinkage are currently being compounded by several other factors. What are they? Perhaps the most obvious is economic headwinds, as inflation and the cost-of-living crisis put both retailers and consumers under financial pressure, potentially affecting shrinkage rates and security investments.

But there are also other contributory factors at play, both internal and external to retailers. Within the industry, there are some ineffective loss prevention strategies, as retailers with outdated or inadequate approaches struggle to keep pace with changes such as shoplifters’ evolving tactics. And the adoption of new checkout technologies can have unintended consequences. An example? Take the rise of self-service checkout and “shop & go” capabilities, which can introduce new vulnerabilities and offer guilt-free and more convenient ways of shoplifting.

Meanwhile, we’re also seeing the effects of factors from outside the industry. One is the UK Government’s Anti-Social Behaviour, Crime and Policing Act 2014⁴, under which shoplifting below a value of £200 was re-categorised as anti-social behaviour, meaning offenders are more likely to be fined without a court appearance – thus reducing the perceived risks. Another is the rise of organised crimes through social media, with social platforms introducing a new layer into organised retail crime (ORC)⁵, and shoplifters exchanging methods via blogs and posts to glamourise and promote theft.

How retail shrinkage haunts retailers

Whatever the causes of rising retail shrinkage, its effects haunt UK retailers, for several reasons. One is its financial impact, which is to reduce their collective annual turnover by 1.1%⁶ – a burden that falls mainly on supermarkets and grocery, but also affects department stores and specialist fashion shops.

This loss of revenue has caused some retailers to save costs through staff reductions, which can have knock-on effects on service quality, customer experience and brand reputation. And when stock runs out because of shrinkage, customers may go elsewhere. Overall, it’s estimated that UK consumers are “crime taxed” an average of 6p extra on every product they buy⁷ due to shoplifting.

Alongside the effects on customers, shrinkage also impacts retailers’ operations. By causing staff to verify stock levels manually and replenish the affected shelves on a regular basis, it can put downward pressure on operational efficiency. Additionally, dealing with damaged or expired goods contributes to waste, further affecting overall efficiency.

Shrinkage can also be associated with violence, exposing staff to risks: Reported instances of violence and abuse in UK shops have risen by around 50% in the past year to around 1,300 incidents a day, leaving shop workers feeling vulnerable and anxious⁸. Finally, the higher waste and product obsolescence caused by shrinkage have a negative impact on the retail industry’s sustainability and ethical responsibility.

Four ways to tackle retail shrinkage

What’s clear is that retail shrinkage is a major issue that the UK retail sector needs to address as a matter of urgency. Here are four ways it can do so.

1. Collaboration and industry partnerships: showing a unified front

A united industry is better equipped to tackle shrinkage collectively. Closer collaboration around this challenge between retailers, technology providers and industry associations fosters an environment where insights are shared, and best practices are collectively refined.

2. Spreading awareness among stakeholders: a shared responsibility

From front-line staff to senior executives, spreading awareness about the impacts of shrinkage and the role everyone can play in prioritising actions and preventing causes, is crucial in tackling losses effectively.

3. Navigating the regulatory landscape: balancing compliance and security

Understanding the regulatory framework surrounding retail shrinkage is imperative. Advocating for policies that strike a balance between compliance and security will help to create an environment where retailers can address shrinkage proactively without coming up against unnecessary barriers.

4. Driving technological innovations: shaping the future

The continued integration of cutting-edge technologies into the retail landscape with play a major role in reducing and preventing future losses from shrinkage. Artificial intelligence (AI), data analytics and advanced surveillance systems promise to make loss prevention strategies more effective and efficient. GenAI offers solutions to detect unexpected transactions, generate proactive alerts for product expiry, and help retailers forecast more accurately to optimise inventory levels. And computer vision technologies can add a further layer of security to frictionless shopping models including self-checkout and shop & go.

Laying the foundations

A closing thought? An effective shrinkage management plan requires the orchestration of an ecosystem where a retailer clearly defines, communicates and executes targeted actions across the organisation. And tackling shrinkage successfully will require the right policies and processes, together with the right people to execute them – empowered with the right technology and assets. With these building blocks in place, the UK retail industry can progress towards a future where shrinkage is not merely a challenge to overcome – but an opportunity for transformative growth and resilience.

But how to navigate that journey and how to empower retail in-store employees and enhance customer experience through successfully solving this problem? That’s the topic we’ll explore in our next blog post. Stay tuned!