The impact of shrinkage in grocery stores and how to fight it
Tuesday, October 13, 2020
According to industry surveys, retail shrink ranges from 1.7% to over 3% of total sales, with grocery stores operating on the highest end of that range according to FMI’s 2019 Food Industry Speaks study. Beyond direct inventory dollar costs, grocers also experience increased labor costs and lower customer satisfaction as a result of shrink.
The COVID-19 pandemic has delivered a temporary Band-Aid to grocers as the sales surge masks underlying root causes and symptoms. However, in time, the pandemic will pass, sales will decline towards the norm, and grocery shrink will rise north of 3% again, unless today’s profits are invested into preventative, long-term shrink savings strategies and technologies.
Shrink is a broad term, applying to both theft and operational causes of loss ranging from shoplifting and cashier/vendor theft to poor production planning and lack of rotation. While shrink from theft can be deterred, the largest gains come from focusing on the operations 100% within a store’s control. Let’s break down some of those operational opportunities — looking at the simple procedural changes needed and technology that can be leveraged to heighten results.
Prioritize SKU Rationalization
While sale doesn’t solve all shrink problems, it certainly is the MVP. In the 2020 FMI study Variety or Duplication, stores that made an effort to reduce variety by focusing on eliminating what consumers would view as duplicates led to an increase in sales ranging from 0.96%-1.62%, while 96% of shoppers surveyed noticed no change in assortment or in fact felt there were more items available than before.
Reducing SKUs on shelf has a double-positive effect on shrink. The increase in sales improves sell through, while less complex category sets make rotation easier for stocking crews. Think, did grocery stores have any issue rotating back in the good ol’ days when there was only one kind of ketchup on the shelf? Never.
Investments into computer generated ordering (CGO), shrink tracking software, and customer loyalty applications will arm category management to win at SKU rationalization.
Get Smart with Markdowns
There’s a well-accepted adage that “the first markdown is the best markdown.” That is, when discounting is used to drive sales on damaged, short-coded, or seasonal products, each consecutive markdown further erodes margin while driving additional labor costs.
Yet, what we’ve come to learn is that a dynamic markdown model can still be implemented in a one-markdown world. For example, store specific sales data per SKU can be leveraged when deciding whether or not, and by how much, to markdown short-coded inventory.
If getting SKU- and movement-specific with markdowns isn’t achievable, take time to experiment with how deep the markdown policy needs to be. Try out varying discount percentages, comparing the percentage of inventory sold and net sales. Findings need to differentiate the results by product categories and departments, as the optimal markdown for grocery or dairy products is likely vastly different than for OTC/vitamins.
Repurpose Shrink in Prepared Foods
Some of the most savvy and frugal grocery operators will tell you they have almost no expired or damaged shrink. Not because they never occur; they have built out a pipeline to turn this would-be loss into prepared foods ingredients.
Most product dating uses a Best If Used By date rather than a true expiration date. These Best If Used By dates serve as a worst-case timeline of diminished quality rather than a marker on food safety. Thus, using a dented can of tomato sauce on a take-and-bake pizza, or slicing up some bruised or irregular shaped apples into a caramel apple fluff, is perfect for this fall season.
Shrinkage has a huge impact on grocers — and, unfortunately, this issue is not uncommon. However, by implementing effective solutions, such as repurposing shrink, using optimal markdowns, and prioritizing SKU rationalization, grocery stores can decrease labor costs and sales loss while increasing customer satisfaction.
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