As retailers report on the busy holiday shopping season, operations managers will be trying to get more understanding into shrinkage and theft, reports The Wall Street Journal (Jan. 9, 2024). The stores are fighting a growing wave of theft, cutting into profits that were already under pressure. But theft is just one contributor to shrink, the industry term for the difference between inventory on the books and what’s physically on hand. Lost or damaged goods and inaccurate records also play a part.
Shrink is now one of the most frequently discussed topics among management at Home Depot, said the firm’s CFO, having moved onto its list of top priorities two years ago. That focus hasn’t changed even though some mitigation efforts, such as locking up certain items and using live-view parking lot cameras, are in place.
The higher shrink may partly reflect a return to prepandemic norms rather than entirely new trends in theft. Reduced visits to physical stores starting in 2020 simultaneously decreased the opportunities for theft, an effect that dissipated as shoppers stepped out of their houses again.
Dollar General’s gross profit rate, or its profit as a percentage of net sales, fell 5% last quarter, due primarily to increased inventory shrink, more markdowns and lower inventory markups. Shrink is a roughly 100-basis-point headwind for Dollar General. Dick’s Sporting Goods expects shrink’s impact on its gross margin to be roughly 50 basis points higher in its current fiscal year compared with 2022.
Retailers have said they are responding by adding security personnel and technology, locking up goods and closing hard-hit stores. Target, which last year said that shrink was expected to cut into profitability by more than $500 million, closed nine stores, citing higher theft and safety concerns for shoppers and workers. Nike closed one of its Portland stores in 2022 amid issues with theft. Academy Sports & Outdoors is using locked shelves for certain items and outfitting some departments that have seen higher shrink, such as the baseball bat section, with sensors that indicate when people linger in an area. Some retailers, such as Costco, are less exposed to theft for reasons including that they sell larger, harder-to-steal products, and stores are laid out with one primary entrance and exit.
Classroom discussion questions:
- Why is this an OM issue?
- What would you do, as a supermarket manager, to cut shrink?