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Retailers urged to focus on shrinkage
Archived article dated Saturday April 30th 2005
Real savings to be made, argues KPMG
As trading profitably in the UK retail sector becomes increasingly difficult, retailers have today been urged to turn their attention once more to the thorny issue of shrinkage in an effort to cut more costs.
Industry experts at business advisory firm KPMG believe that shrinkage can no longer be dismissed as simply an accepted facet of the retail trade. As retailers investigate every possible avenue for cutting costs, shrinkage may remain as one of the few areas in which really substantial savings can still be made.At this wee'*#*8217;s British Retail Consortium Policy Lunch, Duncan Stephenson of KPMG said: "With retail sales under pressure across the UK, the apparent value of stock loss is once again starting to draw the attention it usually gets at this stage of the cycle. "Recent figures from the Centre for Retail Research*#*8217;s (CRR) European Retail Theft Barometer show that shrinkage across Europe is falling but that the UK remains the worst sufferer with average shrinkage of just over 1.5 per cent, based on the retail value of 'lost' products. That doesn*#*8217;t sound like a huge amount in percentage terms but for a business with a turnover of £100m, that*#*8217;s £1.5m worth of sales that haven*#*8217;t happened and the cost value of those products comes off the bottom line."
Stephenson believes part of the problem with tackling shrinkage is the industry*#*8217;s attitude towards it. He claims that many retailers see shrinkage simply as a cost of doing business *#*8211; an inevitable by-product of an industry with large amounts of consumer products moving around in the system at any one time.
Another barrier to action is that a proportion of what is recorded as shrinkage is down to error and there are widely varying views on how much that is. The sources of error include inaccurate receiving at distribution centres and stores, the miscounting of stock and having incorrect prices set up on the systems.
When shrinkage is put down to these sorts of errors, it is often perceived as simply a misclassification of cost rather than a cost which can be saved. Attempts to address the situation are therefore seen as pointless.
Stephenson said that some of the measures which retailers can be putting in place now to address the shrinkage issue include:
Self-assessment of risks to stock integrity and the controls that are in place to manage them as this gives the overall picture of how well protected the retailer is against shrinkage
Line-by-line shrinkage exercises to pin down the real extent to which shrinkage may be down to error versus how much of it is real loss and then assessing the impact of that loss on product profitability
Radically different ways of managing stock being considered, including VMI (vendor managed inventory) or 'pay-as-you-scan'. This eliminates a lot of process and paperwork and transfers shrinkage risk back to the supplier
Stephenson said: "Retailers will be well aware of where the 'hot' stores are within their store portfolio *#*8211; those outlets which suffer from higher rates of shrinkage than normal. Sometimes, this will be put down to a consequence of the surrounding social geography *#*8211; the theory being that bad areas give rise to bad stores.
"Other times, it is attributed to the role of the management team, the rate of staff turnover or even the age of the store layout. Whatever the key reason may be though, retailers should now actively be considering how to minimise the financial cost of shrinkage. Many of the best ones will already be doing so but as long as that average shrinkage level continues to run at 1.5 per cent, there will be plenty of incentive remaining for all retailers to make a real effort on this."
Tagged as: KPMG
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