Most of Retail Shrink May Occur in the Supply Chain

Someone who has spent the past 30 years specializing in retail asset  protection, including 23 years at Walmart’s HQ in Bentonville, AR, says that people are conflating the burgeoning growth of retail shrink with the in-store shoplifting epidemic dominating the headlines.

In-store theft, as well as organized retail crime, no doubt is a major factor expanding the huge tallies of shrink being reported by some of the largest retailers, including Target. But huge opportunities for shrink also occur in the supply chain and from accounting errors.

According to Brand Elverston, now an industry consultant, retail shrink totals are based on an annual reconciliation of what a retailer’s financial ledgers say matched against the physical count: the gap is shrink.

“That’s just an annual reconciliation, which publicly held retailers are required to do,” Elverston said, in a webinar discussing retail shrink hosted by BTIG. “At that point, they don’t have any idea whether it’s theft, an administrative problem or it disappeared in the supply chain.”

“The mischaracterization of shrink that we’re seeing all over social media is that it’s all theft, and all of it happens within the four walls of a store,” he added. “That’s naïve at best.”

According to Elverston, the opportunities for shrink begin when a huge retailer sends a large purchase order to a supplier. He then ticked off a litany of potential problems:

The container is missing because it never got shipped. Discrepancies in invoices, as in duplicate invoices being issued for the same order. Goods that disappeared or were damaged in the supply chain. Here’s our favorite: when the goods get to the store, nobody is bothering to count anything.

“If you’re a major retailer, nobody is item-counting anything coming in the back door except maybe the milk delivery, the Coca-Cola delivery or the beer delivery,” Elverston said.

“Your major general merchandise grocery trucks that back up to the door of your Walmart, and there are five a day, nobody’s item-counting anything, so there’s an assumed accuracy that everything that is being billed for is accurate,” he said.

Regarding in-store theft, Elverston said the widespread adoption of self-checkout and the corresponding reduction in cashiers and floor staff at retail stores have created opportunities for theft.

Omnichannel sales also create shrink opportunities, he added, giving the example of someone who places an online order and then texts a buddy, an order-filler at a major retailer, with the order number and asks the pal to add a few items to the cart.

Elverston said in-store theft needs to be addressed by bringing more staff back to retail stores, including reinstating cashiers, as well as adopting new technologies to police the problem in self-checkout operations.

He cited as an example Kroger’s installation of Ireland-based Everseen, an AI technology that flags items from passing through self-checkouts without being scanned.