Retail Loss Prevention: 9 Tips & Techniques to Reduce Shrinkage

Loss prevention should be a priority for every retail business. Here’s why: Retail loss or “shrinkage” can have a significant impact on your business’s bottom line.

According to the National Retail Federation, shrinkage accounts for $112 billion (about $340 per person in the US) in retail industry loss each year. And sadly, it’s widespread, occurring at roughly 95% of retail businesses in some form.

The best solution you as a business owner can take? Be proactive.

You should be using retail loss prevention strategies in your business right now. But if not, start. Improve your inventory tracking, find out where loss is occurring, and prevent it. If you’re looking for help, check out these loss prevention tips to address the problem head-on.

What Is Shrinkage?

Retail shrinkage, or “inventory discrepancy,” refers to the loss of inventory from a retail store for reasons other than legitimate sales.

For retailers, it’s like having a hole in your pocket where your merchandise mysteriously disappears.

Imagine a store that starts with 1,000 shirts. They sell 500 shirts, and should have 500 left in stock, right? But during inventory count, they only find 450 shirts. That difference of 50 shirts represents retail shrinkage.

Inventory shrinkage can happen for many reasons. Some of the most common include:

• Shoplifting
• Return fraud
• Employee theft
• Administrative error

Step #1 in preventing shrinkage is identifying where loss occurs in your business. (See tips below!)

5 Common Types of Retail Loss (Shrinkage)

To prevent loss, you have to know where it’s occurring. Therefore, before you build a retail loss prevention strategy learn how to identify different types of shrinkage and loss.

According to the National Retail Federation (NRF), these are the most common sources of shrinkage in retail:

1. Shoplifting (External Theft)

The majority of retail businesses experience shoplifting. According to NRF data, retailers said customer theft accounts for about 37% of all shrinkage.

Shoplifting, traditionally, was mostly petty. A customer “pockets” an item and leaves without paying.

However, today, retail theft is more sophisticated. Organized retail crime, in which groups shoplift and resell stolen merchandise, is on the rise.

Tip. Determine which products you sell are most likely to be shoplifted . According to the NRF, these items include:

• Alcohol, tobacco and vape products
• Clothing and shoes (especially brand-name items)
• Cosmetics
• Infant care items
• Backpacks, jewelry and accessories
• Lottery tickets

2. Employee Theft (Internal Theft)

Employee theft occurs in various ways and it’s the No. 2 most cited reason for retail shrink (28.5%). Common forms of employee theft include:

• Under ringing – A cashier charges the customer for 5 items, rings in 4, and pockets the difference.
• Short ringing – The cashier charges for a higher priced item and then steals the difference.
• Skimming – An employee takes cash from the register, typically in small amounts over time.
• Inventory Theft – Employees steal merchandise from the sales floor or warehouse.
• Sweethearting – A cashier deliberately under rings an order for friends or family.
• Time Theft – An employee manipulates the time clock. For example, using “buddy punching” to clock in for a coworker.

Employee theft commonly occurs at the point of sale. Therefore, a POS with features like a weighted cash drawer, cash discrepancy alerts, and a fingerprint time clock can help prevent many of these issues.

3. Return Fraud

Return fraud occurs when a customer or employee uses a return or exchange to steal. Common return fraud tactics include:

• Stealing merchandise and then returning for cash
• Paying with counterfeit money and then returning the items for cash
• Working with an employee to commit return fraud

Preventing return fraud starts with creating an iron-clad return policy. Additionally, a POS with a receipt scanner will help you catch counterfeit receipts (a common tactic used in this type of theft).

4. Clerical Errors

Often overlooked, “paper loss” refers to shrinkage caused by clerical error. And it accounts for about 15% of all retail losses. Common reasons for this include:

• Inaccurate inventory – Mistakes in inventory data often result in overstocking and understocking, a significant source of loss.
• Pricing errors – A common reason for paper loss, this occurs when an employee underprices items in your Pricebook.
• Markdown errors – Similar to pricing errors, this occurs when markdowns are improperly attributed.
• Receiving errors – This occurs when employees receive orders with inaccurate quantities or damaged items but fail to notice the mistake.

To prevent employee loss, focus on education. Proper employee training on receiving, inventory and product database changes is the most effective strategy for preventing administrative loss.

5. Vendor Fraud

Although less common, vendor fraud still accounts for about 5% of retail shrink. The most common example would be billing schemes.

For example, you’re overcharged for an invoice, or you’re charged twice for an order. This can be addressed with an inventory management tool with vendor and invoicing management.

What Is Loss Prevention in Retail?

Retail loss prevention refers to tactics that businesses use to prevent shrinkage. Generally, the tactics each business uses are determined by the type of loss they face. Some common strategies include:

• Security systems
• Store layouts
• Cash drawer management
• Inventory reporting
• Effective return policies

Fortunately, there are many low-tech, cost-effective and easy-to-implement options that can improve shrinkage.

A simple strategy like using a biometric time clock, for example, minimizes employee time theft. And changing the store’s layout helps prevent shoplifting. Below, offer 9 strategies that offer the most potential.

9 Retail Loss Prevention Strategies to Use

Which retail loss prevention measures are right for you? First, determine where you’re experiencing loss. You can start with:

• Cash Reporting – Identify unusual transactions at the POS, such as high-value refunds for single items, voids or returns without receipts.
• Inventory Audits – Conduct an inventory count and reconcile that with your existing inventory data. Notice which products and categories have the largest discrepancies. These categories may be the ones most affected by shoplifting.
• Cash Audits – Conduct surprise till audits to reveal cash skimming schemes.

Once you have an idea of problems you’re facing, you can implement these loss prevention tactics:

1. Change Store Layout

Your store’s layout is a powerful shoplifting deterrent. Think about large retail stores that keep high-theft items under lock and key or behind the counter.

Tips for store layout include:

• Use a single entry/exit and ensure staff have clear sightlines
• Place expensive items near the checkout or in areas with high staff presence
• Minimize blind spots created by large displays
• Make sure your checkout desk has good visibility of the shop floor

Additional tip. Place mirrors or security cameras strategically to increase visibility of the shop floor without being intrusive.

2. Staff Placement

Encourage your staff members to greet customers as they enter the store. This is a simple, yet effective shoplifting deterrent. People are less likely to steal, if they feel “seen.”

Additionally, encourage staff to monitor blind spots and areas with high-value products and interact with customers. Not only does this reduce loss, it better for customer service too. Your staff should have a presence on the sales floor.

A few ways your employees can help:

• Ask customers if they need help
• Provide direction
• Offer advice on products

This helps you stay engaged and promotes better visibility in theft-prone areas.

3. Point-of-Sale Shrink Prevention Tools

The best retail POS systems include tools and reports to prevent. FTx POS, for example, includes loss prevention tools that address common problem areas like skimming, time theft, cash theft and barcode scanners. Some tools include:

• Fingerprint Timeclock – Choose a POS that requires biometric authentication when employees clock in and out.
• POS Access Control – Use fingerprint logins at the POS to control access to the cash drawer.
• SMARTtill – SMARTtill is a weighted cash drawer that identifies discrepancies between cash accepted and sales transactions.
• Drawer Audit – Your POS should include reconciliation processes with cash discrepancy and suspicious activity alerts.
• Purchase Order Automation – Effectively monitor the status of purchase orders and prevent invoice payment fraud.
• SKU / Receipt Scanning – Your POS should include barcode scanners that can help you more accurately track inventory, receiving, and returns.

4. Retail Loss Prevention Technology

With technology, the sky is the limit. Large corporate retailers, for example, invest millions in loss prevention efforts. These tools include everything from security cameras at self-checkout to real-time video and cash drawer analytics.

Some systems you might consider include:

• Security camera systems (highly recommended)
• Electronic scanners at the exit
• Security video analytics
• Weight sensors at self-checkout
• AI fraud detection

5. Vet and Train Employees

Nearly three-quarters of employees admit to theft. Use background checks and reference checks to catch bad actors.

Additionally, regularly train your staff on loss prevention strategy. Your employees should receive proper training for:

• Monitoring the sales floor (focusing on high-theft areas)
• Reporting suspected theft
• Technology platforms (POS Pricebook, returns, inventory tools, and security systems)
• Cash handling procedures

Training keeps your staff informed. And it also increases awareness of the impact theft has on the business. This can also be a powerful employee theft deterrent.

6. Conduct Regular Inventory Audits

Inventory counts reveal when / if shrinkage is occurring. The frequency of inventory control audits typically depends on factors like:

• Shrinkage rate: If your store experiences high shrinkage (losses due to theft, damage, etc.), you’ll need more frequent counts to identify discrepancies quickly.
• Value of inventory: The higher the value of your inventory, the more crucial it is to conduct regular counts to ensure accuracy and protect against financial losses.
• High-theft items: You might conduct daily counts for high-theft items like lottery and tobacco items.

Tip. Choose a POS with a robust inventory management system. The right system can automate some counting tasks and provide real-time inventory data, reducing the need for frequent physical counts.

7. Set Return Policies

Your return policy should be designed to prevent return fraud. For example, you might consider rules like:

• Receipts required for cash returns (or all returns)
• Acceptable quantities for returns
• Time limits on returns
• Specific product exclusions

Additionally, train staff on return protocol. Your staff should understand these requirements and have tools to scan receipts and look up past orders.

8. Advertise Your Tactics

Make customers and employees aware of your strategies. A “Smile, You’re on Camera” sign is a classic example.

But you can also use signage to remind customers and employees of the consequences of fraud and shoplifting. Your training program should also let employees know about expectations and processes.

9. Ongoing Monitoring

Unfortunately, the problem of retail loss doesn’t go away. Loss prevention is something that requires new strategies to respond to changing schemes. For monitoring, you can:

• Build data analysis capabilities to identify new suspicious activity
• Create real-time inventory reports
• Set up alerts for discrepancies
• Conduct regular audits of inventory and cash management

Bottom line, loss prevention isn’t set-it and forget-it. You have to manage your program and update and refine your tactics over time.

Improve Your Retail Loss Prevention Strategy with FTx POS

FTx POS was built with retail loss prevention in mind. We’ve developed a range of tools that help businesses identify, prevent, and manage loss prevention efforts. Our POS software includes these features:

• Lottery reconciliation
• Real-time inventory
• Inventory management with alerts
• Cash drawer auditing (SMARTtill)
• Robust alerts and reporting

And these are just a few of the ways we can help. If your business is experiencing loss, consider a switch to FTx POS. We help our customers build the tools and capabilities they need to reduce loss and grow their businesses.