How To Make Profit In Retail

How to Make Profit in Retail

The retail industry has been severely affected by the current economic crisis. Understandably there is panic as retailers look for creative ways of surviving. One very important weapon in their arsenal, which is commonly ignored but if effectively deployed can change their fortune is the issue of shrinkage reduction. While this might seem obvious to many within the industry, several retailers still underestimate the significance of shrinkage reduction or have not given it the attention it deserves.

A Global Retail Theft Barometer report revealed that in 2008 retailers lost 65 billion to shrinkage which represented 37% of their net profit margin. Furthermore, numerous research reports have reported that a staggering 79% of retail shrinkage problem is directly related to internal activities, only 21% is caused by shoplifting. With retail loss prevention experts concluding that about 68% of shrinkage is controllable, retailers could have added 44 billion to their net profit margin last year.

Why has the issue of shrinkage reduction not been given the level of prominence it deserves? The answer is two fold. Firstly, the issue of shrinkage reduction has traditionally focused on shoplifting, secondly, security providers have failed to demonstrate the concept of Return on Investment (ROI) to retailers.

While there is no argument that shoplifting accounts for a major percentage of retail shrinkage, employee theft commonly referred to as bonus or fringe benefit and lack of properly administered best practice have significant impact on profit margins. While shoplifters focus on the quantity of merchandise, dishonest employees steal merchandise of high value and poor operational practices in warehouses and receiving departments are responsible for merchandise going missing, damaged or perishable left to expire.

The conventional wisdom is that shoplifting is the major source of retail shrinkage problem, consequently, retailers spend four times more resources on shoplifting than on internal activities which are ironically responsible for four times more shrinkage. For retailers to derive more benefit from their loss prevention measures, the emphasis has to be shifted towards operational issues, such as properly vetting new recruits, redesigning warehouses to ensure high value merchandises are properly secured, developing consistent receiving procedures, using smart technology that links warehouse to Point of Sales and developing a loss prevention culture amongst staff because in the final analysis it is the staff members who can make any measure effective or redundant.

Shrinkage reduction properly thought through, managed and implemented with a suitable mechanism for measurement can put many retailer back into profit. In an industry where competition is fierce and margins are low, shrinkage reduction can be a competitive advantage.