Following the release of a new report on defining and managing retail loss, RILA's Senior Vice President, Retail Operations Lisa LaBruno spoke with Professor Adrian Beck of the University of Leicester to discuss the report's findings and what it means for the retail industry moving forward. Below is a transcript of their conversation.
Lisa LaBruno: What prompted this research into retail loss?
Adrian Beck: Traditionally, retail losses have been measured primarily using 'shrinkage', a term used by the industry for the past 100 years, based primarily, but not exclusively, upon the difference between the value of expected and actual stock levels in a retail business. While it is widely used, the term suffers from a lack of an agreed definition – few retailers use it in the same way, which means that meaningful benchmarking between businesses is at best difficult and at worse misleading. In addition, the retail landscape has changed dramatically since the term shrinkage was first used, meaning that a range of types of losses can now be found in the retail space, which are not always properly captured by the term. The research therefore, set out to try and understand what the full range of losses suffered by retailers might be and develop a way of categorizing them systematically.
LL: Why is it important to establish an industry-wide consensus about retail loss?
AB: While the term 'shrinkage' has been in use for an awful long time, there is no agreed definition as to what it actually means. You therefore find some retailers adopting a very narrow definition – only the difference in the value of expected and actual stock – while others are much more inclusive, including other forms of loss, such as markdowns, stock going out of date and losses recorded as theft. Given this variance, it is actually impossible to generate any meaningful benchmark statistics to understand how losses are impacting across the retail industry. In addition, ambiguities in the definition of what constitutes 'loss' can mean that some forms of loss have in effect simply been transformed in to the 'costs' of doing retail business – hard baked into the organization, receiving little focus or attention on how to minimize their impact on the company. If we can establish an agreed industry-wide definition of loss, then it would certainly make it easier for companies to benchmark their performance on loss and better recognize how they are impacting upon profitability.
LL: What was the biggest key finding from the research?
AB: I would argue that the research has developed a strong rationale for a definition and typology of Total Retail Loss that fully recognizes the breadth and range of losses experienced by retail companies. It has developed an approach that differentiates between what can be regarded as the 'costs' of doing retail business and the outcomes that can be seen as a true 'loss'. In addition, the research has also better defined the category of costs which can be viewed as 'margin eroders', which sometimes are included in definitions of shrinkage. So I think the key output from the research has been the development of a more systematic and rational framework for understanding how losses impact upon retail businesses.
LL: What can retailers take away from this report and utilize in their future operations?
AB: The work thus far has been relatively theoretical and developmental – putting together a framework that is supported by a researched evidence base. It is hoped that retailers will now take the proposed Total Retail Loss Typology and begin to use it in their organizations to better understand their own landscape of loss, and use this to inform their future resourcing decisions.
LL: What does the future of measuring and managing retail loss look like?
AB: In many respects, the level of loss experienced by a retailer is a consequence of the business choices they have made. While some choices are likely to generate higher levels of loss than others, they can also make a significant positive impact upon profitability – there is always likely to be a positive and a negative impact of any given business decision. What retailers need to do is fully understand both sides of this decision coin – do the benefits (such as an increase in sales and profits) more than offset the negative outcomes (retail losses)? While companies have typically been relatively good at measuring the benefits, they have lacked the means to fully measure and understand the consequent losses. It is hoped that by providing a more rigorous and inclusive oversight of retail losses, the Total Retail Loss Typology will help retailers make better choices that genuinely help them to grow profits and customer satisfaction.
The full report, "Beyond Shrinkage: Introducing Total Retail Loss," can be found here.