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June 21, 2005 Shrinking Profits Sales have been great, expenses are under control, but gross margin continues to be a problem. While most retailers and wholesalers focus their efforts on increasing sales and whittling down expenses, many never pay attention to shrink and how it can affect margin and overall profitability. Simply put, shrink is the profit percentage difference between what you buy a product for and the margin you should make when you sell it. Example: You buy deli products at $2.00 a lb. and sell them for $4.00 lb. You should earn a 50% gross margin, but when you take a physical inventory, it comes back at 44%, giving you a 6% shrink or loss. That equates to losing 6 cents on every dollar sold. Leaving this critical area unchecked is quickest way to diminish gross margin and thus your bottom line. Let's take a look at some of the statistics that involve shrink. According to the 2003 National Supermarket Shrink Survey, shrink costs retailers alone an average of 2.2% of overall sales (multiply that number times the billions of sales done by the retail arena in this country; and that doesn’t include the shrink incurred at warehouse level). The causes, however, have shifted over the past ten years: · Employee caused shrink has gone up from 49% in 1990 to 57% in 2002. · Direct vendor/receiving shrink has gone down from 17% in 1990 to 11% in 2002. This is due mostly to electronic backdoor receiving systems as well as more sophisticated vendor route accounting packages that verify weights, allowances, and tares. · Shoplifting is at its lowest rate at 20%, down from 24% over the past ten years. · Perishable shrink is now recognized as 54% of total store shrink. · The bakery and deli department lead the perishable shrink field with 4.75% and 4.48% shrink respectively. So how can shrink be controlled? As a retailer where should you begin? As a wholesaler or Distributor, how can shrink be controlled in your warehouse or Distribution Center? The following are some of the shrink reduction methods and their percentage reduction savings for a one year time period: Expanded loss prevention programs -13% (not just theft, but anything that contributes to loss) Shrink awareness training - 9% (training in what is acceptable to discard, etc) Pre-employment testing - 6% (pre-determine if this is the right person for the job) Formal known loss program - 4% (education of the causes and results of shrink) Computer based training - 4% (how should product be weighed, portion control, etc) Electronic surveillance - 2% (controls theft) For those of you that deliver to your accounts directly, what better way is there to show your value to your customers than offering ideas to help them reduce shrink. Consider the following steps suggested by the National Shrink Survey. Step 1: The Accurate Shrink Measurement Phase- Stop all practices that boost store profit artificially. Allow yourself to really see the shrink; it was there all the time. Until the shrink is realized, it can't be acted upon. Step 2: New Process Implementation Phase- Change your behavior in trying to affect shrink. Don't repeat the same steps as before. Once you determine your shrink, learn what other successful operators in the industry are doing to reduce their shrink. Step 3: Monitor and Audit- Be prepared to implement your strategies and measure your progress. Adjust what isn't working and reinforce what is working. Overall however, it will be senior management's commitment to supporting mid-level managers in the endeavor to control shrink, and the ability of their employees to implement the necessary disciplines involved in receiving, controlling, tracking, and measuring to make reducing shrink successful.
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