The two things in business that get our attention are those that are the best and those that are the worst. Shrink or loss fits into the same model. Interestingly, having looked at hundreds of shrink results, store losses tend to (mostly) follow a traditional Bell Curve. And not so surprisingly, our attention and loss prevention efforts tend to focus on the highest shrink locations. While those high-shrink reduction efforts are necessary, we might enjoy greater success through placing more attention on moving the middle performers.
Whack-A-Mole Shrink Reduction
You know the game. Those moles pop up all over the board, and you score by bopping them on the head with that big awkward hammer. It’s one of those games where you can score high, but you can’t win.
High Shrink stores are a lot like that. We’re often surprised where they “pop-up” and no matter how many times we “whack” them down, seems there is always another in its place. The truth is that there are still going to be stores on that Top list. That’s the nature of forced ranking: someone is always number one.
These extreme underperforms, of course, need our attention. If your company isn’t using a tested and effective “target store” program, then you’re leaving profits on the table. However, simply correcting these outliers each year is a reactionary process unless we can ensure next year’s “top list” has a lower overall average or dollar total than this year’s.
In other words, with each consecutive season the total losses should continue to drop, and the worst performers should be “less” worse than those on the previous list.
You will still have moles popping up, but they won’t pop as high or as fast.
The Fallacy of Diminishing Returns
Imagine again that Bell Shrink Curve. Your worst performers are out there at the end, but in the middle is a broad swath of “average” performers. No single one of particular alarm, but all together make up a substantial portion of your losses.
Since that’s the group that will feed some of next year’s worst of the worst, it makes sense to work actively and in advance to reduce their averages.
However, we often operate under the fallacy of diminishing returns. That is, we believe there is “only so much” return on efforts (investment) we can get from these middle of the road locations.
Consequently, we focus the majority of our efforts on the “targets,” and everyone else gets just the basics.
But that’s only true if we focus on these middle-roaders individually. If we consider them as a group, the math suggests we could reduce as many lost dollars in that group, as we can in our target stores.
Build A Breaker to Change Where the Waves Crest
If your high shrink stores are a wave that comes crashing down on your beach blanket, then moving the middle shrink is like building a breaker farther off the coast. The result is that big wave breaks sooner, smaller, and further from your beach.
It is somewhat theoretical (because bad and unexpected things happen) but if your total middle shrink averages drop lower (farther from the beach) then your total losses, even with the bad stores, will be lower.
In short, you’ll have more room for a couple of unforeseen disasters and their impact on the total not as bad. I’m not a finance guy, but you can think of lowering the middle group’s average as building a hedge fund against the extreme underperforms.
How to focus on the middle shrink?
In general, the entirety of your loss prevention program is designed to reduce “all” shrink. Depending on your store count, however, that can be a lot to focus on in a single year. An established and successful way to start moving that middle shrink is to create more than a two-tiered approach.
Traditionally we have target stores that get a particular program and then everyone else. In a middle shrink focus, we start with the application of a bit more analysis.
First, we look at history and identify the three to five-year rank and movement of each location.
Second, since we already have our first breaker (those target stores), we create a second breaker for those locations that tend to be in the upper quadrant of our middle average.
It looks like this:
If you don’t have significant data or a long enough history, then start with the stores currently in this new tier.
Third, in your analysis don’t just categorize stores by losses. Consider sales, traffic, and geography when ranking them. These additions to the report and ranking combat the diminishing return factor by eliminating locations that may have a high shrink percentage but meager sales (C level stores), but it adds stores that have a low average because of sales but still represent a top dollar amount.
Finally, once your ranking is complete, and the new tier established, create a specific program for these locations. The program won’t be as extreme or labor intensive as your target program but should include practices known to reduce Shrink such as a third audit, a self-created store action plan, additional training, and specific KPI reporting.
The Cultural Effect
The benefits of this approach are tri-fold. First and most importantly you are beginning the process of lowering the overall average. You are also testing the limits of diminishing returns by seeing how much you can, through your program efforts, move the needle. Moreover, finally, you are building a culture of loss prevention by demonstrating that “not” being the worst isn’t the goal and by showing team members that they can take charge and reduce their losses more than they imagined.
Resources and Results
Does this approach require more resources?
Perhaps, but cost-cutting has never been the path to long-term profitability.
Additionally, it may not take as many or any additional resources if you have a fine-tuned LP program focused on results.
Has it ever worked?
Yes. I’ve used this approach several times with retailers, especially those struggling to break the 2% mark, and when embraced and executed it always gets results.
Director of Business Development & Marketing
HS Brands Global
Raymond Esposito has over 28 years of loss prevention experience, working within the department store, specialty, and grocery segments of retail. He has developed loss prevention programs for over 125 retailers in the U.S., Canada, and the United Kingdom. He holds a bachelor’s degree in psychology from the University of Connecticut and is an expert witness.
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