jard-logo
blg
19 Jun 2017
Share

Have we been underselling the cost of Shrinkage in the GCC?

The GCC Loss Prevention Survey conducted by Professor Adrian Beck was the first of its kind in the region. Over the last 20 years, surveys have been carried out around the world seeking to understand how retail companies experience retail loss and the measures they take to prevent it.

While most surveys tended to focus upon a particular country or region, none to date had covered the Gulf Co-operation Council (GCC) region and therefore no data on loss prevention existed in the GCC until this survey was conducted. The survey delved into various topics namely, Loss Prevention in an Organisational Context, Perceptions of Loss Prevention, Measuring the Impact of Loss and Managing and Responding to Loss.

 Jard will undertake to write articles that explore the findings of Professor Beck’s report and the significance this has for the GCC region – which is fairly unique in many respects.

Overall, the survey suggested that GCC retailers generally have visibility of the sources or causes of shrinkage and measure a broad range of issues in their shrinkage calculation. What is most significant about this finding is that most of the causes of loss are due to non-malicious reasons which are very different to most other regions where malicious factors are the primary cause of loss.

However, the report highlights the inconsistencies that are prevalent within the region in terms of which causes of loss are included in the figure that is ultimately expressed as a single figure as a percentage (often quoted as the Shrinkage %).

 

Figure 1: Types of losses included in the loss/shrinkage calculation

The inconsistencies in terms of which causes of loss are included or excluded from the ‘shrinkage’ calculation are not unique to the GCC and is in fact, the reason that many practitioners are questioning the traditional conscript of ‘shrinkage’. It cannot offer any meaningful comparison where one organization includes a broad range of process-failure related measures but another excludes them from their definition.

Nonetheless, when asked to express this rate of shrinkage within given parameters, there was a broad range of responses as illustrated below;

 

Figure 2: Rate of loss as a percentage of turnover for the previous financial year at cost prices

 

When extrapolating these findings, it would suggest that on the low end, retailers are encountering a 0.98% rate of shrinkage whilst on the high end this would equate to 1.42% and a mid-point, or average shrinkage rate for the region of 1.21%;

 

Figure 3: Estimates of the rate of loss for the GCC region at cost prices


However, the most significant finding of the report is that most GCC Retailers are measuring loss at cost price whilst in most other regions they measure loss using the retail price;This finding is important as many Loss Prevention / Profit Protection practitioners have previously believed that the shrinkage in the region was in the range of 0.5% at the low end and 1% at the high end.

 

Figure 4: How retail losses are calculated in the GCC

 

Given that most GCC Retailers would be measuring losses at cost and possibly comparing themselves to other regions where they are measuring losses at the retail price, they would be creating the misperception that their rate of shrinkage is lower than other regions.

 

If one was to assume that the difference between retail and cost price (profit margin) was 30%, then a potentially comparable loss number might be in the region of 1.4% to 2.0%, with a mid-point of 1.7% which, when compared to the figures published in other Loss Prevention surveys, would be significantly higher than other regions.

 

One of the major negative consequences of undervaluing shrinkage is that most companies do not consider it a problem and therefore tend to allocate insufficient funding towards shrinkage mitigation strategies. Organisations could incorrectly be thinking that their Loss Prevention programmes are successful at containing loss when in fact they are not. This could also potentially result in lower level of management commitment and support of the loss prevention efforts.

 

The Total Retail Loss typology proposed by Professor Adrian Beck in his Total Retail Loss (2016) report, removes the ambiguity that currently exists in terms of which causes of loss are included or excluded when calculating ‘shrinkage’. Adoption of this typology would enable retailers to better understand the sources and/or causes of loss and consequently channel scarce resources and energy to areas that will have the greatest impact. The Total Retail Loss typology is highlighted below;

 

Figure 5: Total Retail Loss Typology

 

We would welcome any comments that you might have on the opinions expressed in this article. Alternatively, should you wish to receive a copy of Professor Beck’s report relating to Loss Prevention in the GCC or his report relating to Total Retail Loss, please feel free to enquire at info@jard.me