Leveraging Technology to Combat Internal Retail Theft

More than ever before, retailers are turning to technology to combat the plague of internally caused shrink.


Generally speaking, the retail term "shrink" refers to loss. This loss can take the form of merchandise, cash or virtually any other asset of the operation. Shrink is typically measured using periodic inventories and closely monitored as a key retail business barometer. Shrink may result from a number of crimes including shoplifting and cashier theft. It may also result from mistakes such as missed price changes. Generally speaking, shrink falls into four categories across all retail segments, based upon the cause of the loss.

External. Shrink caused by external sources. This is the shrink category of which the retailer and the public are the most aware. Many people mistakenly equate external shrink with shoplifting only. However, external shrink can also come about through robberies and other causes.

Internal. Shrink caused as a result of illegal employee behavior. Internal shrink is caused by such acts as fraudulent cashier activity and theft of merchandise by employees. Internal shrink is the most serious category of shrink the retailer faces.

Administrative. Shrink that occurs either as a result of intentionally or unintentionally mismanaged administrative tasks, such as improperly managed price changes, improper disposition of damaged goods and mismanagement of inter-store transfers.

Vendor. Shrink incurred in the vendor delivery process. Causes of vendor shrink include often-deliberate errors made during the delivery process and improper handling of damaged goods credits.

These combined shrink categories cost U.S. retailers approximately $31.3 billion annually. The table below compares the four basic shrink categories in terms of percentage of contribution. Historically, retailers have focused more of their loss prevention resources combating external shrink, primarily shoplifting, rather than internal shrink. However, according to retail and loss prevention studies, shrink caused by the retailer's own employees is almost always at least as detrimental as shoplifting. No other shrink category contributes more to the overall loss problem across all retail segments. Internal shrink cost U.S. retailers more than $15 billion in 2001.

Deconstructing Internal Shrink
Internal shrink occurs on all levels and in a variety of ways. The most prevalent perpetrators are employees who steal alone. However, many employees steal in collusion with friends or family, and some employees work together to steal from their employer. The schemes used by the dishonest employee are quite varied and run the gamut from the most basic to quite elaborate. Cashier dishonesty at the point of sale is consistently the largest component of the internal problem. Dishonest cashiers employ a multitude of theft methods, and they vary depending on retail segment, POS system, and the retailer's specific policies and safeguards. Here's a summary of just a few of the most prevalent methods of cashier theft.
• Fraudulent refund activity
• Fraudulent use of the void key
• Fraudulent use of point-of-sale training mode
• Fraudulent credit card activity
• Fraudulent suspension of transaction
• Numerous customer short-changing schemes
• Sliding merchandise completely around scanner
• Switching bar codes on merchandise

Fraudulent cashier behavior typically accounts for as much as 65 percent of total internal shrink. Cashier point-of-sale activity must become a closely monitored area if the business hopes to reduce overall shrink.

With such a large percentage of the internal shrink problem occurring at the point of sale, it's important to have a basic understanding of how the shrink is occurring. There is almost always a direct relationship between the amount of empowerment the cashier has at the point of sale and the level of real security the business enjoys.

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