What exactly is ‘retail shrinkage?’ Retail shrinkage is the difference between what you have on your inventory sheets and what you actually have in your inventory. This delta is causing real issues for commercial vendors and commercial real estate investors alike. So, where does that inventory go, and, what is the effect of this retail shrinkage on commercial real estate investors?
Different Types of Retail Shrinkage
Generally speaking, retail shrinkage is what happens when a company loses inventory to a method other than sales. While the immediate thought is that shrinkage is a result of theft, and that’s very true, there are a few other ways in which shrinkage can occur. Let’s look at each.
Retail theft is as big a problem as ever. In fact, there’s seemingly more attention on it than ever with some large retail chains issuing instructions to NOT stop shoplifters from committing active and obvious theft. Why in all the world would this directive be implemented?
Primarily, employee safety is paramount and the human element is critical here, but also financial liability for bodily harm. Retailers have also come to realize that prosecuting for theft (legal fees, court costs, etc.) can actually be more costly than the merchandise in question. While this is not an entirely common practice (thieves are still more often prosecuted than not), many have become aware of the fact that stealing inventory in some locations is actually tolerated. As a result, cultural habits and norms are changing a bit in the retail space and that’s not good news for those trying to maintain their inventory and, thereby, retail-focused occupancy in the world of commercial real estate.
Shrinkage can also occur because of employee theft and return fraud. After all, who suspects the loyal employee and if an employee is smart enough, small thefts over a period of time can prove to be a little more difficult to detect. Again, inventory disappears and the vendor is stuck with that cost.
There is also the matter of administrative errors. This means that inventory is not correctly put into the system or it is not properly tracked by the vendor’s existing software. This is also the result of typos and mislabeled merchandise. Again, this becomes a preventable loss and that cost falls back onto the vendor.
The Retail Shrinkage Snowball Effect
Many retail establishments, especially grocery stores, are known for having extremely tight margins. Financial woes by losing inventory to shoplifters, employees or clerical mistakes can create a bothersome effect for vendors and property owners alike.
Too much suffrage means that a business is unable to meet their own financial goals and, thereby, the terms of their own lease. This becomes an issue that then trickles up to the actual property owner who, in turn, must vacate the property and seek new occupancy.
One of the more effective ways to deter preventable loss is to eliminate the matter of administrative error. This can be done by installing a more effective inventory tracking system that is easier to use and allows for more accurate reporting and cataloging of incoming and outgoing inventory. Security systems and employee training are two additional ways to mitigate retail shrinkage.
Retail Shrinkage and Commercial Real Estate Investors
As it pertains to commercial real estate investors, your objectives remain unchanged: positive cash flow and increasing property value trends. Retail shrinkage is one of many factors that can negatively affect each. The location of a property is very important. Crime trends are public and should be observed. Shrinkage varies per retail category as well. Perhaps a retail category that is less susceptible to crimes of convenience is a better fit than one that loses hefty margin to shrinkage.
Tenant relations are also critical to maintaining retention in a world where shrinkage is a reality. What are your tenant’s expectations of shrinkage and is this included in their business plan in addition to ensuring you get covered for the lease? What is their familiarity with the area and what are their precautions to mitigate shrinkage?
CRE investors have to juggle an enormous amount of controllable and uncontrollable factors where retail shrinkage may not even be top of mind. However, use of commercial real estate software is a great way to distill down to the most important elements of profitability to help you make strategic portfolio decisions and nurture tenant relations. Get your free demo today.
