Shrinkage is on the rise in grocery retail and it continues to damage the bottom line. According to FMI's Food Industry Speaks 2019 Report1, overall store shrinkage reached 3.1%, which is slightly higher than the 2.5% average. This rise is closely related to the growing popularity of fresh foods, which present challenges because of quick expiration, operational inefficiencies and waste. As consumers’ demand for fresh food products increases, retailers are struggling to balance growth, while minimizing the annual industry shrink losses, now totaling $50 billion.
Fresh Product Expansion
The FMI report indicated many consumers now choose a grocery store based on the quality of its fresh product selections, such as meat, deli, fruit and vegetable departments. Over the next two years retailers (63%) plan to allocate more space for fresh produce, followed by deli products (45%), fresh seafood (41%), fresh meat (33%) and bakery (29%). Furthermore, retailers plan to increase the amount of fresh item SKUs, which elevates the risk for systematic errors.
Some prime reasons why shrink and fresh foods are linked, include label swapping, missed or inaccurate scans, manual hand keying at the cash register and self-checkout missteps.
Although shrinkage is typically associated with thefts and consumer misdeeds, a 2018 NRF Survey indicated these cases only account for 36% of total shrink. The remaining 64% of shrink is tied to operational inefficiencies such as improper markdowns, inventory controls (41%) and an overstock in unsaleable products, which results in waste.
For example, according to the FMI report, the departmental-level breakdown of shrinkage is 8.7% in deli, 8.5% in bakery, 7.6% in seafood and 5.7% in meat, compared to a modest 1.2% shrink rate among dry grocery goods. Fresh goods have shorter shelf lives and face abrupt price changes, which strain inventory management and inflate waste.
Maintaining profitability, while growing fresh departments and satisfying consumer preferences, will pose new challenges for retailers.
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1 David Orgel 2019, FMI The Food Retailing Industry Speaks, viewed October 2019