Fraud and Shrinkage Detection For the Modern Retailer

Fraud and Shrinkage

Shrink is proving to be a major threat to retailers’ bottom lines at a time when they’re still reeling from the decline they’ve experienced throughout the pandemic. The industry loses tens of billions of dollars every year due to shrinkage that can be as much as 2% of sales. This amounted to $61.7 billion in 2019, according to a study conducted by the National Retail Federation.

On the other hand, Javelin Strategy & Research reports that fraud costs retailers over 7.5% of their revenue annually. In the United States, 82% of retailers have reported a notable increase in fraud attempts throughout the pandemic. The fallout has been monumental: 26% of global retailers say the damage to their profitability caused by fraud is significant. Yet, a more practical approach to loss prevention would decrease fraud and shrink-related losses.

Types of Inventory Shrinkage

There are four primary types of inventory shrinkage:

  1. Customer fraud or theft
    This is the most common type of shrinkage, and it can take many forms, from shoplifting to organized retail crime. It accounts for at least 35.7% of total retail shrinkage.
  2. Administrative errors
    This type of shrinkage includes billing mistakes, discrepancies between what was ordered and what was received, incorrect data entry, and other errors during the administrative process. It accounts for as much as 18.8% of the total shrinkage for in-store retail.
  3. Employee theft
    This shrinkage occurs when employees steal from the company, either directly from inventory or through fraudulent transactions. It accounts for 33.2% of total shrinkage.
  4. Physical shrinkage
    This type of shrinkage includes damage, spoilage, and other types of loss that occur during the physical storage and handling of inventory. It accounts for 5.8% of total retail shrinkage.

To adequately address shrinkage, retailers must first understand which types of shrinkage affect their business the most. Once they have this information, they can develop a more targeted loss prevention strategy.

One such way to accomplish this is by installing video surveillance that can be integrated with point-of-sale (POS) systems and other data sources. This would allow for real-time monitoring of store activity, providing visibility into potential fraudulent or criminal behavior. And also, it is important to note that such an installation must be in compliance with GDPR.

In-store retailers must adapt to the new reality of increased fraud and shrinkage. By taking a proactive approach to loss prevention, they can protect their bottom lines and keep their businesses afloat.

Targeted Loss Prevention Strategy

There are several retail shrinkage and loss prevention strategies that can be used by retailers to combat shrinkage, but not all will be equally effective for every type of shrinkage.

For example, installing security cameras is an effective way to deter and detect customer fraud and employee theft, but installing cameras will be inadequate if it is not accompanied by a system that analyzes that footage for insights into possible fraud and theft.

Here are a few retail shrinkage and loss prevention strategies that you can use to combat the four primary types of shrinkage:

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  • Customer fraud or theft: Install security cameras, use RFID tags, invest in loss prevention software, and conduct regular audits.
  • Administrative errors: Implement barcoding and scanning technologies, double-check orders before they’re shipped out, and cross-train employees.
  • Employee theft: Conduct background checks, implement security measures, and create a culture of accountability.
  • Physical shrinkage: Use proper storage techniques, invest in damage-resistant packaging and conduct regular inventory audits.

While there are many traditional methods that you can use to detect fraud and shrinkage, these methods often fall short. For example, security cameras can only capture what happened in the past and require someone to monitor the footage constantly. Additionally, audits are time-consuming and expensive and can only be conducted on a small portion of the inventory.

Cognitiwe Smart Retail for Fraud and Shrinkage Detection

Of the four issues listed above, Cognitiwe Smart Retail supports fraud and shrinkage detection. In-store fraud and shrinkage is a complex problem that requires a multi-faceted approach. Cognitiwe Smart Retail allows businesses to detect fraud and loss in the most efficient way possible. By using the Cognitiwe predictive vision AI platform, retailers can gain a more holistic view of their business and identify potential risks before they become actual losses.

Cognitiwe transforms your images and videos into data and leverages its cutting-edge technologies to identify patterns that could indicate fraud or shrinkage. Retailers can use our predictive vision AI to monitor customer behavior, track employee activity, and detect potential threats in real-time.

Here’s how the system works:
An area in front of the checkout is marked to determine potential fraud. Every shopping cart that gets into the camera’s angle is detected. The detected carts are monitored inside the marked area to ensure controls. The carts are expected to be empty before they leave the marked area. In case any fraud is detected, an authorized person is notified immediately. For such sensitive use cases, Cognitiwe makes sure to work in 100% compliance with GDPR and other relevant regulations.

Reach out to us today, and let’s explore how Cognitiwe can help you better understand and how to prevent fraud and shrinkage before they affect the profitability of your retail business.


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