It's Shrink or Swim in the Retail Food Sector

Shrink is not really a measure of asset protection. Shrink precisely measures organizational effectiveness and should be considered as a direct measure of a CEO's leadership abilities.

In today's environment, where the retail food industry is suffering from deflationary pressures, e-commerce margin pressure, talent wars and a saturated market, generating the expected return is becoming harder and harder. For the CEO, changing the lens on how we view shrink should be a solution to building a legacy of confidence and certainty.

Shrink is a simple equation

While there are few retail food operations that can claim immunity from excess shrinkage, many fail to recognize it is a measure of their organizational effectiveness. Historically, organizations have tended to take a pretty narrow view of shrink, seeing it mainly as an asset protection issue rather than as a bucket of expense just waiting to be converted to shareholder cash. Let's take a look at shrink as a straightforward equation:

Expected Gross Margin -- Actual Gross Margin = Shrink

This simple equation answers the question -- did we perform as we expected?

Missing financial expectations is costing the retail industry over $44 billion in lost profits[1]. More importantly it erodes confidence throughout the organization because when we plan for one thing and deliver another, investors, shareholders and colleagues become skeptical or uncertain. In our experience, many executives name shrink as a reason why they are not meeting expectations. They know they are losing money but haven't figured out what causes shrink or where expectations got missed. Often, executives seem resigned to the loss, perhaps not fully appreciating the broader implications for their business. The fact is that if we accept that shrink is an inevitable part of doing business, our customers start receiving less than expected and that is, without doubt, a disaster. Make no mistake, the equation is simple but the complexities underlying the numbers most certainly are not. Yet, with the right approach, you can begin to address them.

Some immediate opportunities to unlock shareholder value inside shrink

Most companies begin the financial year with an air of optimism, expecting to achieve their carefully built annual financial goals of gross margin and sales. However, most miss the mark by as much as 2--3%. All too often, they simply record and accrue this loss on one line of the P&L statement as 'shrink'. By re-examining this approach, you can unlock these gaps and improve your EBITDA. Working across the retail food sector, there are a number of key themes that we come across again and again; addressing these themes can deliver substantial and sustainable savings.

1. Analyze the entire value chain: From procurement through checkout examine if expectations are clearly defined, executed and measured accurately. Planning well is critical, identifying early fail points brings quick resolution and benefits.
2. Work with people who perform expected tasks: Identify key break points and the related impacts -- for example if forecast accuracy is missing expectations, why? If you assume skillsets without purposeful development and coaching it will generate subpar performance.
3. Design meaningful process feedback loops: Ensure expected tasks are completed as designed, through each relevant stage gate -- this helps you prepare for predictive capabilities. If you have too many reports and many versions of the truth it will detract from accountability.
4. Test impact and validate results: To ensure rapid EBITDA improvement.
5. Sustain impact through Total Value Optimization^TM: TVO is founded on solid data analytics and brought to maturity through leader and organization improvement. Focusing on clear definitions of roles and understanding which metrics are truly KPIs brings consistent execution.

• If you would like to talk through the opportunities discussed in this article and find out how we can help your organization reduce shrink and optimize your entire value chain, contact us for a no-obligation chat.

[1] https://nrf.com/resources/retail-library/national-retail-security-survey-2015

As specialists in procurement, logistics and operations, we know that there are cost savings to be found almost everywhere in the key areas of your value chain. Not only that, we have the experience, methodology and capability to deliver significant savings and help clients move up the maturity curve to achieve Total Value Optimization™.

Find out how Maine Pointe can help assess your operations and implement improvement projects that deliver fast and compelling economic returns.