December 2023Retail PracticeThe art and science of reducing retail shrinkFor retailers, battling shrink requires a data-informed, collaborative, store-by-store approach. The payoff: higher profits and better customer experience.It’s been in the news in recent months, and it’s a complex and multifaceted topic: retail shrink is not, as some people might think, synonymous with theft. On this episode of the McKinsey on Consumer and Retail podcast, hosted by Monica Toriello, two retail experts discuss shrink—not just as a problem for retailers to solve, but as an opportunity to improve both the bottom line and customer experience. The following is an edited transcript of the conversation. Monica Toriello: Hi, everyone. We’re back with one more episode before 2023 comes to a close. Our topic today is a timely and important one for retailers: retail shrink or, as it’s also known, shrinkage. It’s an issue that has a significant impact on retailers’ bottom lines. In 2022, US retailers lost more than $110 billion from shrink, according to the National Retail Federation (NRF)—and, of course, shrink is a problem not just in the US market but globally as well. Here with us today to discuss retail shrink—and some of the solutions for addressing it—are two people who have worked alongside many retailers on this problem.Mark Ibbotson has been a McKinsey senior adviser for the past two years. Prior to that, he spent seven years at Walmart, most recently as the executive vice president in charge of central operations and real estate. In that role, Mark’s responsibilities included innovation, process improvement, and asset protection and safety. Before joining Walmart, he was COO at Asda.Bill Mutell is a McKinsey partner based in Atlanta. Bill has advised grocers, drugstore retailers, restaurant chains, and other types of retail companies on a range of sales and operations topics. He has also cowritten a number of articles on store operations, including an article on shrink.Bill and Mark, thanks for joining us today. Let’s start by defining terms. Some people think of retail shrink or shrinkage as synonymous with theft and shoplifting. But “shrink” is a much broader term, right? Define retail shrink for us: What does it encompass? And how do retailers measure it?Bill Mutell: Theft is, as you mentioned, one part of shrink. But another part of shrink, as some retailers define it, is waste and spoilage—so when things go bad because you’ve ordered too much or because the traffic hasn’t met the demand levels you were expecting.One of the first things we do when we sit down with retailers around the world is simply ask the question that you just did: “How do you define shrink within your company?” What we find is that the definition varies quite a bit. Some retailers, for example, include things like markdowns. Another piece...
