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Lowering Losses Due to Shrinkage

Shrinkage. That word should strike fear in your pocketbook as a business owner. Industry groups generally agree that shrinkage will account for 1% and up to a maximum of 1.4%, but for some retailers it can be double that!

Business is a numbers game. For cannabis, one of those numbers is $175 million. That is the value currently assigned to shrinkage, or loss in inventory value, since legalization.

Unlike other retail industries, the cannabis industry has effective measures in place to prevent customer theft.  So, if the losses are not attributed to shoplifting, where are they coming from?

Studies have found that 10% of that total loss, or $17.5M, is due to mistakes in the numbers. Incorrect or inconsistent reporting in any business is problematic, but in the highly regulated cannabis industry, it can be costly, leading to fines, legal infractions, and potentially, loss of license. This is a serious topic with serious consequences. Unfortunately, for retailers, it’s likely your business is included somewhere in these numbers.

Approximately 90% or $157M of shrinkage can be attributed to employee theft.

As for the bulk of total losses, reported data and comparable market studies indicate that approximately 90% or $157M of shrinkage can be attributed to employee theft.

Inventory is more than just products. It’s cold hard cash, and it is important to look at it that way. When your employees handle inventory, they’re handling your dollar bills and by extension, your bank account. In an industry plagued with higher-than-average staff turnover—the average budtender turnover rate in Canada during the past twelve months was 56.4%—would you ever dream of handing over your debit card or PIN to employees? Would you allow access without checking your account balance daily? Of course, you think you wouldn’t, but maybe you already did.

People Are at Risk

The first rule of risk management is to identify risks. The second is to mitigate them.

inventory counting
Courtesy of Count Canna

When you read that 90% of losses are due to employee theft, you might imagine someone pocketing product at the end of a shift. However, you are sure this isn’t possible because you are diligent and have protections in place like a solid POS system and security cameras to prevent theft. You believe you have done everything to respond to the risk, and maybe you’ve resigned yourself to accept some loss as a cost of doing business.

However, employee theft means more than taking product. It includes discounts, manipulating and falsifying financial systems, exaggeration of hours, and other means to drain your bank account. At first blush it sounds daunting to have eyes everywhere, but it doesn’t need to be overly complicated.

Keep it Selectively Simple

You need to focus on three simple words: Accountability, Accessibility, and Analytics.

Accountability starts and ends with you. How are you holding your staff accountable? Can you declare with 100% certainty that physical counts match your records? Are numbers accurate? Can you be sure systems aren’t manipulated to cover up accidental, or potentially nefarious activity? Are there unexplainable losses?

If you can’t answer those questions with conviction, then you already know there are problems. Your answers will be an immediate measuring stick as to whether you are managing risk, or it’s managing you.

Accessibility to the right information and true inventory is key. Any business with an inventory usually manages it by employee-performed counting. In an industry where heavy losses are known to come directly from employees, external auditing is no longer an option, but rather a vital requirement. There’s a need to incorporate additional layers of auditing controls to ensure accuracy.

Analytics will identify errors and could uncover falsified entries to hide theft. Smart changes can start with making a formal request to your POS provider to remove inventory and sales totals from main operating screens and end-of-shift cash outs. Along with your daily sales reports, request analytics for daily discounts, adjustments, and labour costs. Daily reviews will show patterns, eliminate abuse, and give you control of your inventory.

Discounts are an area of prime concern. Nationally, discount statistics show that from the beginning of 2019 (where 1% was the average) to April 2022, reported discount levels had increased to 3.4%. With national sales exceeding $350 million monthly, that 2.5% increase amounted to almost $12 million a month in discounts!

While discounts are a benefit to encourage your staff to try new products and get other products moving, your job is to make sure this privilege is not being mistreated, extended to family and friends, or applied to random cash sales, where the “discount” turns into a tip.

Food for thought: Altering or adjusting just one product a week at a cost of $50, to cover up internal theft, produces a net annual loss of $2600. An unauthorized discount of $20/day is the equivalent of $7300/year.

Disrupt Your Reality

British economist Umair Haque said, “There’s nothing more fundamentally disruptive to the status quo than a new reality.”

Make these operational changes to directly mitigate your shrinkage:

  • Stop exposing inventory totals.
  • Implement blind cash drops.
  • Create digital logbooks.
  • Reduce access to financial reports.
  • Pay attention to red flags.
  • Stay in tune with analytics related to discounts, adjustments, and scheduling.
  • Take control of your inventory.
  • Hold your employees accountable.
Queensborough Cannabis

Calvin Basran, owner of Queensborough Cannabis has been operating with third party auditors throughout his career and knew it was a practice that he would integrate immediately when he entered the cannabis market. “External auditing has allowed me the transparency and information I need to ensure compliance and the legitimacy of my numbers,” he explains.

With two new locations set to open by fall, recent additions have included digital logbooks and increased analytics to protect his profits. “With tools and services to streamline operations readily available, I wouldn’t do business any other way,” Basran says. With shrinkage now substantially below the national average, he adds, “The proof is in the numbers.”

Considering all the circumstances, eliminating internal theft is not a viable option, but you can take measures to decrease overall losses, like conducting external audits and analyzing data. If you haven’t considered this before, it’s something you should deal with, before any more of your hard-earned money goes up in smoke!

Tags: Calvin Basran (1), Cannabis Retail (331), employee theft (1), loss of inventory (2), Michelle O'Flynn Cozzuol (1), Queensborough Cannabis (1), reducing shrinkage (1)