Offsetting the Bottom-Line Impacts of Shrinkage with AI-Driven Price Optimization

Is your retail business grappling with the spiraling costs of shrinkage that is eroding your bottom line – even more? Are you witnessing a surge in both customer and employee theft – contributing up to 80% of the total shrink number? If so, you’re not alone.

Concealed behind the bustling aisles and welcoming customer service, there lies a significant issue quietly undermining the retail industry – shrinkage. All retail segments are being targeted from Grocery to Electronics, Automotive, DIY, and Fashion. Detergent, power tools, meat, denim, designer handbags, medication…the list of high theft items is targeted and growing.

Beyond the immediate revenue and gross margin losses from stolen items, you’re also faced with a cascade of additional costs—security measures, tech upgrades, personnel training, and legal expenses. So, how can retailers like you recoup a substantial portion of the Gross Margin Dollars (GM$) lost to shrinkage?

AI-Driven Price Optimization: Your Solution to Margin Erosion

By implementing Digital Wave’s Price Optimization technology, you can recoup between 4% and 10% of additional gross margin dollars. This solution allows you to set optimal pricing based on real-time demand at the product and location-channel level, compensating for the gross margin dollars you lose to theft and shrinkage.

Understanding the Gravity of Shrinkage

The increase in theft during a store’s open and closed hours contributes to a profit-draining issue crippling the retail industry: shrinkage. This term encompasses inventory loss due to theft, errors, or damage, and its incidence has been alarmingly on the rise, primarily driven by theft.

Source: Shipbob

Recent statistics paint a grim picture. Over the past two years, shrinkage has evolved into a more pressing problem, seriously affecting gross margin dollars and bottom-line profit. In 2022, 81% of retailers reported experiencing an increase in shrinkage.

One of the largest mass merchants in the U.S. is projecting an additional $500 million in shrinkage over 2022, pushing their total shrinkage for 2023 to exceed $1 billion. And this issue isn’t isolated; shrinkage is rampant across the industry and its unpredictability makes planning even more challenging.

The Financial Fallout of Shrinkage

Shrinkage not only dents your revenue but has a multi-faceted impact on your business:

  1. Financial Loss: Shrinkage directly erodes revenue and profitability, making it harder for retailers to invest in growth.
  2. Consumer Price Inflation: Retailers often pass the cost of shrinkage onto consumers by raising product prices, making essential items less affordable.
  3. Employee Morale: Persistent shrinkage often leads to a culture of mistrust, affecting employee morale and, subsequently, customer service.
  4. Inventory Challenges: Time and resources are diverted to track and manage inventory, sidelining other important aspects of the business.
  5. Risk of Closure: In extreme instances, ongoing shrinkage could force stores to close permanently, affecting jobs and local communities.

An Alternative to Offset Lost Gross Margin Dollars Due to Increasing Shrink 

What tools are at your disposal to offset the lost gross margin dollars attributed to shrinkage? Digital Wave Technology’s AI-driven Price Optimization offers a viable solution, helping retailers capture conservatively an additional 4-10% in gross margin dollars.  

Let’s discuss an example using an annual retail financial statement.  You are a retailer with $10 billion in annual sales and your cost of goods sold (COGS) is 62%. The shrink number is accounted for within your cost of goods sold.  For the year you have realized a 38% gross margin or $3.8 billion in gross margin dollars. 

In this case, let’s assume $7 billion (of the $10 billion in revenue) is utilizing a price optimization solution to recommend demand-driven pricing. Not all your revenue will be applicable to price optimization and this example accounts for that.  

On the $7 billion under the price optimization management, the original gross margin would be $7 billion x 38%, or $2.66 billion in gross margin.  

However, when you capture an additional 5% gross margin dollars using the AI-powered price optimization solution, an additional $133 million in gross margin dollars is generated. This would result in adjusted gross margin dollars of $3.933 billion ($3.8 billion + $133 million = $3.933 billion) and 39.3% ($3.933 optimal gross margin dollars divided by $10 billion). The improvement is $133 million in NEW gross margin dollars and a 1.3-point improvement in gross margin percentage.  

Digital Wave Technology’s AI-Powered Price Optimization

Whether you opt for AI-powered regular Price or Markdown Optimization, retailers can realize additional GM$ through demand-driven, optimized pricing strategies. Don’t let increasing shrinkage rates wreak havoc on your financials.

Reach out to Digital Wave Technology to explore how AI-driven Price Optimization can help you recover lost Gross Margin Dollars. Interested in quick wins, in a matter of weeks, Digital Wave Technology can have retailers receiving optimized prices on your highest priority categories while capturing additional GM$ – using this as a strategy against unprecedented shrink/theft rates, that are destroying your already strained bottom line. Whether you are looking for a quick win engagement or to roll out across all categories, Digital Wave Technology is looking forward to hearing from you!

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