Is Breakage the New Shrinkage? Why Breakages are the Pressing Issue for Ecommerce Businesses in 2024
For traditional high street retailers, ‘shrinkage’ was (and remains) the hidden overhead that everyone recognised but that nobody really liked talking about. Shrinkage is a euphemistic term for unexplained losses of stock, in which a business experiences fewer items in stock than its recorded book inventory. This is primarily due to shoplifting, employee theft, administrative errors, and vendor fraud, and is a big issue for UK retailers, with the UK grocery sector reporting a 33% increase in shrinkage in 2023 compared to figures from 2018.
In financial terms, the cost of shrinkage is huge, with British retailers reportedly losing almost £11 billion each year due to shrinkage (2019 figures), which is the highest amount in any European country. This figure includes losses caused by crime, estimated to be around £5.5 billion in 2019.
Shrinkage is less of a problem for ecommerce retailers, simply because warehoused stock is more safely concealed from prying fingers. However, in place of shrinkage, Ecommerce retailers face the growing problem of breakage, which is potentially the most pressing financial issue for online retail businesses as we move into 2024.
Breakages in the warehouse and during transport are a significant real-world concern for ecommerce businesses, contributing to considerable losses and impacting profit margins, especially among independent retailers.
Not only do breakages cause direct financial losses for ecommerce businesses, but they also create an additional financial burden managing replacements for customers, and can also lead to reputational damage.
According to figures from 2021, the average ecommerce return rate was 18.1%, close to one in five orders, and 80.2% of these returns were because the product was damaged or broken.
What are the potential reasons for this surge in breakages?
Post-Covid ecommerce boom: firstly – there being a silver lining to every cloud – the UK ecommerce sector has observed an unprecedented boom since the pandemic in 2020, with record-breaking online spending reported on Black Friday 2023. This is clearly a positive trend for online retailers, but this growth comes with challenges. One of these is the increased risk of breakages during the delivery process, with all players in the supply chain under extreme pressure to achieve rapid fulfilment, which can lead to customer dissatisfaction and additional costs for retailers.
Pressure on margins: secondly, the pressure on profit margins for online retailers has increased, due to stagflation and increased expectations from customers. According to a survey in December 2022, over 40% of British ecommerce businesses had already cut or were considering cutting costs due to financial pressures. This suggests that issues such as breakages, which contribute to increased overheads and returns, are likely to remain a significant concern for ecommerce businesses throughout 2024. Ironically, an area in which cost efficiencies are often made is packaging, which is the first line of defence that online retail businesses have against breakages in transit.
Reduce your breakage levels in 2024
While breakages and returns can never be avoided entirely, the risk of breakage can be significantly reduced by investing in relevant packaging solutions for your products. To find out more, please contact one of the packaging experts at Kudos Giftwrap today by clicking here.
