Challenge of Shrinkage in Trent Ltd.

Introduction

Trent Ltd., of the Tata Group, is a prominent player in the Indian retail sector, known for its
innovative approach and strong brand portfolio. Established in 1998, Trent has successfully
carved out a niche in the retail landscape with its unique strategy of focusing on private
labels and an omnichannel presence. The company's flagship brands include Westside,
Zudio, and Star Bazaar, each cater to different market segments and consumer needs.

Strategic Brand Positioning

Trent operates under a distinctive business model that emphasizes "own brands," allowing it
to maintain control over product quality, pricing, and customer experience. The Westside
brand offers a premium shopping experience with a diverse collection of apparel, home
decor, and beauty products, while Zudio targets the value-conscious consumer with
affordable, trend-led fashion. This strategic positioning enables Trent to cater to a wide
range of customers, from budget shoppers to those seeking high-quality products. In recent
years, Zudio has emerged as a significant growth driver for Trent, contributing
approximately 30% to the company's total revenue, up from just 8% a few years ago. This
rapid growth is indicative of Trent's ability to adapt to changing consumer preferences and
market dynamics. The brand's success is also attributed to its aggressive expansion
strategy, with plans to open 200 new Zudio stores in FY2024 alone.

Financial Performance

Trent Ltd. has consistently delivered robust financial results. The company reported
a 50% increase in net sales for FY2024, reaching ₹12,375 crore, while net profit surged
nearly fourfold to ₹1,477 crore. Over the past five years, Trent has achieved a 31%
CAGR in revenue and a 26% CAGR in profit, demonstrating its effective business model
and operational efficiency. The company's financial health is further evidenced by its strong
gross profit margin, which improved from 15.8% in FY2023 to 23.4% in FY2024. This
increase reflects Trent's focus on private label merchandise, which typically yields higher
margins compared to third-party brands.

Expansion and Growth Strategy

Trent has adopted a measured approach to expansion, prioritizing quality over quantity. The
company has successfully increased its store count, adding 12 Westside and 86
Zudio stores in the March 2024 quarter alone, bringing the total to 232 Westside and 545
Zudio stores across India. This disciplined growth strategy ensures that Trent can maintain
operational efficiency while meeting consumer demand. The company is also exploring
international opportunities, particularly targeting the Indian diaspora abroad. Trent's
management has expressed interest in forming strategic partnerships to facilitate this
expansion, although concrete plans are still in the exploratory phase.
Omnichannel Presence

Trent has effectively leveraged technology to create a seamless omnichannel shopping

experience for its customers. The company’s brands are exclusively sold on Tata-owned
platforms such as Tata Neu and TataCliq, allowing for a cohesive brand experience across
online and offline channels. This strategy not only enhances customer engagement but also
drives sales through multiple touchpoints. The online channel has shown promising growth,
contributing approximately 6% to Westside's sales, with a 24% year-on-year increase in
FY2023. This digital focus aligns with the evolving retail landscape, where consumers
increasingly prefer the convenience of online shopping.

Challenges and Opportunities

Despite its impressive growth trajectory, Trent faces several challenges typical of the retail
industry. Rising input costs, particularly for raw materials like cotton, could impact
profitability if not managed effectively. Additionally, heightened competition from both
established players and emerging private labels poses a risk to Trent's market share.
However, these challenges also present opportunities for Trent to innovate and differentiate
itself further. By continuing to invest in private label development and enhancing its supply
chain efficiency, Trent can maintain its competitive edge in the market.

However, the company, is currently facing increasing shrinkage rates, which have become a
pressing concern for its operations. In the financial year 2023-24, Trent reported a
shrinkage rate of 0.41% of sales, a notable increase from 0.22% the previous year. This
rise is attributed to several factors, including significant volume growth and heightened
theft, particularly in high-value categories like apparel and electronics. The increase in
shrinkage at Trent Ltd. can be traced to several interconnected factors:

• Volume Growth: As Trent expands its product offerings and increases its store
footprint, the complexity of managing inventory also grows. Higher volumes can lead
to more opportunities for errors and losses, especially if inventory management
systems are not adequately equipped to handle the increased scale.

• Theft Trends: The retail landscape in India has seen a rise in theft incidents, which
can be attributed to economic pressures that drive some consumers to steal. High-
value items, particularly in the apparel and electronics categories, are often targeted
due to their resale value.

• Operational Challenges: With the expansion of retail operations, Trent may face
challenges in maintaining consistent security measures across all locations. Variability
in store management practices can lead to lapses in loss prevention protocols,
making stores more vulnerable to theft.

Financial Implications of Shrinkage

The financial implications of shrinkage are significant. For Trent Ltd., a shrinkage rate of
0.41% translates into a considerable loss of revenue, which directly impacts profitability.
This situation necessitates immediate and effective strategies to mitigate losses and protect
the company's bottom line. According to recent reports, shrinkage is a growing concern
across Indian retail firms, with many experiencing similar increases. For instance, V-Mart
Retail reported an increase in shrinkage from 0.4% in FY23 to 0.5% in FY24. The Retailers
Association of India (RAI) has noted that shrinkage levels up to 0.5% of sales are generally
considered manageable within the industry. However, it is important to contextualize these
figures against global standards, where average shrinkage rates typically range from 1.5%
to 2%. In comparison, Trent's shrinkage rate of 0.41% is below the upper threshold of
what is considered manageable within the Indian context, but it is still a notable increase
that reflects the challenges the company faces in managing inventory losses.

Comparative Analysis

To further understand Trent's position relative to the industry, it is helpful to consider the
following points:

• Trent Ltd.:

• FY24 Shrinkage: 0.41%

• FY23 Shrinkage: 0.22%

• V-Mart Retail:

• FY24 Shrinkage: 0.5%

• FY23 Shrinkage: 0.4%

• Industry Average:
o Generally considered manageable up to 0.5%.

• (Global average: 1.5% to 2%.)

Generic Causes of Shrinkage

Shrinkage in retail refers to the loss of inventory that cannot be attributed to sales, and it
poses a significant challenge to businesses in the Indian retail sector. The primary causes of
shrinkage can be categorized into several key areas:

• Shoplifting: This is one of the most prevalent causes of shrinkage, accounting for a
substantial portion of losses in retail. In India, shoplifting is often exacerbated by the
lack of adequate security measures in stores, making it easier for customers to steal
items without being detected.

• Employee Theft: Internal theft by employees can significantly contribute to

shrinkage. This can occur through various means, such as skimming cash from
registers, providing unauthorized discounts to friends and family, or stealing
merchandise. The trust placed in employees can sometimes lead to exploitation of
that trust.

• Administrative Errors: Mistakes in inventory management, such as incorrect stock

counts, mislabeling, or errors during the receiving process, can lead to discrepancies
between recorded and actual inventory levels. These human errors, while often
unintentional, can accumulate and contribute to significant losses.
 • Vendor Fraud: This involves dishonest practices by suppliers or vendors, such as
overcharging for goods or colluding with employees to steal inventory. Vendor fraud
can be particularly challenging to detect and address, as it often involves established
relationships.

• Product Damage: Damage during shipping, handling, or even in-store can lead to
shrinkage. Perishable goods, in particular, are susceptible to loss due to spoilage,
which can be a significant issue for grocery retailers.

Understanding these causes is crucial for retailers to implement effective loss prevention
strategies and minimize shrinkage.

Overview of Shrinkage Rates in Indian Retail Categories

1. Apparel and Fashion: Shrinkage in the apparel sector is notably high. Retailers
have reported shrinkage rates in this category reaching up to 2.9%, making it a
critical area for loss prevention efforts.

2. Electronics and Gadgets: Reports indicate that shrinkage rates in electronics is

comparable to those in the apparel sector, often hovering around 2.5% to 2.9%.

3. Grocery and Consumables: The average shrinkage in this category is often

around 0.5% to 1.5%. However, factors such as spoilage and expiration of
perishable goods can contribute to losses, albeit in different ways than theft.

4. Footwear: Shrinkage rates in this category can reach 1.5% to 2.5%, depending
on the retailer and location.

5. Home Improvement and Furnishings: Shrinkage in home improvement stores

tends to be lower, typically around 0.5% to 1%.

Addressing the Shrinkage Challenge

In summary, Trent Ltd. is facing significant challenges related to shrinkage rates, driven by
factors such as increased theft and operational complexities. By implementing strategic
initiatives and leveraging the expertise of local audit teams, the company may be able to
mitigate the losses and enhance its performance in the competitive retail landscape.