Retail shrink is a $100 billion problem that's eating away at retailers' bottom lines. Whether it's a small boutique or a big box store, inventory is disappearing from shelves—and it's not just from sales.
From shoplifting to employee theft to administrative errors, retail shrink can cost businesses thousands of dollars each year. And the problem continues to grow. Last year, the National Retail Federation found that shrink has increased by 1.6% year over year, causing a collective loss of $112 billion for global retail companies.
But theft isn't the only culprit; damaged goods and operational inefficiencies are also to blame. This guide dives into the real causes of retail shrink and provides practical strategies to calculate and combat this costly problem head-on.
Common causes of retail shrink
Employee theft
Employee theft is a major contributor to retail shrink, accounting for 29% of all losses. And it’s on the rise: according to 48.5% of retailers, employee theft was a more pressing issue in 2023 than the year prior.
For smaller businesses, the risk increases as the team grows. The majority (90%) of retailers with 31 to 40 employees reported this type of theft, compared to 77% with 21 to 30 employees.
Employee theft takes many forms, including:
- Stealing merchandise
- Misusing employee discount schemes
- Ignoring theft by friends/family
- Pocketing petty cash from the register
- Processing fraudulent returns
- Issuing fake gift cards
Shoplifting
External retail theft, including organized retail crime, accounts for 36% of total retail shrink. Again, it’s on the rise—shoplifting increased by 24% during the first half of 2024, according to the Council on Criminal Justice.
Major retailers like Target, Best Buy, and Walmart have closed stores due to shoplifting. But this isn’t just affecting the big players. Small businesses are feeling the pinch, too, with 85% dealing with shoplifting at least once a year.
Even more concerning, 88% of retailers say shoplifters are becoming more aggressive and violent. You’ll need to factor this into any retail training programs to maintain employees’ safety.
Administrative errors
Administrative errors, known as “paper shrink,” account for 27% of retail shrinkage. This huge chunk of lost profits often results from simple mistakes that lead to merchandise being sold for less than intended.
Common forms of administrative errors include:
- Inaccurate inventory counts
- Mismanagement of paperwork
- Incorrect pricing or mislabeling
- Erroneous markdowns
- Accounting discrepancies
📌Pro tip: Shopify integrates with barcode scanning tools to improve inventory counting accuracy. Instead of mentally totalling how many units you see, point the barcode scanner to the product’s label and have the quantity automatically update in your POS system.
How to create and print barcode labels || Shopify Help Center
Vendor fraud
Vendor fraud might account for less than 5% of shrinkage, but it’s still a threat worth watching out for. It manifests as financial manipulation or direct theft during inventory delivery, often resulting from inadequate vendor vetting or lax internal controls.
Common vulnerabilities that lead to vendor fraud include:
- Skipping background checks or not reviewing vendors’ legal history
- Lack of separation between purchasing and invoice processing duties within the company
- The absence of a robust and anonymous fraud reporting system
These gaps create opportunities for employee-vendor collusion and unreported fraudulent activities that impact retail shrink.
Damaged or expired goods
Spoilage is a major headache in sectors like food retail. Supermarkets lose 2.5% to 4% of potential revenue from surplus food going bad.
Many factors can cause product damage or expiration, leading to significant retail shrink:
- Improper storage conditions (temperature, humidity, etc.)
- Inadequate rotation of perishable goods
- Customer mishandling in self-service areas
- Returned items, especially those damaged or used
These problems create extra work, like more frequent inventory checks, manual stock adjustments, and staff training for proper handling procedures.
How to calculate shrink in retail
Inventory shrink occurs when a business loses products between buying them from a supplier and selling them.
Here’s the formula to calculate shrinkage for your retail store:
Inventory Shrinkage = Recorded Inventory - Actual Inventory
For example, if records show 1,000 items but you only find 950, your shrinkage is 50.
Shrink percentage formula
You might also calculate retail shrink as a percentage of inventory you’ve lost. This percentage provides a standardized way to measure inventory loss, letting you compare across different store sizes, time periods, and retail industry standards.
In that case, we’d use the following formula:
Shrink Percentage = (Recorded Inventory - Actual Inventory) / Recorded Inventory x 100
Impact of retail shrink
Financial losses
Retail shrink causes significant financial damage to businesses of all sizes. These continuous losses often force retailers to take serious actions, such as cutting staff, limiting store hours, or closing locations altogether.
Major chains like Target, Walmart, Macy’s, Best Buy, and CVS have closed multiple stores due to shrinkage-related financial strain. And it’s not getting easier despite the introduction of new technology—organized shoplifting groups and the rise of minimally supervised self-checkout systems are making inventory losses even worse.
In response, retailers have adopted defensive strategies:
- 45.3% have reduced store hours
- 29.7% have decreased or changed product selections
- 28.1% have closed specific store locations
Reduced profit margins
Shrink doesn’t just eat into your retail sales; it also drives up costs and reduces efficiency. To fight shrinkage, retailers often have to:
- Do more frequent manual stock counts
- Constantly replenish shelves due to theft or mismanagement
- Spend more time on loss prevention instead of customer service
Plus, there’s the added waste from dealing with damaged or expired goods. It all adds up to thinner profit margins.
Increased prices for consumers
Unfortunately, retail shrink costs often get passed on to customers through higher prices. In 2024, The National Retail Federation reported that 64% of small business owners have had to raise their prices to offset losses from theft and fraud. In the UK, it’s estimated that this “crime tax” adds an average of sixpence (8¢) to every product sold.
As retailers struggle with retail loss, some are forced to cut costs by reducing staff, which can lead to a poorer customer experience. Plus, when popular items are constantly out of stock, customers might shop elsewhere to find what they need.
This mix of higher prices, reduced service quality, and frequent stockouts can drive customers away, making it harder for retailers to keep their customer base and protect their profits.
How to prevent shrink in retail
Get an inventory management system
Inventory management software is essential for reducing shrinkage as your business grows. Manual counting methods often lead to errors and missed discrepancies, wasting time and resources.
Advanced inventory management systems like Stocky offer:
- Real-time data and inventory reports on stock levels
- Multichannel inventory tracking—including stores, warehouses, and 3PL distribution centers
- Barcode scanning for faster, more accurate counts
- Automated reordering to maintain optimal stock levels
- Forecasting tools to predict demand and prevent overstocking
Tools like Shopify POS offer comprehensive inventory management features, letting you track unlimited products, reconcile inventory across stores, and generate detailed reports. You can easily compare actual stock with recorded inventory in real time, addressing discrepancies immediately to prevent shrinkage.
By unifying your view across all channels, you can quickly identify and address stock discrepancies, reducing shrinkage from administrative errors and improving inventory accuracy and customer experience.
“The move to Shopify POS was prompted by our investment in the retail channel, as we transitioned from pop ups to a permanent brick and mortar store,” says Benn Martiniello, founder and CEO of Elite Eleven.
“We needed to improve our inventory management and amalgamate customer data. Moving to the Shopify platform was a no-brainer—we now have one unified commerce system across online and offline stores to understand our customers and serve the most relevant products.”
Train retail employees
While cameras or bag checks might deter employee theft, they can create an atmosphere of mistrust and lower morale. Instead, focus on hiring employees with strong ethics and integrity. These individuals are less likely to steal and can actively help you prevent losses.
Once you’ve hired reliable employees, train them to spot and prevent shoplifting, refund fraud, and other theft tactics. You can offer online courses through organizations like the Loss Prevention Academy or bring in experts for hands-on employee training.
You could also experiment with scorecards and incentives that include retail shrink metrics. Make shrink reduction a team effort and tie it to perks like better employee discounts. For example, if you reduce shrink by $500, can you organize a team building day using a portion of revenue you’ve kept?
It’s also worth training your retail team on proper inventory recording, handling returns, and processing markdowns. This makes sure that everyone understands their role in preventing shrinkage and the consequences of theft or carelessness.
Implement security measures
Clear loss prevention policies show your business’s commitment to ethical standards. But not all retail stores are created equal when it comes to risk. Tailor yours to each store location and the products you’re selling.
Rate your stores for risk based on location, local crime rates, and merchandise value. For high-risk locations, focus on “hardening the target” with enhanced security measures like cameras, better lighting, and secure gates. Regular store visits can help you spot departments that are losing a lot of stock and figure out why.
If you use self-checkout, consider staffing these areas with well-trained “hosts” who can help customers and handle tricky situations. Some stores use smart gates or intelligent cameras to detect skip-scanning and alert staff to potential issues.
Hire a loss prevention team
As your business grows, consider building a strong loss prevention and asset protection team that takes proactive measures to prevent losses.
These trained professionals assess areas where your business may be at risk and develop targeted strategies to reduce retail shrinkage. They use advanced analytics, predictive modeling, and real-time monitoring systems to spot patterns, predict potential loss events, and respond quickly to theft or fraud.
Here’s what a top-notch retail loss prevention team might do:
- Lead investigations into fraud, theft, and other incidents, then report findings to retail management
- Regularly check how well your loss prevention strategy is working and flag any big issues
- Promote and enforce security best practices, including surprise checks on inventory and store security procedures.
Use RFID technology
Radio-frequency identification (RFID) tags let you track real-time inventory, streamline supply chains, and speed up checkout. These systems use radio waves to send data from tagged items to readers, automatically updating your inventory database. This cuts down on human error and labor costs and makes your inventory counts more accurate.
RFID technologyoffers better asset tracking by combining sales data and video surveillance. For example, if more items leave the store than are sold, RFID can determine which specific products were stolen and when they were taken and provide video footage of the incident.
Advanced RFID tags can also track stolen items after they leave the store, helping law enforcement find the offenders and catch them.
Conduct regular inventory audits
Inventory audits help discourage employee theft, spot discrepancies between physical inventory and stock records, and catch potential problems before they escalate.
Surprise audits can be particularly effective. They often uncover issues that might slip through during scheduled checks, especially if employee theft is a concern.
Inventory management software simplifies auditing by helping you spot discrepancies and accurately manage stock levels. It can help you spot patterns, like frequent discrepancies in specific product categories or periods. This lets you focus your prevention efforts where they’ll have the biggest impact.
Minimizing retail shrink without sacrificing buyer satisfaction
As a retailer, you’re walking a fine line. You want to reduce shrink, but you also need to keep your store welcoming. Go overboard with security, and you might scare away more customers than thieves.
The key is to implement smart inventory management and thoughtful loss prevention strategies. This way, you can protect your profits while creating a warm and respectful environment for customers and employees.
A tool like Shopify POS can help you strike this balance, positively reducing shrinkage while giving you all the tools you need to grow a thriving retail business.
Retail shrink FAQ
What is retail shrink?
Retail shrink describes inventory loss due to causes such as shoplifting, employee theft, administrative errors, vendor fraud, damage, and cashier errors. It’s the difference between the recorded inventory and the actual amount present.
What is the difference between shrink and theft?
While theft is a significant component of shrink, they aren’t the same thing. Shrink includes all forms of inventory loss, including intentional and accidental. Theft specifically refers to someone deliberately taking merchandise or cash without permission or payment.
What is the average retail shrink rate?
NRF reports that the average retail shrink rate is 1.6%. This means that for every 100 units, they’ll lose almost two to theft, administrative errors, vendor fraud, damage, or cashier errors.
Where does most retail shrink come from?
Theft accounts for nearly one-third of retail shrinkage. External theft, including organized retail crime, accounts for 36% of all losses, and employee or internal theft is responsible for 29%.
