What Is Shrink In Retail? 6 Causes and 7 Prevention Strategies

$112.1 billion. Yep, you heard that right. That's how much money was lost to retail shrinkage in 2022, according to the National Retail Federation (NFR) -Ouch!

Shrink in retail happens when physical inventory goes missing from the store and no one knows where it went. It’s a huge headache for retail businesses, but if you know what causes it and how to stop it, you can save a lot of money (and stress).

We're going to break down the six most common causes of shrink and share seven smart strategies to prevent it. Because, after all, nobody likes losing money!

Shrink definition 

Shrinkage is when a store loses inventory due to internal theft, external theft (AKA shoplifting), administrative errors, vendor fraud, damage, and cashier mistakes. It’s basically the gap between what the store’s records say they have and what they actually have. This is a big issue for retail businesses because losing inventory means losing profits.

6 causes of inventory shrinkage

You now know what it is, but what's causing your stock shrinkage? Here are the six main culprits likely sabotaging your inventory:

Shoplifting

Shoplifting is a classic. We've all seen those security camera clips of someone trying to sneak out with a pair of shoes stuffed down their pants. It’s not just a minor annoyance. Nope, it’s a major drain on your inventory.

Every time a shoplifter gets away, your bottom line takes a hit. In 2020, Jack L. Hayes International’s 33rd Annual Retail Theft Survey found that the average value of shoplifting cases went up by 13%. It’s a big reason why stores lose money, accounting for over 35% of all the items that go missing each year.

The worst part is that it often goes unnoticed until it’s too late. The key is to stay vigilant. Install those cameras, train your staff, and make it as difficult as possible for the thieves to get away with their tricks. Plus, watch out for organized retail crime rings (they’re a step above your typical shoplifter and can cause serious damage.)

Return fraud

Return fraud is like the sneaky cousin of shoplifting. Ever had someone bring back an item, only to realize later it wasn't even from your store? Or worse, they "return" something they never bought in the first place. It’s a clever scam, but it costs retailers big time. Fake receipts, worn-out items passed off as new, or even stolen physical inventory returned for cash, the tricks are endless.

Employee theft

Employee theft is a tough pill to swallow. Your own team, the people you trust, taking from you. Unfortunately, it happens more than you’d think.

 Did you know, 75% of employees admit to swiping something from work at least once? That’s a staggering number. It’s not just a few pens or paper clips—they might be taking bigger stuff, like cash from the register or products off the shelves. 

Employees know the ins and outs of your store, which makes it easier for them to sneak things past you. It could be money from the register, products off the shelves, or even giving out unauthorized discounts to friends.

Administrative error

Who knew paperwork could be such a villain? Administrative errors might seem harmless, but they can lead to big discrepancies in your inventory. Miscounting stock, entering wrong data, pricing errors – it all adds up. Imagine thinking you have 50 units of something, but you actually have 45. That’s money lost. In fact, simple administrative and paperwork errors can add up, accounting for as much as 18.8% of annual shrinkage (which is sometimes referred to as “paper shrink” FYI.)

Regular audits and a good retail POS system with advanced retail inventory management features can help keep these mistakes in check. Double-checking might feel like a hassle, but it saves a lot of dramatic breakdowns down the line.

Vendor fraud

Vendor fraud is a sneaky one. You trust your suppliers to deliver what you paid for, but sometimes they shortchange you. They might send fewer items than listed or bill you for products they never shipped. It’s frustrating and costly. The best defence here is to build strong relationships with your vendors and always verify shipments. Check what comes in against what you ordered and what you’re billed for.

Operational loss 

Operational loss is the catch-all category for the little things that go wrong in the day-to-day running of a store. It could be damaged goods, items that expire before they’re sold, or just plain old mismanagement. These losses might seem small on their own, but they quickly add up.

How to calculate shrink in the retail industry 

Now, in order for loss prevention to be effective, you need to know how to calculate shrink. Here's how you can nail this:

1. Start with what your inventory says you’ve got. This is what your inventory account tells you you've got when you start counting. You can check your POS software to help you really gauge this.
2. Add in what you’ve bought. Every new shipment and purchase goes into this mix.
3. Time for a reality check—count your actual stuff. Get hands-on and tally up what’s really on your shelves at the end of the period.
4. Do the math. Subtract what you’ve got from what you should have. This gives you the mysterious missing piece.
5. Now, crunch the numbers to get your shrinkage rate. Divide the missing inventory by what you started with, then multiply by 100.

Here’s the formula:

Let's see this in action, shall we? If your recorded inventory says $50,000 and you physically count $47,000:

Shrinkage Rate = ((50,000 - 47,000) / 50,000) * 100 = 6%

Boom, now you know you’ve got a 6% shrinkage rate.

When it comes to loss prevention strategies for retail stores, keeping a tight inventory account is key. Regularly updating it helps you spot discrepancies early, so you can take action before losses mount. Remember, a well-managed inventory isn’t just a number—it’s your shield against profit disappearances.

Effects of retail loss for your store 

Let’s talk about what happens when your retail store takes a hit.

Financial impact

Losses from shrinkage hit where it hurts most—your profits. In retail, where margins are tight and sales volumes high, losing inventory directly eats into your ability to make money. When items disappear due to theft or other reasons, you can’t sell them to recoup costs. This loss of potential revenue can seriously dent your bottom line. 

Remember that $112.1 billion we mentioned earlier? Well, that number has grown every year since 2018! It’s not just about the immediate cost. Nope, losses add up over time and can affect your ability to grow and invest in your business.

Operational impact

Imagine trying to complete a puzzle with missing pieces. That’s what happens when shrinkage messes with your inventory. You might struggle to keep popular items in stock, leading to missed sales opportunities or delays in fulfilling customer orders. To combat shrinkage, retailers often have to invest in beefed-up security measures like guards and technology, adding to operational costs and potentially raising prices for consumers.

Customer experience 

Customers expect reliability and fair prices. When shrinkage forces prices to go up to cover losses, it can drive price-sensitive customers away. Moreover, inventory discrepancies can lead to out-of-stock situations or incorrect pricing, which frustrates shoppers and damages trust. Keeping shrinkage in check isn’t just about protecting your profits; it’s crucial for maintaining a positive customer experience and building brand loyalty.

7 Retail shrink prevention strategies

Regardless of all of the known (and unknown) causes of retail inventory shrink, there are some tried and tested ways to keep your shrink percentage low. We've put together seven of our favs below. Don't just use one, mix any of the below methods for the best results:

Employee training

Start by teaching your team why tracking inventory matters. Show them how to spot anything unusual, like missing items or strange transactions. When everyone understands their role in protecting inventory, you’re better prepared to prevent losses. Plus, good training sticks with your crew, even when employee turnover happens. When new members come in, they're already set up to handle things like pros, keeping your operation tight and shrinkage low.

💡 TIP: Before you train them, make sure your hiring process is spot-on. After all, if you’re hiring responsible team members with great references, there’s less of a chance they’ll steal from you in the first place. They’ll also have much more experience spotting theft and other retail shrinkage causes. Learn more about the importance of hiring the right employee in our handy guide.

Control access to your store’s sensitive areas

Think of your stockroom and cash registers as restricted zones. Only give access to retail employees who really need it, like managers or trusted staff. This way, you reduce the chance of unauthorized people messing with your goods or money.

Technological tools to enhance data analytics 

Use modern tools like a point of sale (POS) system that analyze sales data and tracks SKU inventory in real-time. These systems can flag unusual patterns or discrepancies, helping you catch problems early.

Epos Now POS systems can even automate stock taking. This streamlines your daily admin, gives you an accurate inventory count, and saves you and your staff hours of admin time. 

💡 TIP: This is just one of the many retail management responsibilities. Find out the rest in our helpful guide. 

Improve stock management practices

Keep your shelves organized and regularly check your inventory against your records. This helps you spot any missing or misplaced items quickly. Simple routines like these ensure that what’s on your shelves matches what’s on your books.

Set clear policies for your business and customers 

Create straightforward rules for handling returns, discounts, and security measures. Make sure every employee knows these policies inside out. Clear guidelines leave no room for confusion or misunderstandings, making it harder for mistakes or dishonesty to slip through.

Secure your store with a clear layout

Design your store layout to maximize visibility. Keep aisles clear and use mirrors or cameras to eliminate blind spots. When you can see everything, it’s easier to spot any suspicious activity and deter potential thieves.

💡 TIP: Check out our complete grocery store layout strategy guide to learn how to make your store safer. Arrange shelves strategically and use mirrors or cameras to eliminate blind spots. This setup helps deter theft and ensures your store stays secure. Stay alert to spot any suspicious activity and keep your business protected.

Place clear signals to raise customer awareness

Inform your customers about store policies through signs and friendly reminders. Let them know how returns work and encourage them to report any issues they notice. When customers are informed, they’re more likely to respect your rules and help maintain a safe shopping environment.

Protect your store from shrinkage with Epos Now’s point of sale solution

Our cloud-based retail POS system has the software and hardware you need to put a stop to inventory shrinkage. Here's how:

• Inventory management: Track every item from delivery to sale, ensuring accurate stock levels.
• Detailed reports: Access real-time, functional reports on sales, inventory, and staff performance to make informed decisions.
• Security features: Control access with customizable user permissions and monitor transactions for fraud prevention.
• Operational efficiency: Streamline processes with integrated tools for faster transactions and smoother operations.
• Loss prevention: Implement strategies to reduce retail shrinkage with visibility into inventory movements and alerts for suspicious activities.
• Customer insights: Understand purchasing patterns and preferences to enhance customer experience and loyalty.
• Support and updates: Receive ongoing support and updates to ensure your system stays current and effective.

With Epos Now, you can manage your store effectively, protect your inventory, and improve overall efficiency to drive business success.