Spotlight on shrinkage: 5 causes of retail shrinkage and how to protect your bottom line

What retail shrinkage is
The 5 main causes of retail shrinkage
How next-gen tools can help and what to look for in a tech partner
Extra resources: learn about loss prevention and more

Retail Shrinkage Explained

Shrinkage, sometimes referred to as ‘shrink’, is a pressing concern amongst retail decision makers, and for good reason. The National Retail Federation estimates that retail shrink is a $94.5 billion global problem¹.

So, what is retail shrinkage? It’s essentially a discrepancy between what the inventory list is showing and the amount of products actually in stock. The higher the discrepancy, the higher shrinkage rate a retailer has. And a high shrinkage rate has a negative impact on the bottom line.

Keep reading for a deep dive into the main reasons for shrinkage, and access a free downloadable strategy checklist to counter them.

“Retailers are reporting inventory shrinkage as high as 3 percent of revenue.” - Andy Szanger, Director of Strategic Industries at CDW, writing for BizTech Magazine

Top 5 Causes of Shrinkage in Retail

Retail shrinkage occurs when a company’s inventory decreases for reasons other than sales, and can be attributed to five main things: administrative errors, operational loss, vendor fraud, employee theft, and customer shoplifting.

It’s important to understand each root cause in order to safeguard your profits, maximize staff productivity and radically improve the customer experience. Below we’ve outlined the five main triggers of shrinkage, with a free guide on how to tackle them included further down the page.

#1 Cause of Shrinkage: Customer Shoplifting

Customer shoplifting – otherwise referred to as ‘external theft’ – is responsible for 37% of retail shrink.
Shoplifting rates have increased in recent years, which many reports attributing this to the cost of living crisis.
Another reason for the spike in theft is the boom of self-serve checkouts and rise in popularity of Scan & Go. Without the right security protocol in place, these services can provide an opportunity for shoplifters to intentionally mis-scan, switch barcodes or leave the store without paying for an item.
Retailers must account for not only intentional shoplifting, but human error (such as selecting the wrong item by mistake at checkout) as a contributor to shrinkage. See cause #3 for further information on human error.
On average, retailers offering Scan & Go or self checkouts experience 18% higher shrinkage rates
The most popular product categories targeted by shoplifters are: apparel, electronics, health & beauty, accessories, footwear, home furnishings, home improvement, office supplies, food and beverage, and children’s items².

#2 Cause of Shrinkage: Employee Theft

Sometimes labeled as ‘internal theft’, employee theft causes 28.5% of retail shrink.
There are many opportunities for employees to take advantage of their position, and they can often work with accomplices inside and outside of your business.
Common tactics are offering heavy discounts to family or friends, mishandling returns, taking products from their store, or removing cash from the till (also known as ‘skimming’).

#3 Cause of Shrinkage: Administrative or Human Errors

25.7% of shrinkage cases are attributed to admin errors or process failures, making it a close third.
Administrative mistakes can happen in-store, in the warehouse or even in back office environments (such as finance departments).
Despite often being honest mistakes caused by human error, they can have a large detrimental effect on revenue.
Instances can include incorrect unit measurements, miscounting, mislabeling and typos.
For example, in-store, nearly 3% of all store transactions contained at least one error³.

#4 Cause of Shrinkage: Vendor Fraud

Often overlooked, vendor fraud is a type of organized crime that can result in considerable profit loss.
Vendors may collaborate with employees, offering bribes or threatening them in order to infiltrate or influence processes.
The most common instance of vendor fraud is when a retailer is charged for products that don’t arrive. Fraudulent invoices are raised, or invoices are submitted twice, in order to hoodwink finance departments.
Other examples of vendor fraud include price fixing, over billing and bid rigging.

#5 Cause of Shrinkage: Operational Loss

Operational loss, or accidental loss, is usually worked into a retailer’s financial plans.
In order to remain profitable, retailers must intervene when operational losses exceed projections, or if they are easily preventable.
Accidental losses are normally attributed to breakages or supply chain disruptions, but expired products are also a huge contributor (for example pharmaceuticals, cosmetics and food and beverage going out of date).
Streamlining inventory management systems is often the first step in countering accidental loss, but there are many more ways to take action – keep reading to find out how.

Self-service and loss prevention webinar

Shrinkage Reduction Strategies

Businesses should be implementing a robust loss prevention program that will deter both internal and external shoplifters, dramatically reduce human error, counter vendor fraud and prevent unnecessary operational loss. And if retailers address every cause of retail shrinkage, they’re sure to reap bottom line benefits, as well as boosting both staff and customer satisfaction.

Successful prevention tactics should be holistic, covering many aspects of your retail business. These can be loosely grouped into the following categories:
For example, installing security barriers near self checkouts, as well as lockers or RFID tags for high-value items.

Skip to the bottom of the page to download the detailed loss prevention checklist, a free step-by-step plan designed specifically for retail decision makers.

“Retailers are prioritizing new resources to safeguard their customers, employees and operations, with 44.5% indicating loss prevention as an area of investment.” Security Magazine report.

Tech Partnerships to Reduce Shrinkage

Many causes of shrink can be combated with a powerful mix of process reviews, staff training and digital transformation technologies. But with so many solutions on the market, particularly software, apps and cloud-based technologies that all claim to deliver the same benefits, what should you be looking for?

A good tech partner will offer:

A simple User Interface (UI) and User Experience (UX)
The ability to deliver a personalized experience for the user (whether staff or customer)
A solution incorporating the latest tech advancements such as automation, computer vision or machine learning
Flexibility to grow with you, and integration with 3rd parties such as surveillance cameras

If you want to remain competitive in an increasingly challenging retail landscape, it’s imperative that you adopt the latest technologies to maximize staff’s productivity, catch >4x more fraud, reduce shrinkage and protect your bottom line.

“We are seeing a shift towards intelligence-based loss prevention systems and that trend will continue into the future.” - Jia Wertz for Forbes.

Next Steps for your Retail Shrinkage Strategy

Now you can identify the top reasons for shrink in retail, you’re ready to start formulating your loss prevention strategy. Our loss prevention experts have created a free guide: The 360° strategy to reduce shrinkage and maximize profits, specifically for retail and grocery decision-makers. In this downloadable checklist, you’ll discover actionable strategies to counter the 5 main causes of retail shrinkage, as well as uncover trends and predictions for the future of the industry.

“45% of retailers increased their loss prevention budgets last year.” - Michael Keenan for Shopify.