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

Retail shrinkage is a major concern for retailers worldwide, affecting profitability and operational efficiency. Simply put, shrinkage occurs when there is a discrepancy between the recorded inventory and the actual stock.

The National Retail Federation estimates retail shrinkage costs businesses $94.5 billion globally annually. This loss can stem from various sources, including theft, operational errors, supplier fraud, and damaged goods.

As organized retail crime continues to rise, along with challenges in inventory management, it’s critical for retail businesses to address shrinkage head-on.

This article will explore the primary causes of retail shrinkage, its impact on the retail industry, and strategies to help businesses mitigate these losses and improve their bottom line.

“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.

Understanding each root cause is important to safeguarding profits, maximizing staff productivity, inventory management, and radically improving the customer experience. Below, we've outlined the five main triggers of shrinkage, with a free guide on tackling them included further down the page.

#1 Cause of Shrinkage: Customer shoplifting

Customer shoplifting—otherwise known as ‘external theft'—accounts for 37% of retail shrink.
Shoplifting rates have increased in recent years, and many reports attribute this to the cost of living crisis.
Another reason for the spike in theft is the boom of self-serve checkouts and their popularity. Without the right security protocol, these services can allow shoplifters to intentionally mis-scan, switch barcodes, or leave the store without paying for an item.
Retailers must account for intentional shoplifting and human error (such as selecting the wrong item by mistake at checkout) as contributors 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
Shoplifters target the most popular product categories: apparel, electronics, health and beauty, accessories, footwear, home furnishings, home improvement, office supplies, food and beverage, and children's items.

#2 Cause of Shrinkage: Employee theft

Sometimes labeled as ‘internal theft,' employee theft causes 28.5% of retail shrink.
Employees have many opportunities to take advantage of their position and can often work with accomplices inside and outside 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 administrative errors or process failures, making it a close third.
Administrative mistakes can happen in-store, warehouse, or back-office environments (such as finance departments).
Despite often being honest, mistakes caused by human error can have a large detrimental effect on revenue.
Instances can include incorrect unit measurements, miscounting, mislabeling, and typos.
For example, nearly 3% of all store transactions contained at least one error.

#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 to infiltrate or influence processes.
The most common instance of vendor fraud is when a retailer charges for products that don't arrive. Fraudulent invoices are raised or submitted twice to hoodwink finance departments.
Other examples of vendor fraud include price fixing, overbilling, and bid rigging.

#5 Cause of Shrinkage: Operational loss

Operational or accidental loss is usually worked into a retailer's financial plans.
Retailers must intervene when operational losses exceed projections or are easily preventable to remain profitable.
Accidental losses are normally attributed to breakages or supply chain disruptions, but expired products (for example, pharmaceuticals, cosmetics, and food and beverage products that go out of date) are also a huge contributor.
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 implement a robust loss prevention program to deter internal and external shoplifters, dramatically reduce human error, counter vendor fraud, and prevent unnecessary operational loss.

If retailers address every cause of retail shrinkage, they'll reap bottom-line benefits and boost staff and customer satisfaction.

1. Strengthening security measures

Investing in advanced security solutions can significantly deter internal or external theft. Retailers increasingly deploy tools such as surveillance cameras, RFID tags for high-value items, and anti-theft barriers near self-checkouts and store exits.

Additionally, implementing locker systems for customer belongings and limiting unauthorized access to restricted areas can further reduce opportunities for shrinkage.

2. Training and empowering staff

Employees play a critical role in loss prevention. Comprehensive training programs that teach staff how to identify suspicious behavior, prevent errors during transactions, and adhere to inventory management protocols are essential. Empowering employees with clear policies and fostering a culture of accountability ensures greater vigilance and reduces the risk of internal theft or operational mistakes.

3. Optimizing inventory management

Efficient inventory management systems minimize discrepancies between recorded and actual stock levels. Automated solutions like barcode scanning, real-time tracking, and inventory analytics can detect irregularities and alert managers to potential issues. These technologies reduce human error and streamline stock-handling processes, safeguarding inventory against unnecessary losses.

4. Enhancing vendor accountability

Vendor fraud can be a hidden yet significant contributor to retail shrink. Establishing rigorous vendor verification processes, implementing detailed receiving protocols, and conducting regular audits can ensure transparency and accountability. Tracking vendor performance and maintaining clear communication also help mitigate discrepancies in deliveries and billing.

5. Leveraging technology for loss prevention

Advanced technologies like AI and machine learning are becoming indispensable in shrinkage reduction strategies. These tools can analyze shopping patterns, identify anomalies, and predict potential theft scenarios, enabling retailers to respond proactively. Smart POS systems integrated with inventory tracking and loss prevention features provide real-time insights to reduce shrinkage across all operations.

6. Adopting holistic prevention tactics

A holistic approach to loss prevention considers the entire retail environment. Retailers should regularly evaluate their store layouts, optimize the placement of high-risk items, and ensure clear lines of sight for employees monitoring customer activity. Combining physical measures with technological solutions creates a seamless and secure shopping experience.

“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

A powerful mix of process reviews, staff training, and digital transformation technologies can combat many shrinkage causes and implement proper loss prevention measures. 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

Flexibility is another key feature of an effective tech partnership. As your business evolves, the technology should scale seamlessly with your growth, ensuring continued support for loss prevention efforts and overall operational efficiency.

To remain competitive in an increasingly challenging retail landscape, you must adopt the latest technologies and loss prevention measures to maximize staff productivity, catch more than four times more fraud, reduce shrinkage, and protect your bottom line.

By investing in strong tech partnerships, retailers can dramatically reduce shrinkage, improve operational visibility, and protect their profit margins—all while fostering a safer, more efficient shopping experience for customers and staff alike.

“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

Retail shrinkage is a significant challenge, but with the right strategies in place, retailers can overcome it. By adopting comprehensive loss prevention measures—spanning advanced security technologies, employee training, optimized inventory management, and vendor accountability—businesses can reduce shrink, protect their bottom line, and create a secure shopping environment that benefits both customers and staff.

Now that you can identify the top reasons for shrinking 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 leading causes of retail shrinkage and uncover trends and predictions for the industry's future. Take the first step toward a more secure, profitable future for your retail business!

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