Shrinkage

Understanding Shrinkage: Causes, Impact, and Solutions in Retail

Key takeaways
* Shrinkage is the difference between recorded (book) inventory and actual (physical) inventory.
* Causes include shoplifting, employee theft, administrative errors, vendor fraud, and damaged goods.
* Shrinkage reduces profits, raises operating costs, and can lead retailers to increase prices.
* Common controls include regular audits, surveillance, vendor checks, and employee training.
* In 2019, U.S. retailers lost roughly $62 billion to shrinkage (about 1.6% of sales).

What is shrinkage?
Shrinkage is inventory loss that creates a gap between what a retailer’s records say should be on hand and what is physically present. Inventory is recorded as a current asset when received and reduced as items are sold. When inventory is missing for any reason, the difference is shrinkage.

Example:
* Book inventory: $1,000,000
Physical inventory: $900,000
Shrinkage: $100,000

Why shrinkage matters
Shrinkage directly reduces gross margin because lost inventory cannot be sold. Retail typically operates on thin margins and relies on volume, so even small percentage losses can have a large profit impact. To compensate, retailers may raise prices, invest in security, or absorb the loss—each option affects competitiveness and customer experience.

Common causes
* Shoplifting and organized retail crime (ORC)
Employee theft or fraud
Administrative and data-entry errors
Vendor fraud or delivery errors
Damaged, expired, or miscounted items

How to calculate shrinkage
Shrinkage (dollars) = Book inventory − Physical inventory
Shrinkage rate (%) = (Shrinkage ÷ Book inventory) × 100

How retailers control shrinkage
* Regular inventory audits and cycle counts
Surveillance systems and point-of-sale monitoring
Vendor verification and tighter receiving procedures
Employee training on loss prevention and ethics
Clear internal controls, segmentation of duties, and incident reporting

Industry trends and scale
Retailers are increasingly prioritizing loss prevention in areas such as e-commerce fraud, organized retail crime, and internal theft. Surveys indicate growing concern about online crime and ORC, and large-scale studies have estimated annual losses in the tens of billions of dollars (roughly 1–2% of sales for many retailers).

Bottom line
Shrinkage is a persistent retail risk that erodes profits and can drive higher costs for businesses and consumers. Regular measurement, targeted prevention strategies, and robust internal controls are essential to limit losses and protect margins.