Retail Shrinkage: What Is It and How to Prevent It?

Retail shrinkage refers to the loss of inventory and/or revenue due to various factors such as theft, human errors, fraud, and administrative mistakes within the retail industry. Causes of shrinkage in retail include shoplifting by customers, employee theft, supplier fraud, waste, and paperwork errors. Shrinkage can have a significant impact on a retailer’s profitability and overall operations. To mitigate shrinkage, retailers employ various strategies such as implementing security measures, surveillance systems, inventory controls, employee training, and technologies like RFID tags and electronic article surveillance (EAS) systems. By addressing the causes of shrinkage and implementing preventive measures, retailers can minimize losses and maintain a healthy bottom line.

Today, average shrinkage in retail is calculated in the billions of dollars each year. It is also on the rise, by lone operators and criminal enterprises alike. Internal employee theft and “sweethearting” also plays a part in the loss of revenue for big retail brands. For all the aforementioned reasons, shrink is an issue retailers must address head-on.

When we discuss shrinkage in retail today, we are discussing the nearly $100 billion of lost revenue in 2022, a number that has risen over $40 billion since 2019 and is only continuing to climb. Shrinkage in general is experiencing major increases, but In recent years, theft, both external and internal, have skyrocketed due to macroenvironmental factors such as inflation and the Covid-19 pandemic, leaving retailers searching for solutions.

The above-cited National Retail Federation (NRF) research shows that theft alone accounts for 65.5% of all shrinkage. Elaborate criminal schemes are pouncing on opportunities to exploit retail companies and resell stolen products for profit, an issue that 70.7% of respondents on the NRF Security Survey have seen an increase in in the past 5 years. With a similar payout to other criminal activity but with less risk, organized retail crime is a more attractive option to criminals that are seeking a financial gain. 

Inefficient inventory management is also a direct cause of shrinkage, specifically for grocery retailers. Products that are left on shelves past expiration are ultimately wasted and revenue is lost, only contributing to the growing problem. 

Damaged and wasted products significantly contribute to store shrinkage, impacting both the financial health and operational efficiency of retailers. Damaged products can occur during transportation, handling, or even while on display, leading to unsellable items. This can result in a loss of inventory value and the need for additional resources to manage and dispose of damaged goods. Wasted products, on the other hand, encompass perishable items that expire or spoil before they can be sold, such as food items in grocery stores. These products not only represent a direct loss in revenue but also require proper disposal and can result in additional costs for retailers. Overall, damaged and wasted products contribute to retail shrinkage by reducing available inventory, decreasing profitability, and necessitating additional expenses for removal and replacement.

Employee errors, fraud, and sweethearting are significant concerns leading to retail shrinkage. Employee fraud refers to the deceptive practices employed by staff members to steal from the company or manipulate its processes for personal gain. This can include stealing merchandise, cash fraud (stealing money from the till), falsifying transactions, or misusing discounts and refunds. On the other hand, sweethearting occurs when employees collaborate with friends, family, or acquaintances by offering unauthorized discounts, free items, or overlooked security measures, leading to a loss of revenue for the retailer. Both forms of employee dishonesty can severely impact a retailer’s bottom line and necessitate robust preventive measures and vigilant monitoring to curb these detrimental activities.

For years, retailers have employed technologies to help them increase efficiency and decrease labor costs with innovations like self-checkouts. Investments in technology are supposed to help retailers reduce shrinkage, but with innovations like self-checkout, studies show an opposite effect that actually exacerbates the problem. With self-checkout technology, consumers can either purposely or inadvertently misrepresent products or add them to their carts without scanning. These losses add up. Studies from 2018 show that for every 1% of sales that are completed through a self-checkout system, there is an unknown loss of 1 basis point for the retailer. Since then, we can assume that these numbers are only growing. 

Retailers in today’s society are in desperate need of a solution that effectively stops shrinkage in its tracks.  

In order to combat organized retail crime and reduce shrinkage, retailers have tried to get creative. Target, after losing over $94 billion from theft in 2021, has employed methods to combat organized retail crime and theft such as keeping heavily stolen products in locked compartments or hiring security officers to deter criminals from their stores. These methods ultimately create the opposite effect than retailers were hoping for. Joe Budano, CEO of anti-theft technology company Indyme, has stated that locking products in anti-theft compartments decreases sales 15%-25%, and drives consumers to alternate methods of shopping such as online. Some of the other methods for minimizing shrinkage include:

• Implement Comprehensive Security Measures: Investing in comprehensive security measures is essential for reducing shrinkage. This includes a combination of physical security measures such as surveillance cameras, electronic article surveillance (EAS) systems, and visible signage to deter potential thieves. Employing trained security personnel or partnering with professional security services can also help maintain a secure shopping environment. Additionally, implementing access control systems, such as electronic key cards or biometric systems, can restrict unauthorized entry to stockrooms and sensitive areas. By having robust security measures in place, retailers can discourage theft and increase the likelihood of identifying and apprehending shoplifters.
• Enhance Inventory Management Processes: Effective inventory management plays a vital role in shrink loss provention. Retailers should implement robust inventory control systems that accurately track stock levels, monitor movement of goods, and reconcile physical counts with sales records. Regular inventory audits, both scheduled and surprise, can help identify discrepancies and potential issues promptly. Adopting advanced technologies such as RFID tagging, which enables automated inventory tracking, can significantly improve inventory accuracy and minimize errors. Additionally, implementing stringent receiving and return processes, including verifying deliveries, checking for damaged goods, and ensuring proper documentation, can help prevent supplier-related shrinkage. By maintaining accurate and efficient inventory management processes, retailers can reduce shrinkage caused by administrative errors and improve overall operational efficiency.

Controlling shrinkage in retail: By implementing comprehensive security measures and enhancing inventory management processes, retailers can take proactive steps to minimize retail shrinkage. These strategies, when combined with employee training on loss prevention techniques and fostering a culture of awareness, can help create a secure and efficient retail environment, protecting valuable inventory and improving the bottom line.

Leveraging computer vision retail automation technology has emerged as a powerful tool for retailers to combat shrink and minimize losses. By implementing advanced surveillance systems equipped with computer vision algorithms, retailers can monitor their stores in real-time with increased accuracy and efficiency. These systems can detect suspicious activities, such as shoplifting, sweethearting, or employee fraud, and provide timely alerts to store personnel. Additionally, computer vision can track inventory levels and identify discrepancies, enabling swift action to address stockouts or overstock situations. This technology not only acts as a deterrent to potential wrongdoers but also enhances operational efficiency and optimizes inventory management, ultimately leading to a reduction in shrink and improved profitability for retailers.