A well-known term or phenomenon in the retail world is shrinkage. But do you know what it really means? According to “Defining Shrinkage” by A. Beck and C. Peacock, shrinkage is, among other things, the amount of goods that disappear as a result of internal theft, shoplifting, damage, incorrect weighing or measurement, and administrative errors. It is also referred to as the difference between the recorded inventory and the actual, physical inventory.
The National Retail Security Survey (2023) from National Retail Federation (NRF) shows that in 2022 a total industry shrink was amounted to $112.1 billion, up from $93.9 billion in 2021. In 2024 the NRF did not release its annual shrink report for the first time in over three decades. The reason? They stated that the old methodology was no longer sufficient to capture the evolving challenges, therefore they introduced a new report focusing on theft and violence instead. In this report, The Impact of Retail Theft & Violence 2024, the NRF reports that retailers reported a 93% increase in the average number of shoplifting incidents in 2023 compared to 2019, and a 90% rise in dollar losses due to shoplifting over the same period.
The causes of retail shrink are fairly well known: internal theft, shoplifting, product damage, incorrect weighing or measurement, and administrative errors. What is often less considered, however, are the consequences of shrink. These can be divided into obvious costs and hidden costs.
One of the most visible consequences is the increase in the shrink rate itself. The latest figure published by the NRF, 1.6% of sales in 2022, represents tens of billions in product value disappearing from store shelves. To offset these often unexpected losses, additional inventory must be purchased, tying up capital that could otherwise have been invested elsewhere.
Another clear impact is the effect of shrink on profit margins. To compensate for losses, retailers face the expense of replacing stolen products, which directly reduces margins. In many cases, prices are raised to pass these costs on to customers, which in turn directly affects the retailer’s competitive position.
Two less recognized, yet equally important, consequences are the impact on staff working hours and customer loyalty. The NRF’s 2024 theft and violence study found 73% of retailers say shoplifters have become more aggressive. This escalation translates to: more time spent by staff on incident reports, inventory recounts, and customer de-escalation. And loss prevention teams dedicating hundreds of hours to investigations, reviewing CCTV footage, liaising with law enforcement, and preparing case files.
Shrink does not only affect the financial numbers, it directly affects the shopping experience. Frequent theft can lead to empty shelves or locked merchandise, making products less accessible to loyal customers. Reduced availability can drive customers to competitors, which reduces customer loyalty and can lead to customer loss.
Shrink is often underestimated. Here are a few points where registering or keeping track of the correct shrink figures goes wrong: Undefined shrink. Retailers lack a consistent definition of shrink leading to muddled data and skepticism. Especially when some include known losses (e.g., markdowns, damage) while others focus solely on unknown losses (e.g., theft). Even the NRF withdrew a claim that almost half of the losses were due to organized retail crime after errors in the data came to light. This shows how easily misleading figures can be disseminated.
Accounting blind spots. An article of Proviti reveals how a major North American retailer reported misleadingly low figures on inventory loss due to separate business units and inconsistent, undocumented processes, i.e., significant “blind spots” in the way inventory was moved and recorded between distribution centers and stores. These gaps impeded a holistic understanding of inventory loss, leaving senior management without an accurate picture of losses and undermining profit margins.
Operation failures. According to a recent Retail Dive analysis (source), in-store inefficiencies such as understaffing, pricing errors, and poor stock management contribute more to shrink than high-profile thefts, and are often overlooked.
Theft as a default explanation. Retailers often seem to use “theft” as a standard explanation for declining profitability or other internal problems. Analysts warn that the image of rising shoplifting, and sometimes organized crime, is regularly exaggerated or used as a diversionary tactic for failing inventory control or inadequate merchandising.
How does the impact of loss figures (shrink) affect your net margin? Let’s assume that the shrink rate of a store is 2% of their sales and that they have a net profit margin of 5%.
This means that if a retailer loses 2% of sales to shrink and operates at a 5% net margin, shrink wipes out 40% of the company’s net profit. Why the impact is so big? Shrink is calculated on total sales, but profit margins are much smaller, so every point of shrink is disproportionately damaging to profit. For example:
Sales = $10,000,000
Net profit of 5% margin = $500,000
Shrink of 2% of sales = $200,000 loss
$200,000 / $500,000 = 40% of net profit gone.
Technologies are essential for reducing the shrink rate quickly. Leading industry sources including the NRF and Retail Dive emphasize integrated, data-driven tools combined with empowered staff as the winning formula.
Check Out Security system is one of the integrated type of systems that ensures a locking event when a bad actor attempts to leave the store without paying for the products in the shopping cart. This system is particularly effective in combating Organized Retail Crime (ORC), where multiple individuals coordinate to steal as efficiently as possible. By verifying whether each cart has passed through a check out for payment, the system prevents a second, identically stocked cart from exiting without purchase. Any cart that has not followed the proper checkout route is automatically stopped at the exit. In such cases, the cart is often abandoned at the store entrance, allowing staff to calmly retrieve it and deactivate the alarm, without the need for physical confrontation with the offender.
Using RFID tagging combined with cloud-based analytics platforms allow retailers to track items at an individual level, from the shelf to the (self) check out, identifying shrink hotspots and suspicious patterns. The NRF’s 2024 data shows retailers using these tools have improved loss prevention speed and accuracy drastically, reducing investigation times and enabling proactive interventions.
Real-time data feeds to loss prevention and store staff enable immediate responses to suspicious activity flagged by analytics or surveillance. Staff can intervene before shopping theft occurs. Store employees can approach the aisle where suspicious activity is occurring and engage the potential offender, for example, by offering assistance or restocking nearby shelves. This proactive presence often prompts the individual to abandon their attempted theft, resulting in reduced administrative workload, fewer incident reports, and an overall improvement in store security.”
Shrink doesn’t just drain margins—it quietly erodes customer loyalty and sales potential. Our whitepaper Pushing Out Profits shows how addressing push-outs and shopping cart theft can turn overlooked losses into real profit opportunities.
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