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 stock and the actual, physical stock.
The National Retail Security Survey (2023) from the National Retail Federation (NRF) shows that in 2022 total industry shrinkage amounted to $112.1 billion, up from $93.9 billion in 2021. In 2024, the NRF did not release its annual shrinkage 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, and therefore 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 shrinkage 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 shrinkage. These can be divided into obvious costs and hidden costs.
One of the most visible consequences is the increase in the shrinkage rate itself. The latest figure published by the NRF, 1.6% of sales in 2022, represents tens of billions in product value disappearing from shop shelves. To offset these often unexpected losses, additional stock must be purchased, tying up capital that could otherwise have been invested elsewhere.
Another clear impact is the effect of shrinkage 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 recognised, yet equally important, consequences are the impact on staff working hours and customer loyalty. The NRF’s 2024 theft and violence study found that 73% of retailers say shoplifters have become more aggressive. This escalation translates into more time spent by staff on incident reports, stock recounts and customer de-escalation — and loss prevention teams dedicating hundreds of hours to investigations, reviewing CCTV footage, liaising with the police and preparing case files.
Shrinkage does not only affect the financial numbers; it directly affects the shopping experience. Frequent theft can lead to empty shelves or locked-away 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.
Shrinkage is often underestimated. Here are a few points where registering or keeping track of the correct shrinkage figures goes wrong:
Undefined shrinkage. Retailers lack a consistent definition of shrinkage, leading to muddled data and scepticism, 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 organised retail crime after errors in the data came to light. This shows how easily misleading figures can be disseminated.
Accounting blind spots. An article by Protiviti reveals how a major North American retailer reported misleadingly low figures on stock loss due to separate business units and inconsistent, undocumented processes — significant ‘blind spots’ in the way stock was moved and recorded between distribution centres and shops. These gaps impeded a holistic understanding of stock loss, leaving senior management without an accurate picture of losses and undermining profit margins.
Operational failures. According to a recent Retail Dive analysis, in-store inefficiencies such as understaffing, pricing errors and poor stock management contribute more to shrinkage 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 organised crime, is regularly exaggerated or used as a diversionary tactic for failing stock control or inadequate merchandising.
How does the impact of loss figures (shrinkage) affect your net margin? Let’s assume that the shrinkage rate of a shop is 2% of sales and that it has a net profit margin of 5%.
This means that if a retailer loses 2% of sales to shrinkage and operates at a 5% net margin, shrinkage wipes out 40% of the company’s net profit. Why is the impact so big? Shrinkage is calculated on total sales, but profit margins are much smaller, so every point of shrinkage is disproportionately damaging to profit. For example:
Sales = £10,000,000
Net profit at a 5% margin = £500,000
Shrinkage at 2% of sales = £200,000 loss
£200,000 / £500,000 = 40% of net profit gone
Technology is essential for reducing the shrinkage rate quickly. Leading industry sources, including the NRF and Retail Dive, emphasise integrated, data-driven tools combined with empowered staff as the winning formula.
The Check Out Security system is one such integrated system, ensuring a locking event when a bad actor attempts to leave the shop without paying for the products in the shopping trolley. This system is particularly effective in combating Organised Retail Crime (ORC), where multiple individuals coordinate to steal as efficiently as possible. By verifying whether each trolley has passed through a checkout for payment, the system prevents a second, identically stocked trolley from exiting without purchase. Any trolley that has not followed the proper checkout route is automatically stopped at the exit. In such cases, the trolley is often abandoned at the shop 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 allows retailers to track items at an individual level, from the shelf to the (self-)checkout, identifying shrinkage hotspots and suspicious patterns. The NRF’s 2024 data shows that 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 shop staff enable immediate responses to suspicious activity flagged by analytics or surveillance. Staff can intervene before theft occurs. Shop employees can approach the aisle where suspicious activity is taking place 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 a reduced administrative workload, fewer incident reports and an overall improvement in shop security.
Want to know how quickly you can recoup your investment in Check Out Security? Use our calculator to calculate your potential savings.
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