Inventory Shrinkage: How to prevent it in retail

8 min read

One of the top damaging factors in retail is inventory shrinkage. Why? Because it strongly affects business loss (almost 50 billion dollars yearly are lost because of shrinkage in retail). So it should be the full attention of retailers and business holders.

inventory shrinkage



What is inventory shrinkage?


Inventory shrinkage is a broad term that covers many business aspects. Especially, inventory loss caused by damage, theft (shoplifting, employees, vendor fraud), manual errors and old-fashionedness. Shrinkage can usually be discovered after the process of physical counting: as shrink is typically the difference between your accounting records (receipts and purchase orders) and physical inventory. Obviously, shrinkage influences every business revenue because inventory loss is equal to the potential profit and income loss. So you should always remember that your inventory loss should be managed accurately and continuously. 


Why does inventory shrinkage take place? 


More than 70% of shrinkage in retail companies took place because of theft (both by customers and employees), accounting errors, manual inventory management or damage. Let’s see the leading causes of shrinkage separately.




Shoplifting is the number one cause of shrinkage and lost profit. According to the National Retail annual survey 2018, 35% of losses turned out to be because of shoplifting, according to the National Retail Federation’s annual survey. The main shoplifting methods are hiding goods, interchanging price tags, shifting the containers.  




Fraud is an intentional deceiving happening in 2 forms from two sides: return fraud and vendor fraud. Return fraud occurs when the buyer has used or stolen items and wants to return for a refund. Vendor fraud is the vendor’s intention to deceive for personal gain. 


Theft by the employees 


Another cause of shrinkage very close to shoplifting is internal theft (33% of retail shrinkage). There are various creative ways (fake returns, fake gift cards, inappropriate use of employee discounts, cash pocketing, etc.) that dishonest staff members use to rob inventory and cash. 


Administrative mistakes


Sometimes real mistakes can happen as well. But they also severely affect your business. Administrative mistakes are about annual 20%, 2.5 billion dollars of shrinkage. Usually, they occur in the forms of ticketing errors, accounting inaccuracies, transaction errors.



Inventory Shrinkage Causes


Inventory Shrinkage accounting: how to calculate it 

As already mentioned, the term retail shrink indicates the difference between the amount of inventory and the results of a physical count of it. The fundamental inventory shrinkage formula is the following: 


Retail Shrink = Optimal Retail Value or Income from Retail Merchandise – Actual Retail Value or Income from Retail Merchandize 


Retail shrinkage is also often expressed in percents. It helps to understand the interrelationship between several business areas and loss prevention. And for this there is another formula:

eswap-store eswap-store-mobile


Inventory, Order & Shipping Management Software



For example, $20,000 Losses / $1,000,000 Total Sales = 2% Retail Shrink

 a store with a yearly 1 million dollars of sales found out that 20,000 dollars were lost because of retail shrink that is 2% of retail shrink. 



How to prevent inventory shrinkage in retail 


Every employee should be concerned with inventory shrink, take actions and have some input for its prevention. Of course, there will be many mistakes, and it’s ok, most importantly, they should be admitted and improved. Here are 5 ways to prevent inventory shrink.


Track your stock 


Reliable and current inventory numbers are an essential part of specific business running. By doing calculations, not at the end of the year, but regularly, you will be able to note all the data regarding your inventory along with business activities. And indeed it is much easier to catch and identify loses soon and not far after it happens. With this insight, you can focus on understanding the causes of shrinkage and prevent them.


Monitor Your Cash Management


No matter missing cash is theft or error, it always an issue to think about. The simplest way to relieve such cases is to review registered data not only at the end of the day but also per shift. There are automated options for a smoother work process, such as POS that can give or deny permission for each person. 


Use balances and checks 


If you systemize your inventory management practices, you’ll undoubtedly find out not accurate calculation and reveal shrinkage models. Exact stock numbers reduce errors. And a step to take for fraud reveal is the inspection of spoiled items. So all these can be categorized better with task division. When one employee handles inventory management, the other should do the recording, and the third one works with receipt processing. 


Support Return and Exchange Policy 


Returns and exchanges are of those points where fraud and shrinkage happens. So particular policies are strongly required. For example, you can use those points, that need a valid ID for every return and exchange.


Rotate products 


It is essential to be able to rotate those products that after certain period become out-of-date. Reliable inventory management and tracking system will help you deal with your listings. For example, on our platform, you can keep constant track of your products and see their status updates and other relevant information. All these will surely help to prevent inventory shrinkage.