Retail shrinkage is a big problem—a $112.1 billion problem, according to the National Retail Federation. And it’s getting worse. Reported shrinkage was more than $18 billion higher that year than it had been the year before. Even more alarming: In 2024, the NRF scrapped its annual shrink report for the first time in more than 30 years to shift its focus to spotlighting the shoplifting, organized crime, and violence now dominating retail losses.

Shrinkage is complex, costly, and dangerous. Left unchecked, it can decimate profits, endanger employees, and alienate customers. Although many retailers still treat it as an unavoidable cost of doing business, others see it as a controllable expense they can combat through inventory management, employee training, security measures, and technology.

By identifying where and why shrinkage happens, retailers can take targeted actions to reduce losses and protect profits.

What Is Retail Shrinkage?

Ask most retailers to define shrinkage and they’ll say it’s the gap between recorded and actual inventory counts. For example, the system shows four pepper grinders on the shelf, but only three are there. That’s shrinkage—but that doesn’t get to the bottom of why it occurred. Among prevalent attributable causes are theft, accounting and data entry errors, fraudulent transactions, and poor stock management.

Instead of defining shrinkage (often shortened to “retail shrink” or “shrink”) only as missing inventory, retailers should interpret it as any loss of inventory or revenue that keeps them from realizing full sales value. Without acknowledging this broader definition, retailers can’t fully identify or address the financial shortfalls that cut into profits.

Note that retail shrinkage is not the same as total retail loss, a related concept. While shrink refers to unexpected losses, total retail loss includes expected losses caused by price reductions, maintenance, and security costs. Once shrinkage is under control, retailers can focus on these additional margin pressures.

Key Takeaways

  • Shrinkage is a growing problem that can cripple profits and put employees at risk.
  • There are multiple causes of retail shrink; theft is only one of them.
  • Reducing shrinkage begins with improved security measures that deter theft.
  • Retailers must also improve their inventory management and financial reporting processes.
  • Technology can minimize manual errors and give retailers real-time insights into their inventory.

Retail Shrinkage Explained

Ideally, a retailer’s inventory—on shelves, in the stockroom, or in the warehouse—should match what was purchased from suppliers but has not yet been sold. Say a beauty supply shop orders 10 high-end handheld hair dryers. It sells three. There should be seven left in stock.

But the store can only account for five. The missing two didn’t vanish into thin air. But it may feel like that to the shop manager, who can’t explain where they went. That’s shrinkage: inventory the store paid for but will never profit from.

So what happened? Maybe shoplifters took them—but maybe not. One could have been broken and tossed without an employee remembering to update inventory. Or the store might have received only 8 of the 10 dryers it ordered and paid for, but no one noticed. Or the wrong stock keeping unit (SKU) could’ve been entered during receiving.

Losing two hair dryers isn’t catastrophic. But this scenario is common across retail operations, whether the product is power drills, pet blankets, Christmas ornaments, or bestselling novels. Shrink doesn’t discriminate. And as losses mount, the impact grows too large to ignore.

Top Causes of Retail Shrinkage

Shoplifting often takes the brunt of the blame for shrinkage, partly because it’s the most visible excuse and the easiest to understand—it’s also the leading cause, according to the NRF. But many contributing factors happen behind the scenes, including administrative errors and inadequate retail inventory management. Even if no one ever stole anything again, shrinkage would remain a problem. That’s why retailers serious about reducing shrink must confront all the potential causes, which include:

  • Shoplifting: The deliberate theft of merchandise by someone not employed by the retailer. It includes the classic grab-and-go, as well as such tactics as switching price tags or hiding expensive items in cheaper packaging. Self-service checkout lanes have made shoplifting easier, enabling barcode switching, mis-scanning an item, or skipping scans altogether. These cheats add up: One study found shrink at self-checkout to be 3.5%, compared to just 0.2% for conventional lanes with cashiers.
  • Organized retail crime (ORC): Coordinated theft carried out by groups of professional criminals who steal goods to resell for profit. Unlike typical shoplifting, ORC often involves serial theft across multiple locations and targets high-value or easily resold items. It’s also more likely to involve violence, including smash-and-grabs or threats against employees and customers.
  • Employee theft: Perpetrated by people who work for the retailer and often underestimated. While we’d like to believe staff will be loyal, employees have access to merchandise, cash, and security systems, giving them opportunities not available to outsiders. According to the NRF survey, employees account for 29% of shrink. Some steal directly from the register, others from the sales floor. And this theft isn’t small potatoes: Internal theft losses averaged $2,180 per investigation, according to the same survey.
  • Sweethearting: A subset of employee theft in which employees cut corners on behalf of family members or friends. Examples include applying unauthorized discounts, giving away merchandise, and accepting fraudulent returns.
  • Administrative errors: A polished term for everyday human mistakes. These include miscounting products during receiving, storage, or stocking; manual inventory tracking errors; mislabeling items; attaching the wrong price tags or setting incorrect prices in the point-of-sale system; and entering sales data. Even paperwork errors—misfiling, losing, or discarding paperwork—can add up unobtrusively and chip away at profits.
  • Return fraud: A deceptive attempt to gain a financial advantage by returning merchandise that has not been purchased legitimately. It can take many forms, such as claiming used items are new, returning merchandise purchased at another store, returning stolen goods or items bought with counterfeit money, or using fake receipts. Sometimes, fraudsters exchange defective or counterfeit items for legitimate ones. Even when inventory count isn’t affected, return fraud causes financial loss, skews inventory tracking, and drives up operational costs.
  • Scan errors: Unintentional checkout mistakes in which items are scanned incorrectly. For example, a customer has four yogurt containers, but the cashier—distracted or rushed—scans only three. (Customers can make comparable mistakes at self-checkout.) Unlike the deliberate mis-scanning tied to shoplifting or sweethearting, these errors are accidental—but they still add up.
  • Damage and spoilage: Losses from products that can’t be sold due to damage, expiration, or contamination. Nonperishables may be harmed during shipping, handling, or while on display. If damage isn’t spotted during receiving, the item may still appear as sellable inventory. Perishables, such as produce, flowers, tropical fish, and some nursery plants, must be sold before spoiling (or dying).
  • Cybertheft: Using digital tools to steal money, data, or assets. Though ecommerce stores are the most obvious targets vulnerable to credit card fraud and identity theft, brick-and-mortar retailers are also at risk. Digital payment systems, customer databases, and supply chain software—applicable to both in-person and online businesses—can all be compromised. Cybercriminals may also steal gift card or rewards points balances or use phishing scams to trick employees into granting system access.
  • Vendor fraud: A type of organized crime in which suppliers seek to cheat retailers by, for example, charging for undelivered goods, submitting fake invoices, overbilling, or engaging in price fixing or bid rigging. Some vendors may send damaged or expired products, steal product when onsite, or even bribe or threaten employees. While vendor fraud accounts for the smallest share of shrink, it’s prevalent enough to warrant close monitoring.

10 Key Ways to Prevent Retail Shrinkage

Shrinkage has always been a part of retail. It isn’t possible to eradicate it fully; some shrinkage will always be a cost of doing business. But that doesn’t mean that retailers should surrender to it, either. There are steps—and evolving technologies—they can pursue to reduce their vulnerability. Here’s how:

  1. Improve store security: Surveillance cameras are often the first line of defense. While basic camera is better than nothing, advanced features—HD imaging, remote monitoring, AI-powered behaviors detection (such as loitering or concealing items), and video transaction matching—can offer stronger protection. Cameras are a more effective deterrent when visibly placed, such as at entrances, in aisles, and near high-value merchandise. Physical barriers, such as turnstiles, exit gates, or electronic article surveillance (EAS) gates, can prevent quick, unobserved exits. Other tools include shelf alarms, radio frequency identification (RFID) cart alerts, and tethered display alarms attached to high-theft items (for example, phones or tablets).
  2. Train employees: Shrinkage tends to drop when employees understand their role in preventing it, making training essential. Start by explaining the importance of accurate inventory tracking, then cover how to identify suspicious behavior, avoid transaction errors, and recognize fraudulent returns. Employees should also understand store theft policies, which can be reviewed during training, documented in a handbook, and acknowledged with a signed statement. Modern tools, such as Zoom, video modules, or training apps, can make training easier—and more affordable—for retailers of any size.
  3. Conduct regular audits: Routine audits help retailers verify that their shrinkage prevention measures are working. Though annual inventory counts are standard, they may not be frequent enough to combat shrinkage. Depending on the store, its merchandise, and its sales volume, inventory audits—or cycle counts—should happen monthly, weekly, or even daily, focusing on smaller product categories (a nursery, for example, might count gardening tools). Audits also help flag damaged products and confirm that vendors deliver what they promise. Financial audits are equally important and may include regular reviews of cash handling, sales versus inventory comparisons, accounts payable, discounts, returns, and refunds.
  4. Use RFID and barcode tracking: RFID uses wireless technology—tags, readers, and a database—to track individual items in real time. Tags attached to individual products help retailers locate inventory, track its movement, and detect missing items. RFID also enables retailers to conduct automated (and highly accurate) inventory counts, reducing the odds that discrepancies and errors will lead to shrink. In some cases, RFID tags can trigger alarms if unpaid items are carried past store exits, adding a layer of theft protection.
  5. Enforce strict return policies: Weak or poorly enforced return policies can open the door to return fraud. Effective policies clearly define eligibility, time frames, and acceptable item conditions. They usually require receipts and set reasonable limits, such as not allowing returns on opened merchandise. Charging restocking fees can also deter fraud, as can tracking and analyzing returns for unusual activity—customers who make frequent, high-value returns across multiple locations, for instance.
  6. Monitor self-checkout lanes: Surveillance of self-service checkouts shouldn’t be an afterthought. High-energy, well-trained staff members should ideally be assigned to these lanes, as friendly engagement can go a long way toward deterring shoplifting. Similarly, well-observed self-service lanes can make it less likely that honest mistakes will go unnoticed.
  7. Limit employee access: Determine which employees need access to certain parts of the store, and restrict access for everyone else. For example, retailers may decide that only receiving clerks and managers need access to stockrooms. Employers can then use electronic key cards or biometrics to track who accesses the stockroom, and when, and to keep unauthorized individuals out. Limiting access can help reduce opportunities for employee theft.
  8. Implement mystery shopping: Hiring undercover customers can help retailers identify gaps in security, employee training, and store procedures that contribute to shrink. These “mystery shoppers” might test whether employees follow transaction and cash handling procedures, observe whether high-risk areas are being monitored, attempt to exit with unscanned merchandise to test alarm response, or verify that return and refund policies are being enforced correctly.
  9. Partner with law enforcement: Retailers can often handle solo shoplifters internally, but ORC groups are larger, more coordinated, and potentially violent—making law enforcement collaboration a must. Report theft patterns and descriptions of suspects to law enforcement, join task forces to share intelligence, and provide clear documentation (such as surveillance footage and transaction records) to support prosecution. Retailers can also work with the police to assess store security and train employees to recognize ORC tactics. Strong partnerships can achieve faster response times, more successful prosecutions, and greater deterrence.
  10. Ensure customer awareness: Visible signage is a simple, cost-effective way to deter theft committed by both customers and employees. Signs can alert shoppers to security cameras, warn that shoplifters will be prosecuted, or reinforce store policies pertaining to returns. Placing them near cashiers, for instance, can make it less likely that customers will hassle employees to bend the rules. Intercom announcements, such as “For your safety and security, this store is monitored by surveillance cameras,” can reinforce the message.

Reduce Retail Shrinkage With NetSuite

Fighting retail shrink requires action on multiple fronts, and NetSuite provides tools that support several of them. A major area is inventory management because, without accurate data on receiving, stocking, monitoring, and removing product from inventory, retailers can’t begin to measure or analyze causes of shrink. NetSuite Inventory Management can improve accuracy—and save time—by automating tasks, such as cycle counting. NetSuite Smart Count also accounts for transactions that occur during counts, keeping numbers up to date in real time. For multilocation or omnichannel retailers, inventory can be tracked across all sites simultaneously.

Another core area is accounting and financial reporting. By integrating inventory and financials within a single platform, NetSuite Enterprise Resource Planning (ERP)—and the more specialized NetSuite for Retail—helps reduce duplicated work and manual data entry, lowering the risk of errors. Real-time dashboards provide a clear view of financial and operational performance, helping retailers quickly find and interpret the data needed to make more-informed decisions.

Addressing shrink isn’t just about cutting losses—it’s about strengthening the overall health of the business. Although no retailer can eliminate shrink entirely, it remains a controllable expense. Knowing what causes shrink is the first step. Then, by targeting those causes with proven strategies, retailers can reduce shrink, protect profits, operate more efficiently, and create a more secure retail space.

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Retail Shrinkage FAQs

Is shrinkage the same as shoplifting?

No. Retail shrinkage is any loss of inventory or revenue that keeps retailers from realizing full sales value. Shoplifting is one cause of shrink, but there are numerous other causes.

What is the normal shrinkage for an average retailer?

According to the National Retail Federation, the average shrinkage rate as of 2023 was 1.6%. But retailers should keep in mind that shrinkage can vary widely based on the type of product sold, the store’s location, and the measures retailers take to reduce it.