Retail shrinkage

What is retail shrinkage?

Retail shrinkage is an inventory error and loss that accounts for lost goods, which happens due to reasons: shoplifting, stock damages, supply chain issues, tracking errors, or other operational inefficiencies. It’s simply a number difference between the inventory records and the actual inventory.

Imagine a retail chain with 20+ stores running across a region. The vendor invoice shows 1000 blue jeans shipped to the store 7, but there are only 890 in the warehouse. The missing 110 jeans denote the shrinkage. This silent leakage could be due to shoplifting, employees not scanning items properly, items missing during delivery, or improper record keeping.

Shrinkage and industries – an outlook

What causes shrinkage in retail?

Retail shrinkage happens due to the following reasons, that’s slowly eating away revenue.

1 - Shoplifting – customers stealing items. 2 - **Employee theft **– staff taking products or cash. 3 - Administrative errors – mistakes in pricing, billing, or data entry. 4 - Supplier fraud – vendors delivering less than invoiced. 5 - Damaged goods – products lost due to breakage, spoilage, or mishandling. 6 - Process gaps – weak inventory controls, poor tracking, or outdated systems.

Why is shrinkage a growing problem?

Estimated losses due to retail shrinkage alone cost 1 to 2% of retail revenue loss globally each year, and it’s untraceable too. This is why retail shrinkage is a major issue that needs to be addressed, as it leads to the following problems.

It affects the profit margins of the business: For a retail company that’s making $200M of revenue, a 1% shrinkage means $1 to $2M of revenue going down the drain.

Traditional methods fail as it doesn’t scale: Be it manual stock counts, CCTV, staff vigilance could all work up to a few levels, so as finding out errors and fraud in records.

Profitability is at stake: Retail margins are thin. With D2C and eCommerce models taking its share, retail industry is striving hard to find its space and sustain its margin.

How to measure retail shrinkage?

The most common way to measure retail shrinkage is through a formula - ((recorded inventory – actual inventory)/recorded inventory)) * 100. Recorded inventory is the inventory count according to retail systems. Actual inventory is the final physical count of the inventory. While retailers have generally accepted 1 to 2% of shrinkage as normal, it could increase as the business scales, becoming more difficult to track.

Other ways to measure and tackle retail shrinkage include RFID & barcode tracking, AI-powered video analytics, supplier to store, etc.

Ways to tackle retail shrinkage

Retail shrinkage happens due to multiple reasons. But it can be tracked and tackled through hidden patterns in data. Sure, there are basic techniques like RFID and bar code scanners, where every movement of the tracked – from inventories to shelves to purchase. But here are some advanced digital solutions to minimize shrinkage in retail, that especially helps retail companies that scale.

IoT-based inventory tracking: Once you have all the data sources integrated—POS systems, warehouse data, supplier records, and sales, enable alerts to notify when there is a discrepancy between reported and actual inventory levels. Though this cannot prevent shrinkage, there will be a proactive management that flags missing items, no matter how insignificant it is.

Fraud detection models: Many large-scale retail and grocery chains already do this – employ AI-powered sensors and tracking devices. This studies customer zones, warehouses, and shrinkage hotspots and alerts when there are instances of shoplifting, potential damages, or malpractices, and flags when it notices any unusual behavior.

Anomaly detection at SKU levels: When there is frequent happening of shrinkage with any particular SKUs, ML/AI powered anomaly detection can be set up to detect, alert, and prevent, fixing up unexplained losses before it happens.

Predictive replenishment: Predict demand with regular forecasts, which will reduce the possibility of excessive stocks, a major reason for retail shrinkage and waste.

Identifying patterns across stores: Once you have shrinkage data across stores, you can compare them and cluster them into different risk categories: low, medium, and high. This awareness helps you prevent shrinkage by focusing more on high-risk stores.

Ways to conduct shrinkage analysis

So, you have decided to gain a control over actual shrinkage happening in your retail company. Here is where you can start – a thorough retail shrinkage analysis, with the help of data and analytics.

1 - Line up your data: integrate sources and defined required fields. For example, date, store_id, sku_id, qty_sold, opening_qty, qty_shipped, qty_received, and more like this, depending on what you need to track. 2 - Standardize data across stores, SKUs, zones, etc.
3 - Build core dashboards that will highlight the differences between received and stored quantity of goods, along with trend and heatmap data of shrinkage cost and % vs sales, weekly trends, POS anomalies, damages, etc. 4 - Set up benchmarks. Look for patterns - Certain stores, certain products (e.g., perfumes, electronics), certain times (holiday season, weekends).
5 - Group and cluster shrinkages based on SKUs, products, stores, risk levels, etc., to spot the risk and red zones. 6 - Set up alerts for regular measurement and consistent monitoring.