Five Types of Retail Shrinkage and How to Prevent Them

Retail shrinkage involves the loss of inventory or money that should be sellable. While shrinkage happens in every sector, it is especially common in retail. According to the National Retail Federation, in 2021, retail shrinkage led to over $94.5 billion in losses, with an average shrink percentage of 1.44 percent. Although some shrinkage is inevitable, retailers aim for a total shrink rate below one percent. The first step in minimizing retail shrinkage is identifying its types. Here are five common types of retail shrinkage:

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1. Shoplifting or Theft

Shoplifting surged by 13 percent in 2020, making it the largest contributor to retail shrinkage. Shoplifters can steal a wide range of products, making the impact vary greatly in financial terms.

2. Return Fraud

Return fraud is often overlooked but is a significant cause of shrinkage. It includes returning stolen merchandise, used products, or items bought with counterfeit money or receipts.

3. Administrative Error

Errors happen, and administrative mistakes are sometimes unavoidable. These may include mislabeling products at a lower price or issuing refunds that exceed the product's value.

4. Vendor Fraud

Although rare, vendor fraud still accounts for about five percent of retail shrinkage. Vendors might overcharge or add fees to invoices or steal inventory from the store when on site.

5. Employee Theft

Employee theft also results in significant loss. This includes stealing merchandise, processing fake returns, misusing employee discounts, or stealing cash from the POS.

The main issue with retail shrinkage is that lost inventory can't be recovered, directly impacting retailers' profits. Some businesses try to offset shrinkage costs by raising prices, but this can harm customer relationships and sales, especially in price-sensitive markets. Below are additional strategies that can help reduce retail shrinkage:

1. Invest in Cash Automation Technology

Cash automation solutions—such as cash recyclers, smart safes, and armored truck services—can help retailers cut down on shrinkage. They reduce human error and increase visibility, accountability, and security around cash. These technologies decrease employee theft tendencies by removing the need for managers to handle bank deposits or change money. They require employees to use individual PINs, creating logs if discrepancies appear. These systems also allow near-real-time cash movement tracking through advanced reporting capabilities, reducing employee opportunities for theft.

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2. Properly Train and Retrain Employees

Store employees are often the first line of defense against shoplifting and return fraud. Regular employee training is crucial and should address all theft forms, including internal theft and return fraud, with procedural guidance for each scenario.

3. Increase Physical Security

While effective cash management technology can reduce administrative errors and employee theft, physical security measures can curb shrinkage from shoplifting and vendor fraud. Strategies include placing security cameras in visible areas, enhancing lighting inside and outside the store, and keeping non-main entrance doors locked.

Retailers who apply these strategies are likely to experience a lower overall shrinkage rate compared to those who don't. For further information on how Loomis can help your business reduce shrinkage, contact us here.

The best-planned initiatives can be thwarted, much like over 1,000 American Airlines flights were canceled recently, disrupting my plans to speak at Yale. You, my dear readers, will have my company this week as my plans fell through. But what should I write about next? Maybe something dreadful—like starting a clothing line where shrinkage over 5% can doom your brand. It turns out that if you want to start a clothing line and you're using a California contractor—even if you’re not operating in California—you need a license from that state. Till then, here's something from my mail:

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I am misunderstanding something about shrinkage. I read your book and scoured the forum, but my pattern maker says I should be worried. My sewing contractor doesn’t press the garments, and I planned at-home shrink testing. She said, “You could wash and dry a sample to evaluate fabric shrinkage, but if it’s more than 3%, you need other options.”

I’m planning on using 90/10 cotton/lycra knit. What am I missing? Is there a book or post you can point me to for better understanding?

I think there’s miscommunication because I know your pattern maker is competent. I couldn't reach her, so I called Patternworks as they deal with shrinkage often. Humberto mentioned the 3% threshold is essential, as stores like Penney’s and Nordstrom’s have shrinkage standards, capping it at 3%.

While you can test fabric at home, if shrinkage exceeds 3%, you need pre-shrinking before shipping the products. Humberto noted that fabric shrinkage varies significantly; once, they used Italian fabric with no variation, though it cost $15 per yard. If your items are loose and boxy, few consumers will notice shrinkage. If fitted, you must minimize it to avoid returns.

I plan on testing all my intended colors (black, red, fuchsia)—possibly removing colors that shrink differently. I hope to use one pattern for all colorways.

I chuckle because it's unlikely one pattern will work for all colors. Maybe for red and fuchsia, but black will likely need a separate pattern. It’s not a big issue; your pattern maker can adjust for shrinkage using CAD easily!

What am I missing? I fear it’s something significant and costly.

It may cost a bit more but won't be disastrous unless you ship without pre-shrinking, potentially leading to returns and a bad reputation if items shrink over 5%.

For more information, please visit Shrink Tester.