13 Causes of Retail Shrinkage and How to Prevent Them

Retail shrinkage is a big problem. The National Retail Federation (NRF) estimates that shrinkage costs businesses about $94.5 billion every year. Losses come from many sources, such as theft, human mistakes, fraud by suppliers, and damaged goods. Even more serious: In 2024, the NRF stopped its yearly shrink report for the first time in over 30 years. Instead, it chose to focus on shoplifting, crime groups, and violence that are now driving major losses in retail.

Shrinkage is complex, costly, and dangerous. If ignored, it can wipe out profits, put employees at risk, and push customers away. Many retailers still see it as just a normal cost of business. But smart retailers know it can be controlled. They fight it with better inventory systems, ongoing staff training, stronger security, and modern technology.

By learning where and why shrinkage happens, retailers can act with purpose. They can reduce losses and protect profits.

In this article, we will explain the main causes of shrinkage, the impact it has on retail businesses, and practical strategies to reduce losses.

As Andy Szanger, Director of Strategic Industries at CDW, wrote in BizTech Magazine:

“Retailers are reporting inventory shrinkage as high as 3 percent of revenue.”

What Is Retail Shrinkage?

Shrinkage means the gap between recorded stock and real stock. For example, the system says there are four pepper grinders on the shelf, but only three are there. The missing item is shrinkage.

But shrinkage is more than missing items. It is any loss of stock or money that stops a store from making its full profit. This includes theft, mistakes, fraud, or poor handling.

Shrinkage is different from “total retail loss.” Total retail loss includes expected costs like discounts, maintenance, or security. Shrinkage only refers to unexpected losses.

Why Shrinkage Matters

Shrinkage is not just about numbers. It can destroy profits and put people at risk. Even if one missing item seems small, the losses add up over time. Across many products and many stores, the impact becomes too big to ignore.

13 Top Causes of Retail Shrinkage

1. Shoplifting

Shoplifting is the intentional theft of merchandise by someone who does not work for the retailer. It covers everything from the classic grab-and-go to more subtle tactics like switching price tags or hiding high-value items inside cheaper packaging.

Self-checkout lanes have made shoplifting easier, allowing tricks such as barcode switching, mis-scanning items, or skipping scans altogether. These methods add up quickly: one study found shrink at self-checkout lanes to be 3.5%, compared to just 0.2% at traditional cashier-staffed lanes.

2. Employee Theft

Employee theft is when store staff steal from their employer; a risk many retailers underestimate. Because employees have trusted access to merchandise, cash, and security systems, they have opportunities unavailable to outsiders.

According to an NRF survey, employees are responsible for about 29% of retail shrinkage. Some steal directly from the register, while others take items from the sales floor. These incidents are far from minor; internal theft losses average $2,180 per investigation, making them a significant threat to store profits.

3. Return Fraud

Return fraud happens when people abuse the store’s return policy. For example, someone might steal a product and return it for money. Others may return used items even though it breaks store rules.

Return fraud can also happen if items were bought with fake money and then returned. Since it comes in many forms, it is often hard to catch. Strong return policies and employee enforcement are key to stopping it.

4. Administrative Errors

Administrative errors are a polished way of describing everyday human mistakes. These can occur at many points in the retail process, including miscounting products during receiving, storage, or stocking. Common issues also include manual inventory tracking mistakes, mislabeling items, attaching the wrong price tags, or entering incorrect prices in the point-of-sale system. Even routine paperwork errors, such as misfiling, losing, or discarding documents, can go unnoticed but gradually chip away at profits.

5. Operational Loss

Operational loss, also called waste, happens when items are lost by accident. For example, merchandise may break in the store. Food may expire before being sold.

Some of this loss is expected in business, but it is still smart to minimize it. Reducing waste helps improve profits.

6. Vendor Fraud

Vendor fraud is a type of organized crime where suppliers attempt to cheat retailers. This can happen in many ways, charging for goods that never arrive, sending fake invoices, overbilling, or taking part in price fixing or bid rigging. Some vendors may also deliver damaged or expired products, steal items while on-site, or even bribe or threaten employees.

While vendor fraud makes up the smallest portion of retail shrinkage, it is still common enough to require careful oversight and strict monitoring.

7. Organized Retail Crime

Organized retail crime involves coordinated theft by groups of professional criminals who steal goods to resell for profit. Unlike ordinary shoplifting, ORC often includes repeated theft across multiple store locations and focuses on high-value or easily resold products.

These crimes are more dangerous than individual theft. They frequently involve violence, such as smash-and-grab attacks, physical threats, or intimidation of employees and customers.

8. Sweethearting

Sweethearting is a form of employee theft in which workers give unauthorized benefits to family, friends, or acquaintances. This can include applying improper discounts, giving away merchandise without payment, or accepting fraudulent returns.

While it may appear small compared to large-scale theft, sweethearting adds up quickly and directly undermines store profits and trust in employees.

9. Scan Errors

Scan errors are unintentional mistakes that happen during checkout when items are recorded incorrectly. For example, a cashier may scan only three yogurt containers instead of four, often due to distraction or rushing. Similar mistakes can also occur at self-checkout.

Unlike deliberate mis-scanning linked to theft or sweethearting, these errors are accidental. Still, they accumulate over time and contribute to noticeable shrinkage.

10. Product Damage

Damage and spoilage occur when products can’t be sold because they are broken, expired, or contaminated. Nonperishable items may be harmed during shipping, handling, or while on display. If not identified during receiving, these items may still appear as sellable inventory, creating false stock counts.

Perishable goods, such as produce, flowers, tropical fish, and nursery plants, carry an even greater risk. They must be sold quickly before spoiling or dying, making proper handling and timely turnover essential.

11. Cybertheft

Cybertheft involves using digital tools to steal money, data, or assets. While e-commerce stores are often the most obvious targets, facing risks like credit card fraud and identity theft, physical retailers are also vulnerable.

Digital payment systems, customer databases, and supply chain software can all be compromised. Cybercriminals may also drain gift card or loyalty program balances or use phishing scams to trick employees into granting access to sensitive systems. These attacks threaten both financial stability and customer trust.

12. Inadequate Security Measures

When retailers lack strong security systems, surveillance, access controls, or proper staff training, they become more vulnerable to theft and mistakes. Weak or outdated security leaves both merchandise and employees at greater risk.

13. Lack of Auditing

Without frequent physical inventory counts and audits, discrepancies between recorded stock and actual stock can go unnoticed. This allows theft, fraud, and errors to continue unchecked, compounding losses over time.

15 Key Ways to Prevent Retail Shrinkage

Shrinkage has always been part of retail. While it can’t be eliminated completely, retailers don’t need to accept it as inevitable either. With the right measures and the use of evolving technologies, shrinkage can be reduced significantly. Here’s how:

1. Improve Store Security

Surveillance cameras are often the first line of defense. While basic cameras help, advanced systems, featuring HD imaging, remote monitoring, AI-driven behavior detection (such as loitering or concealing items), and video-to-transaction matching, offer stronger protection. Cameras are most effective when placed visibly at entrances, in aisles, and near high-value products. Physical barriers like turnstiles, exit gates, and electronic article surveillance (EAS) gates further discourage theft. Other tools include shelf alarms, RFID cart alerts, and tethered display alarms for high-theft items like electronics.

2. Train Employees

Shrinkage drops when employees understand their role in preventing it. Training should explain the importance of accurate inventory tracking, recognizing suspicious behavior, avoiding transaction errors, and spotting fraudulent returns. Employees should also know store theft policies, which can be reinforced with handbooks, signed acknowledgments, and refresher training. Modern platforms like Zoom, e-learning modules, or mobile apps make it easier and more affordable to deliver training across retail chains.

3. Conduct Regular Audits

Routine audits ensure shrinkage prevention efforts are working. Annual counts alone aren’t enough. Depending on the business size and merchandise type, audits or cycle counts should be done monthly, weekly, or even daily, focusing on smaller product categories.

Audits also help identify damaged products, verify vendor deliveries, and uncover financial discrepancies. Financial audits should cover cash handling, sales versus inventory, discounts, returns, and refunds.

4. Use RFID and Barcode Tracking

Radio-Frequency Identification (RFID) uses small tags attached to individual products or packaging to provide real-time tracking and monitoring. This technology allows retailers to perform automated, highly accurate inventory counts, reducing the discrepancies and errors that often lead to shrinkage. In fact, studies show that RFID improves inventory accuracy by an average of at least 25%.

Beyond tracking, RFID also enhances security. Tagged items can trigger alarms if they leave the store without being purchased, serving as both a deterrent and a safeguard against theft.

5. Enforce Strict Return Policies

Weak return policies invite fraud. Effective policies clearly define eligibility, time frames, and item conditions. They require receipts, limit returns on opened merchandise, and may include restocking fees. Retailers should also track return activity to spot unusual patterns, such as customers making frequent high-value returns across multiple stores.

6. Monitor Self-Checkout Lanes

Self-checkouts are vulnerable to both theft and errors. Staff should actively monitor these lanes and engage with customers, as friendly interaction itself can deter theft. Monitoring ensures that mistakes are corrected quickly and that potential shoplifters know they’re being watched.

7. Limit Employee Access

Not every employee needs access to every area. Retailers should restrict access to stockrooms, cash drawers, or sensitive systems, using tools like electronic key cards or biometrics. Tracking who enters restricted areas and when reduces opportunities for theft and improves accountability.

8. Implement Mystery Shopping

Mystery shoppers act like regular customers but test store security and policies. They may check whether employees follow cash handling procedures, monitor high-risk areas, test alarm responses, or attempt policy-based challenges like unauthorized returns. This feedback helps retailers identify weak spots before criminals exploit them.

9. Partner with Law Enforcement

While solo shoplifters may be manageable in-house, organized retail crime (ORC) requires police collaboration. Retailers should share theft data, join task forces, and provide clear documentation, like video footage and transaction records, to aid investigations. Law enforcement partnerships often result in faster responses, stronger prosecutions, and better deterrence.

10. Ensure Customer Awareness

Visible signage is a low-cost but effective deterrent. Signs can remind shoppers about cameras, warn of prosecution for theft, and reinforce return policies. Placing them near cashiers reduces pressure on staff to break rules. Announcements over the intercom, such as “For your safety, this store is monitored by cameras,” can strengthen the message.

11. Create Strong Deterrents

Organized retail crime (ORC) remains a major threat for retailers, with average losses exceeding $700,000 for every $1 billion in sales. According to the NRF’s 2020 Organized Retail Crime survey, relaxed law enforcement guidelines and reduced penalties have only fueled an increase in ORC activity.

To combat these challenges, businesses must adapt their crime-prevention strategies, whether addressing employee theft or customer-driven offenses. Just as important as having strong security is creating a clear appearance of it. Visible measures such as cameras, alarms, security tags, and attentive staff signal that losses are taken seriously, discouraging potential offenders from attempting theft or fraud.

12. Consider Your Store Layout

A poorly designed store layout can unintentionally encourage shrinkage. Tall shelving units, narrow aisles, or blocked sightlines make it harder for employees to monitor activity, creating opportunities for theft or misconduct. Keeping the store open, organized, and well-lit improves visibility and reduces blind spots where dishonest behavior can occur.

Cash handling is another factor to consider. If employees are counting or exchanging money in busy, public areas, it increases the risk of loss. Designating quiet, secure, but well-monitored spaces for cash handling can reduce vulnerabilities and improve overall security.

13. Develop a Culture of Loss Prevention

Loss prevention is most effective when it becomes part of the store culture. Employees should understand that shrinkage, whether internal or external, affects everyone, not just the business. Educating staff about the consequences of shrinkage, such as job cuts or store closures, can help them see why prevention is critical.

Encouraging accountability, rewarding vigilance, and fostering teamwork builds a proactive environment where employees actively participate in preventing losses. When loss prevention is seen as a shared responsibility, the entire business becomes stronger and more resilient.

14. Strict Accounting Practices

Not all shrinkage is visible in-store. Sometimes, losses only appear on the balance sheet, making strong accounting practices an essential part of loss prevention.

Retailers must establish a clear cost basis for all inventory, but the method they use matters. Cost accounting tracks inventory based only on the price paid when items are received. While simple, it often fails to highlight shrinkage effectively. Retail accounting, on the other hand, values inventory at the retail price. This approach accounts for markups, markdowns, and sales, making it easier to spot discrepancies and uncover hidden losses.

Adopting more attentive accounting practices not only improves loss detection but also reduces the time spent reconciling mismatched inventory and sales records. Poorly maintained reports can trigger costly audits by the IRS, so accurate, consistent accounting also protects the business from regulatory risk.

15. Institute Clear Policies

Clear policies are a cornerstone of reducing retail shrink. In fact, more than 92% of businesses reported using a code of conduct as part of their loss prevention awareness programs in 2020. While policies may not physically prevent theft, they demonstrate the company’s commitment to integrity and set clear expectations for employee behavior.

Your policy should define acceptable use of company property and be reviewed with employees during onboarding. It must also outline the disciplinary actions for theft or misconduct so that employees understand the consequences of violating trust.

Consistency is key. Everyone, from associates to supervisors and managers, should be held to the same standards. If employees see leadership bending the rules, they’re more likely to justify doing the same. A fair, consistently enforced policy helps foster a culture of accountability and discourages dishonest behavior.

6 Proven Strategies to Reduce Retail Shrinkage

Stopping shrinkage before it happens is better than reacting after the loss. Proactive steps save money and keep business operations smooth. Here are six strategies that retailers can use to cut shrinkage.

1. Improve Employee Training and Awareness

Employees play a big role in preventing shrinkage. But they need the right training and tools. Staff should learn how to spot suspicious behavior, such as large groups distracting workers, hiding items in bags or clothes, returning products without receipts, or acting nervous at checkout.

They should also be careful with high-value sales, check receipts closely, and call managers when needed. Training should include how to handle suspicious activities safely by involving security or police.

Employees must also learn proper inventory checks and audits. Training should not be a one-time event. Hold regular sessions to teach new theft tactics and use role-playing exercises, like fake shoplifting or supplier fraud, to test staff readiness.

It is also important to build a culture of honesty. Encourage staff to report theft, set clear rules of conduct, and enforce consequences for stealing. These steps reduce internal theft and help protect profits.

2. Strengthen Inventory Management and Auditing

Poor inventory management leads to shrinkage through mistakes, theft, or vendor fraud. Using automated systems with real-time tracking helps spot problems faster. Many modern tools use AI to analyze data and highlight shrinkage patterns.

Barcodes and RFID tags also reduce human errors and make tracking easier. Stores should not wait until the end of the year for audits. Instead, they should perform regular cycle counts and spot checks.

Other strong steps include linking POS data with inventory systems to catch missing stock, inspecting all received goods carefully, rotating staff in inventory roles to avoid collusion with vendors, and adding security at stock areas and loading docks.

3. Enhance Security with Technology

Modern security tools can prevent theft before it happens. AI-powered cameras and license plate readers (LPRs) track activity in real time. If a car linked to known shoplifters enters your lot, you get an alert right away.

This allows quick action and helps build stronger ties with local law enforcement. Sharing evidence, such as video or license plate data, improves investigations and speeds up arrests.

4. Secure High-Risk Areas and Limit Access

Certain areas attract more theft, such as self-checkouts, stockrooms, and shelves with high-value products. These spots must be protected.

Stores should use locked display cases, restrict access to stockrooms with keycards, and use cloud-based systems to track who enters secure areas. Good lighting and well-placed cameras near expensive items and self-checkouts also help. Knowing they are being watched often discourages thieves.

5. Use Data Insights to Prevent Future Shrinkage

Past shrinkage patterns can show how and when losses happen. Smart inventory systems with AI can track data and detect unusual spikes in shrinkage.

For example, if shrinkage increases at the start of the month, this could point to repeat offenders. LPR cameras can track vehicles and alert security when the same cars return.

One real case showed Friedman’s Home Improvement cutting shrinkage by 23% using this method. Their system flagged repeat offenders, and police arrested them quickly after they left the store.

6. Improve Vendor and Supply Chain Controls

Vendors and supply chain errors can also cause shrinkage. Clear vendor agreements should demand correct product counts, quality items, and penalties for mistakes or fraud.

Stores should run regular vendor audits and use tools like RFID, barcodes, and GPS tracking to confirm deliveries. Employees should always check items against invoices and purchase orders.

For full protection, retailers can link warehouse management systems (WMS) with vendor platforms. Adding cameras and LPRs at loading docks ensures all deliveries are monitored and verified.

Note

These six strategies work best together. By training staff, strengthening inventory, using technology, protecting high-risk areas, analyzing data, and monitoring vendors, retailers can cut shrinkage, protect profits, and create safer stores.

Conclusion

Retail shrinkage is a serious threat to every store. It costs billions of dollars each year, lowers profits, and can even put staff and customers at risk. But shrinkage is not something retailers must accept as a normal cost of doing business. With the right strategies, it can be reduced.

The key is to act early and be consistent. Training employees, managing inventory carefully, securing high-risk areas, and using modern technology all work together to fight shrink. Strong vendor controls and regular audits also stop problems before they grow.

Shrinkage prevention is not just about stopping theft. It is about protecting profits, improving daily operations, and creating a safer environment for workers and shoppers. Retailers that invest in loss prevention build stronger, healthier businesses.

By taking proactive steps now, you can cut losses, strengthen your operations, and set your store up for long-term success.