Understanding Shrinkage in Retail Businesses – What Can Retailers do to Prevent It?

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As costs continue to rise in the retail sector, business owners are constantly searching for ways to control their expenses and minimise the impact on their customers. One area where we can make a significant difference is in reducing shrinkage.

Shrink is an unfortunate fact of life in the retail trade, and in many cases will add several percentage points of additional cost. That expense goes straight to the bottom line and contributes to rising prices.

So, what is shrinkage in retail? And how can we slow its impact, or even better, reverse it?

Understanding the different types of retail shrinkage can help us identify areas of weakness in our retail stores and wider business. In this article, we’ll delve into the sources of retail shrinkage and provide insights into loss prevention strategies that will help you protect your business.

What is Retail Shrinkage?

Retail shrinkage refers to the stock losses that occur in a retail business. It is the difference between what a retailer should have in stock, and the inventory on-hand they actually have. Often those discrepancies go unnoticed until the company undertakes a full stocktake, by which time it becomes difficult to pinpoint the cause of the loss.

The Causes of Retail Shrinkage, and How to Mitigate Them

Typically, shrinkage comes from four main sources: internal theft, external theft, intercompany fraud and process failures. Here we look at each of them and suggest some practical strategies you can use to curb their impact on your business.

Internal Theft

Internal theft is the taking of money or goods without permission, by an employee or someone with a close relationship to the business. You may be surprised to learn that it is typically the second largest cause of significant theft losses, accounting for around 28.5% of total shrink on average.1

Theft by your internal team is often something we prefer not to think about. We naturally want to be able to trust our colleagues team members. But if we fail to prepare for the possibility of internal theft, it can leave our business vulnerable.

Employee theft can take many forms, and not all of it looks like the straightforward merchandise theft you might envision. Ringing up fake returns, issuing fraudulent gift cards, neglecting to scan all a friend or family member’s items, or improperly using an employee discount are all forms of internal theft.

Prevention Strategies – Internal Theft

When you implement loss prevention strategies for reducing employee theft, you’ll want to do it without invading privacy or denting morale. Simple policy changes are often the best course of action, such as:

  • Review your hiring practices. Aim to find conscientious employees with integrity to help combat internal theft from the outset.
  • Invest in induction training on managing shrink. Once you have the right people in place, properly training them can help mitigate errors and losses, identify shoplifting and fraud, and reduce retail shrinkage rates. Appointing a Loss Prevention Manager to oversee this process can also be helpful and gives the area greater focus within the business.
  • Consciously build a positive store culture. Creating a positive workplace culture in stores can build loyalty, increase employee retention and reduce incidents of internal theft and fraud.
  • Audit stock as regularly as possible. Tools such as RFID tags and scanners enable you to stock take a store and your warehouse every day, enabling discrepancies to be identified quickly and a culture of accuracy to build within the store team.

External Theft

External theft occurs when goods are stolen from a retail store by customers or outside parties, often through shoplifting or robbery. This type of retail crime can be difficult to track and prevent since it typically involves individuals that are not associated with the business in any way, and it’s not always obvious to store staff.

Prevention Strategies – External Theft (Shoplifting)

As economic conditions tighten for consumers, incidences of external theft in New Zealand are rising, so it’s important to review your prevention practices not only to prevent losses but also to protect your staff. With Vitag’s extensive experience in this area, we’ve found these to be the most effective solutions:

  • Interact with all customers. Train your teams on how to identify and approach potential shoplifters discreetly and professionally. Personal contact or realising they have been noticed is a deterrent for thieves. Even just a simple smile and “hello” when they enter the store can prevent a shoplifting attempt.
  • Use security systems. Install EAS gates, security cameras and mirrors to monitor activity in the store. Make them obvious so that shoplifters know they will be recorded and that products are alarmed.
  • Secure high value products. Keep high-value items locked with safers or wraps, or in a display case. Smart keys will make these locks easy for your team to access quickly when they need to, while showcasing items securely.
  • Create clear lines of sight. Keep the store well-lit and free of clutter to eliminate hiding spots and give store staff a clear view through the store.
  • Roster around peak times. Keep the store organized and adequately staffed, even with a security guard where appropriate to discourage shoplifters from taking advantage of a busy, understaffed environment.

Process Failures

Process failures occur when products are misplaced due to poor inventory management processes, administrative errors, or operational errors that occur during order fulfilment. Simple mistakes such as store or warehouse staff checking stock into a location incorrectly become lost sales opportunities or create system stock errors. These types of losses can add up quickly if they’re not managed effectively, so having systems and clear procedures for tracking orders and ensuring accuracy at every stage of the supply chain will help to minimise these kinds of losses.

Prevention Strategies – Process Failures

  • Implement a real-time inventory management system. RFID based systems enable stock to be tracked in real-time and provide alerts when stock levels fall below a certain threshold. This will help you to quickly identify and address any potential stock shortages or losses before they become major issues. They also eliminate human error when checking stock into and out of a location.
  • Conduct regular stock audits. Stock reconciliations help you to identify any discrepancies between actual stock levels and inventory records. This will help to quickly identify any potential losses due to theft, damage, or other issues. RFID scanners enable you to audit all stock locations in a minimal amount of time, with many RFID capable businesses auditing stock daily.
  • Review your security. Develop and implement a comprehensive security plan that includes measures such as perimeter security, alarm systems, smart locks and regular security assessments. This will help to ensure that you are prepared to prevent and respond to security threats and minimize the risk of stock losses.
  • Invest in thorough training and refreshers for teams. Include proper stock management procedures in your induction plan for new staff, and as regular refresher training for existing staff. This will include things like how to handle and store stock, how to identify and report stock losses, and how to use inventory management systems effectively. This will help to reduce the risk of human errors and ensure that stock is managed properly.

Intercompany Fraud

Intercompany fraud occurs when someone within an organisation misappropriates funds or resources for their own benefit or steals from another member of their team’s commission or bonus structure. This is particularly common in multi-location businesses where there are multiple budgets and accounting systems used by different departments within the company. Embezzlement, kickbacks and false invoicing schemes are all examples of internal fraud.

Prevention Strategies – Intercompany Fraud

Deterring and identifying internal fraud centres around tracking systems and culture. As with internal theft, this type of retail shrinkage is best combatted with preventative strategies, such as:

  • Review your hiring practices. Conduct thorough background checks, criminal records checks and reference checks as standard practice when you’re hiring new team members, at any level.
  • Implement cash handling policies. Make integrity ‘business as usual’ with policies and procedures for handling cash, including requiring two employees to count and verify cash at the beginning and end of each shift.
  • Focus on inventory tracking and accuracy. Implement a system for tracking inventory, including regular audits and checks for discrepancies.
  • Build a positive culture. Foster a culture of transparency and accountability, where employees are encouraged to live the company values, are encouraged to speak up about concerns, and are held to high ethical standards.

As a business owner or retail leader, understanding retail shrinkage, it’s nature and impact, is imperative. Having loss prevention strategies in place to mitigate shrink due to internal theft, external theft, intercompany fraud, and process failures will go a long way towards helping you protect your retail business’ bottom line.

For assistance with inventory management systems such as RFID, or security systems such as EAS, smart locks and merchandise protection, give our Vitag team a call. We’ll help you design the right solution for your business.



1. National Retail Federation, 2022 National Security Survey

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