Five Types of Retail Shrinkage and How to Prevent Them

Retail shrink refers to any type of loss such as missing money or inventory that should be sellable. While shrinkage occurs in every industry it is most prevalent in the retail industry. According to the National Retail Federation, retail shrink costs businesses more than $94.5 billion in losses with the average retail shrink percentage at 1.44 percent in 2021. And while some shrinkage is unavoidable, retailers typically want to have a total shrink percentage of less than one percent. The first step in reducing overall retail shrinkage is to identify the different types. Below are five types of shrinkage commonly found in stores:

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1. Shoplifting or theft

In 2020, shoplifting increased by 13 percent and is typically the largest contributor to retail shrinkage. Shoplifters could steal any product ranging in price so the impact can be highly variable.

2. Return fraud

Return fraud is one of the more overlooked causes of shrinkage. It takes on many different forms including returning stolen merchandise or returning merchandise that has been used or purchased with counterfeit money or receipts. 

3. Administrative error

Mistakes can happen… and administrative errors are sometimes unavoidable. This can include mislabeling merchandise for a lower price or refunding merchandise for more than it is worth.

4. Vendor fraud

While vendor fraud is rare, it still accounts for about five percent of retail shrinkage and typically takes two forms. A vendor will either over charge or add fees to the invoice or steal physical inventory from the store when they’re onsite.

5. Employee theft 

Employee theft also makes up significant theft losses and can include stealing merchandise, ringing up fake returns, improperly using an employee discount, and most obviously, stealing cash from the POS.

The biggest concern when it comes to retail shrinkage is that the loss of inventory cannot be recovered. This directly impacts the retailer’s bottom line. Some businesses will attempt to reduce the cost of shrinkage to their bottom line by increasing prices for customers. However, this tactic will typically cause damage to customer relationships and overall sales, especially in a price-sensitive market. But there are additional strategies retailers can implement to reduce retail shrinkage:

1. Invest in cash automation technology

Cash automation solutions that utilize cash recyclers, smart safes, and armored truck service can help retailers reduce shrinkage in their stores. This is because these solutions reduce human error while increasing visibility, accountability, and security around cash. They significantly reduce employee theft by eliminating the need for managers to go to the bank to make deposits or get change for their registers, leaving them unsupervised with cash. They also require each employee to have individual PIN numbers so retailers can tell who accessed the safe and when, thus creating a record if any type of discrepancy arises. Cash automation technology also allows retailers to track and monitor the movement of cash in near-real time through their advanced reporting capabilities. When machines do the counting, sorting, and reporting of end-of-day sales and reconciliation, retailers give employees fewer opportunities for shrinkage to occur.

Need help deciding which solution is right for your business? Download our free guide “Smart Safes vs. Armored Car Service: What Does Your Business Need?”

2. Properly train and re-train employees

The employees of the store are often the first line of defense in stopping shoplifting as well as return fraud. Therefore, regular employee training should not be taken for granted. Employee training should cover all forms of theft, including internal theft and return fraud, with procedural information on what to do in each scenario.

3. Increase physical security

While the right cash management technology can reduce administrative error and employee theft shrinkage, retailers should not overlook the impact adding physical security has on shrinkage caused by shoplifting and vendor fraud. This can include strategically placing security cameras in visible locations, increasing lighting inside and outside the store, and keeping non-main entrance doors locked at all times.

Retail business owners who leverage the above strategies are likely to see a lower overall shrinkage percentage than retailers who do not. If you have additional questions about how Loomis can help your business reduce shrinkage, contact us here.

The best laid plans of mice and men -are foiled by the cancellation of over 1,000 American Airlines flights. I will not be away after all. Drats. It’s not everyday that one is invited to speak at Yale. So you, my little dears, will have to put up with me this week after all. And I had nothing planned! What will I write about tomorrow? Oh I know. Something truly dreadful. It turns out that if you want to start a clothing line and you’re not doing business in the state of California but are using a California contractor, you still need a license from that state. As I said, dreadful. Till then, here’s something from my mail:

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I am totally misunderstanding something about shrinkage, it seems. I have read your book and searched the forum, but my pattern maker says I should be concerned since my potential sewing contractor doesn’t press the garments and I was going to do the shrink testing at home in my washer and dryer. She said, “You could wash and dry a sample (as the end customer would do) to evaluate how much a specific fabric shrinks…. but if it’s more than 3% I would strongly advise that you look for other options.”

I’m thinking of using a 90/10 cotton/lycra knit. What am I not understanding here that makes her so concerned? Is there a book, posting or something else you could point me to so I can figure out what to do here? I keep thinking is if I wash and dry it according to my content label instructions (wash cold/machine dry), I don’t see why that wouldn’t give me enough information to go on.

I think this is a miscommunication between the two of you because I know your pattern maker is highly competent. I couldn’t reach her on the phone to confer with her or get permission to link to her, so I called Patternworks because they deal with shrinkage more often than I do.

Humberto said it was good that she mentioned the 3%; there’s a specific reason for it. He said that stores known to have good standards (like Penney’s and Nordstrom’s) have rules on the amount of shrinkage that can be passed onto the customer. Specifically, the maximum is 3%.

Sure, you can test your fabric at home according to the content label instructions to get a baseline for your patterns to be cut for shrinkage but if your contractor won’t press them and you’re not garment washing before shipping, you need to have other options. Which is what your pattern maker said. Unfortunately, you’ll have to do one of three things:

• Get another contractor who will press or hire a separate contractor for the pressing
• Garment washing
• Purchasing another fabric with less shrinkage

Humberto says the customer is responsible for fabric testing (see how to measure shrinkage). In other words, so while you can test at home, if the goods shrink more than 3%, you need an alternative of pre-shrinking before you ship the finished products. Humberto says there’s a lot of difference between goods. He says they recently used a fabric from Italy and didn’t see any variation (he sounded amazed). He said that the fabric costs $15 a yard too. Lastly, maybe you have some wiggle-room depending on styling. If your items are loose and boxy like a muu muu, few consumers will notice. If the style is fitted, you’ll have to go the extra mile or else they’ll get returned.

I was thinking of doing this on all three colors (black, red, fuchsia) I’m intending to use – possibly removing or changing some colorways if they shrink very differently from the others. I’m hoping I can use one pattern for all my colorways.

I’m chuckling. Can you hear me? It is unlikely you’ll be able to use one pattern for all colorways. Maybe you can use the same pattern for the red and fuchsia but I’d bet money you need a separate pattern for the black. It won’t be that big a deal though. Your pattern maker has a CAD system. The shrinkage adjustment is very easy!

What am I not understanding here? I have a horrible feeling it is going to turn out to be something big and expensive.

Well, I don’t think it’ll be as dramatic as all that but one way or another, it’s going to cost you a little more. But it won’t bury you. Unless of course you take a chance and ship unshrunk. I suppose you could tell your customer on the hang tag that the garment will shrink x amount but they may not read it and buy the wrong size.

[amendment]
I finally got a hold of your pattern maker. Rocio says that if it shrinks too much, customers will get the impression that this is just another cheap product line. She says anything over 5% is going to ruin the reputation of your brand.

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