There are many reasons why you might end a period with less inventory than you started with.
The best outcome, of course, is that you have less than before because you’ve managed to sell lots of products. And in the majority of cases, this will explain the gap.
But in almost any retail business, there will also be some losses caused by other unwanted factors, and this is known as ‘retail shrinkage’.
Here are the three main causes of retail shrinkage for independent businesses, and how you can try to reduce them:
1. Theft and shoplifting
Shoplifting is on the rise in the UK. There were 29% more cases recorded from June 2023 to 2024 than in the 12 months prior, and the numbers tell a similar story in the USA.
This might be the most frustrating and heartbreaking way to lose your stock. And while it’s not realistic to expect that you’re going to go out and hire a security guard to stand out front, there are some simple best practices you can follow to reduce theft as much as possible.
- Install CCTV cameras. And make them obvious to anyone looking around your store.
- Keep high value items away from the front of the store. This should reduce the temptation for thieves to snatch them and run away.
- Keep your store neat, your merchandise organised, and your sight lines clear. This will put off potential thieves who are hoping to steal something without it being noticed.
2. Damage, accidents and operational losses
A certain amount of damage is accidental and unpreventable; the dropped candle, the cracked mug, the bent greeting card.
But if you find you’re losing a significant amount of stock to damage, it might be time to make some adjustments.
- Try to order less stock at once. The longer stock is hanging around your store room, the more potential there is for it to get damaged — either through an accident, or just becoming damp and dusty over time (or out of date, if it’s a perishable item). Try to order ‘little and often’ — wholesale marketplaces like CREOATE make it easy to top up as you go, and a good inventory management software can reduce the mental load of planning for this.
- Invest in better storage. Cardboard boxes lose their strength over time and aren’t waterproof or airtight, so it’s worth investing in some sturdy shelves and plastic storage boxes to reduce damage as much as possible in your stock room.
3. Human or administrative error
What can sometimes appear as lost stock is in fact caused by a human or administrative error somewhere along the line. Maybe the amount of stock was incorrectly logged when it first arrived, maybe a transaction hasn’t been recorded properly, or maybe the final total of stock has been miscalculated or miscounted.
Either way, these errors are frustrating for small business owners, because they’re hard to identify and correct — and they may lead you to make other false assumptions about how you’re losing stock. Here are a couple of ways to reduce these errors:
- Conduct regular stock takes. These will make the process less painful, and help surface administrative errors more quickly (and reduce the impact of single human errors).
- Invest in your POS. Retailers often tell us the importance of getting the right POS system in place is something they massively underestimated when they started their retail journey. Accuracy across sales channels will reduce errors (and the time you spend trying to solve them).
Other factors that can cause retail shrink
The above three factors aren’t the only causes of retail shrink, but they’re the ones we think are most relevant to small independent retailers.
But to provide a complete picture, here are some other factors that can cause retail shrink (more typically for larger retailers):
1. Vendor fraud
Vendor fraud may occur from vendors adjusting their invoices, or actively stealing stock when they make deliveries.
2. Returns fraud
Returns fraud involves ‘customers’ fraudulently returning merchandise to you that may have been purchased at a different store, returning items they stole from your store, or returning used or damaged items (that you only realise are damaged when you later try to resell the item).
3. Employee theft
Employee theft is an unfortunate reality of retail. Employees may actively steal merchandise, tamper with returns transactions, or use their position to offer preferential prices to family or friends.
FAQs
How can you calculate retail shrink?
To calculate retail shrink, simply divide the total of the unaccounted for merchandise by the total value of sales, and times this by 100 to reach a percentage.
What’s the average retail shrinkage?
Most industry figures for retail shrinkage are a couple of years out of date now, and may well have increased with the new wave of shoplifting we mentioned earlier. The industry standard was once thought to be 1.5%, but it seems more than half of businesses are reporting higher shrinkage than this.
