Damaging effects inventory shrinkage has on retail business

Running a business has never been easy, the harsh reality is, the majority of new businesses fail. According to the Small Business Administration, over half of all small businesses close within five years. The reasons for this are many, but one that stands out as being very common in today’s world is poor management practices. Poorly managed companies often struggle with cash flow issues which lead them into debt or bankruptcy. Business planning and management aside, for the majority of retail and online stores, theft remains the biggest challenge. Based on a 2020 survey by the National Retail Federation (NRF) ​​retail businesses report a median shrinkage rate in excess of 1%.

How to identify the primary cause of inventory shrinkage?

Inventory shrinkage indicates a discrepancy between a retail business’s human count of stock on hand and the actual inventory onsite. The causes of stock shrinkage are varied and this form of stock mismanagement has a real impact on a retail company’s bottom line. 

Shoplifting, employee theft, clerical error, dishonest employees and supplier fraud all need to be addressed to reduce the inventory shrinkage rate. It’s important to have effective security tools in place to identify possible sources of inventory shrinkage. It is also important to identify the primary cause of inventory shrinkage in a retail business in order to ensure that it doesn’t continue to occur unchecked.

The primary cause of shrinkage are;


Shoplifting accounts for a large proportion of inventory shrinkage globally. This usually refers to external theft by people who don’t work for the retail business. Organised retail theft is a huge issue and involves syndicates of sophisticated shoplifters working together to steal stock.

Employee Theft

Employee theft is a form of internal theft. In retail settings, it occurs when staff steal from their workplace. It is a common way to lose stock. It’s important for any retail business to properly screen their prospective employees to avoid hiring dishonest employees. It is also important to ensure that staff only have access to the stock that they need on hand.

Clerical Error

Human error is a common contributor to stock shrinkage. It’s not uncommon for staff to make a simple calculation error whilst ringing up a purchase. This is a large contributor to a business’s overall stock shrinkage percentage.

Supplier Fraud

Supplier fraud can take place in a number of ways and fraudsters are becoming increasingly skilled in their ability to misappropriate funds from retail businesses. In retail companies, this usually involves financial fraud, overbilling and the misrepresentation or undersupply of goods. Up to date internal procurement policies and procedures could prevent a major loss, as well as ensuring that supplier fraud is detected as early as possible to prevent its impact on inventory shrinkage.

Is poor inventory control ruining your business?

Poor inventory management is one of the top reasons for retail business failure. The balance of having enough stock and not enough stock is a delicate one. It can detrimentally impact a business’s profits. 

It’s essential for businesses to stay on top of inventory control to ensure that stock is available as and when it is needed. Customers are fickle and inappropriate stock levels mean that they are likely to buy from another business. This is why effective inventory control is important in retail businesses, particularly in managing inventory shrinkage.

One of the biggest causes of inventory shrinkage is shoplifting. Unexpected stock loss due to theft, fraud and clerical errors makes inventory control very difficult. It’s important to have good inventory management in order to identify inventory shrinkage due to shoplifters as early as possible.

Other issues that impact business profits and inventory shrinkage.

There are many other factors that impact inventory shrinkage and a retail business’s bottom line. These include online fraud, stolen credit cards, lost shipments and stolen shipments amongst others.

Online Fraud

According to the 2020 National Retail Security Survey cybercrime is becoming one of the biggest threats to retail businesses. This is particularly true post-pandemic when e-commerce has become a large source of retail profits. Online fraud by both suppliers and customers is a big risk factor in inventory shrinkage.

Stolen Credit Cards

According to The 2019 Federal Reserve Payment Study there was a marked increase in non-cash payments between 2015 and 2018 when compared with the previous 3 years. This means that credit card fraud is becoming a bigger risk than in previous times. It is much easier for a fraudster to use a stolen credit card online than in a bricks and mortar store. This means that stolen credit cards are becoming a big risk to retail businesses and their profits.

Lost Shipments

Lost shipments are a common issue in e-commerce retail businesses, and account for a large amount of lost inventory. This occurs when products are shipped to a customer but don’t arrive resulting in the customer requiring a refund or a replacement shipment which inevitably costs the business money. This can be due to theft en route, postal service issues, human error or accidental loss of packages. 

Stolen Shipments

As the retail landscape continues to shift towards e-commerce, shipment issues are becoming more and more common. Having shipments stolen en route to a customer or from a supplier can have a significant impact on profits. The scammers responsible for this kind of theft are becoming more and more sophisticated making it essential to put preventative measures in place to combat this kind of theft.

Preventative measures you can take to combat inventory shrinkage.

In the case of inventory shrinkage prevention is definitely better than cure. It is essential to take a proactive approach to inventory shrinkage. A well-developed inventory management strategy is helpful in ensuring that inventory shrinkage is kept to a minimum.

The most effective ways to prevent inventory shrinkage include;

Security Cameras

In bricks and mortar retail stores strategically placed security cameras, placed throughout the premises, go a long way towards reducing shoplifting and in-store theft. They’re not only a great deterrent but also a good way to pick up employee theft and misconduct. 

Inventory Tracking

Making sure that a business has appropriate inventory tracking systems in place is essential in retail. A consistent way of unpacking and recording inventory is a good way to avoid inventory shrinkage. A good inventory management plan starts with creating a streamlined record of data for every product stocked. This makes inventory management and early recognition of shrinkage easier, ultimately saving money.

Security Guards

The presence of vigilant security guards on retail premises is a good physical deterrent to would-be thieves. Potential shoplifters and dishonest employees will be deterred from stealing inventory by the mere presence of a security guard in fear of being caught. Retail security guards are trained in how to handle difficult situations and will also be able to handle any criminal activity sensibly. They will also protect your staff from having to deal with incidents that have the potential to become confrontational.

Security Tags

Security tags are designed to prevent would-be thieves from taking stock out of a retail store. RFID and RF security tags will trigger an alarm when moved through a sensor that’s placed at the exits of a store. They are a reliable way to give retail staff a warning that an item is being stolen. They are also an effective, visible deterrent for shoplifters who are less likely to steal an item with a security tag attached to it.  Security tags have been used by retailers for years to prevent theft and subsequent inventory shrinkage. OMAC security tags are innovative and industry-leading in stopping shoplifting before it happens. The only security tag on the market guaranteed to deter thieves and lower retail shrinkage.

Visual Deterrents

Signage has been used for decades to deter shoplifting. They are a great way to let thieves know that they are being monitored. When people know they’re being watched, they’re far less likely to engage in criminal behaviour. Placing conspicuous signs around retail premises lets people know that they are being surveilled by CCTV and security personnel. 

Pre-employment Checks

Employee theft can account for a large proportion of inventory shrinkage. Pre-employment screening and checks are used to verify the suitability, integrity and identity of prospective employees.  Ensuring that staff are trustworthy through reference checks, criminal record clearances and identity checks is essential. Employing the right staff for a job is an investment and hiring staff that you can trust can really minimise the financial and employee theft risks in a retail environment.

Employee Training 

Even the most comprehensive policies and procedures won’t be successful if employees aren’t properly trained to adhere to them. Training staff effectively is a large contributor in your efforts to reduce retail shrinkage due to employee theft or fraud and admin errors. Thorough training should encompass how to spot prospective criminals, how to prevent shoplifting by being observant and how to properly use all of the systems in a retail business to avoid a clerical error. They should also be made aware of where all CCTV surveillance cameras are set up. By working together with staff to mitigate the problem of shrinkage you will save time and money.


There are many ways that retail businesses lose profitability through inventory shrinkage. Even with the comprehensive strategies outlined above, it is advisable to work with security technology providers as part of any strategy to minimise the impact of shrinkage on a business. Using innovative technologies such as security tags are a cost-effective and efficient way to prevent shoplifting and employee theft.
OMAC security tags work as an effective part of any strategy to reduce retail shrinkage. Get in touch with our team to discuss how our security solution can help your business to stop thieves in their tracks.


What is inventory shrinkage and how do I measure it?

Inventory shrinkage refers to any excess amount of inventory that is shown in the records but no longer exists in the actual stock in hand inventory. This usually happens as a result of shoplifting, employee theft, clerical error, poor inventory management or supplier fraud.

To accurately identify a business’s inventory shrinkage use the shrinkage calculation. Conduct a physical count of the inventory and calculate its cost, and then subtract this cost from the cost listed in the inventory records. Divide the difference by the amount in the accounting records to arrive at the inventory shrinkage percentage.

Ways to prevent inventory shrinkage?

There is some good news when it comes to inventory shrinkage; a well laid out prevention strategy can significantly reduce its impact on a businesses bottom line. Here are some of the top things to include in your business’s shrinkage strategy;

  • Comprehensive item tracking systems, using both software and physical counting
  • Security tags on items
  • Conducting pre-employment screening
  • Training employees effectively
  • Having onsite security guards and CCTV cameras
  • Fostering a shrinkage averse mindset throughout the business
What is inventory management?

In retail businesses inventory is the most valuable asset. A shortage or excess of inventory can be extremely detrimental to a business’s bottom line. Inventory management is a part of supply chain management and encompasses the process of managing inventory throughout the production and delivery process, as well as keeping track of the inventory a store has on hand at any given time. Inventory management as a practice aims to streamline inventories in order to prevent unexpected stock shortages or excesses. 

Effective inventory management reduces the costs of carrying excess inventory while maximising sales, and highlights any inventory shrinkage before it becomes a big issue. It is a good way to avoid items being sold out and to nip any shrinkage problems in the bud. Whether making a stock purchase or checking inventory levels, poor inventory management will cost a retail business money.

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