Retail shrinkage, also known as inventory shrinkage, occurs when the product’s inventory number is different from what is physically available. When this happens, you lose valuable money from the sale of that product. Retail loss is a primary concern for many retailers. Learning the leading causes of retail shrinkage and how to prevent them is an excellent tactic to securing your bottom line.  

Top 5 Causes of Retail Shrinkage

The four leading causes of retail shrinkage are internal theft, external theft, administrative errors, fraud, and product damages. You can attribute most shrinkage to those five categories. Now you’re probably wondering what you can do to prevent those losses from happening. Here are helpful tips and advice on what you can do to avoid retail loss for your business.

#1 Internal Theft

The main concern with internal theft is employees stealing the product. 

Ways to prevent internal theft from occurring:

  • Conduct background checks on potential employees 
  • Check employee references 
  • Provide each employee with a unique POS system login
  • Add video cameras around the register and inside stock rooms 

#2 External Theft

The number one cause for shrinkage is external theft or shoplifting. It’s caused by people (not associated with the business) stealing products for personal use or reselling them. Organized Retail Crime (ORC) groups are a significant concern, especially for retailers located in the city.

Tips for fast and effective protection against shoplifting include:

#3 Administrative Errors

Sometimes mistakes happen, primarily clerical errors. Some common administrative errors include POS transaction mistakes, accounting typos, incorrect markdowns, and mislabeling. 

Here are some ways to reduce these types of oversights.

  • Proper training for all employees on:
    • inventory audits
    • price gun usage 
    • processing returns
  • Conduct partial inventory counts 
  • Establish and maintain an inventory management system
  • Receive and record product shipments as they arrive (don’t wait)

#4 Fraud

Fraud losses include product returns and vendor errors. Return fraud involves people returning stolen products to the store or paying with counterfeit money. Whereas vendor fraud primarily includes delivering fewer products than ordered or providing an invoice with an incorrect inventory amount listed.

Easy tips at preventing fraud. 

  • Be selective about the vendors you work with
  • Develop a tip line for employees to report fraud 
  • Check orders as they arrive against the invoice 
  • Prevent returns without receipts
  • Limit the type of bills you will accept for purchases (i.e., no bills over $50)

#5 Product Damages

This type of loss is self-explanatory. It’s when a customer or employee might accidentally break a product. It can also include food products that expire before being sold.

Since it’s usually an accident, it’s hard to prevent this loss, but here are a few tips to reducing product damages.

  • Install bumpers on shelves 
  • Add sales area corners around the bottom of retail shelving
  • Place sales area rails around fragile merchandise 

Read How to Reduce Shrink in a Produce Department to learn more about preventing food loss.

Loss Prevention Strategies: Your Strongest Defense 

While the above tips and advice can help you prevent retail shrinkage, implementing a complete business loss prevention strategy is your strongest defense. A 360-degree approach offers you protection in all areas of your business, including the store’s exterior, the entrance and exit, and aisle and product protection. 

Product Protection Solutions (PPS) will work with you to develop a strategy that meets your needs and budget. Learn more about our holistic approach to loss prevention and asset protection.

Stop Shrinkage in Its Tracks! 

Don’t wait for your retail shrinkage to increase. Instead, contact the PPS team to learn how we can help protect your business from thieves, fraud, and errors.

Complete our online form or call 866-750-5744.