Industry Insights

ANSWERED: What Percentage of Shrink Is Caused by Employees?

May 07, 2024 • 4 min read

Retail shrink or shrinkage cost American businesses over $110 billion in 2022. That’s more than the GDP of Geneva, Switzerland.

When you think of shrinkage, shoplifting may be the first thing that comes to mind. While shoplifting remains a major cause of shrinkage across industries, employee shrink is another major contributor. But how big of a contributor?

More importantly, what can you do to reduce shrinkage caused by employees and improve your profit margins?

In this post, we’ll explore the concept of retail shrinkage and its causes. You’ll also learn tips to reduce your retail shrink.

What Is Retail Shrink or Shrinkage?

Imagine you're running a store, and suddenly you realize that some of your products have gone missing, but there's no record of them being sold.

That's what we mean by "shrink" in the retail world. Retail shrink is the loss of inventory that can happen for various reasons like theft, errors in record-keeping, or even supplier issues.

Retail shrink is a headache for retailers because every missing item means lost revenue. The average retail business loses almost 1.45% of total sales to shrink. Small businesses are particularly vulnerable to the pain of shrinkage for a few reasons.

Many small businesses neglect their loss prevention measures, often due to budgeting constraints. Small businesses also tend to run on smaller budgets and tighter profit margins than larger enterprises, meaning they feel the sting of shrinkage and loss more acutely than larger businesses.

Now, let’s dive into the details of shrinkage, covering how much shrink is caused by employees, how you can calculate your shrinkage rates, and what you can do to improve them.

What Percentage of Shrink Is Caused by Employees?

Let’s not beat around the bush. Employees, on average, cause 29% of shrink across retailers, second only to external theft. And the average dollar loss reported for employee theft and shrink is approximately $2,180.

Employee shrink can be a result of both direct and indirect factors:

Direct factors — Employee actions that are intended to cause shrink, for example, merchandise theft, refund fraud, and free bagging.
Indirect factors — Unintentional employee actions that cause shrinkage, such as product breakage and carelessness.

How To Calculate Shrink

Want to calculate the employee shrink — and total shrink — in your store? Here’s how you can calculate your retail shrink percentage.

Step 1: Determine discrepancies

First, you need to determine the difference between what your records say you should have in inventory and what's on the shelves. Start by doing a physical count of your inventory and then comparing that data to your records.

Step 2: Identify causes

Once you've got your discrepancy number, it's time to investigate why there's a difference. Your shrinkage issues may be caused by anything from employee theft to shoplifters to simple errors or product breakage.

Step 3: Calculate lost value

Now, it's time to crunch some numbers. You'll want to calculate the total value of the inventory that's gone missing due to shrinkage. Assign a dollar value to every missing product and add them up until you have a figure that represents your business’s total shrinkage.

Step 4: Aggregate shrinkage cost

With the value of the lost inventory in hand, you can now aggregate all those costs together. This number gives you a total picture of how much shrinkage is costing your business.

Step 5: Determine percentage

Finally, you'll want to put this into perspective. Divide the total shrinkage costs by the total value of sales for the same period. This gives you a percentage that shows you how much of your sales are being lost to shrinkage.

By following these steps, you can get a clear picture of how shrinkage is impacting your business financially.

What Are Other Common Causes of Shrink?

In addition to employee shrink and external theft, here are a few other common causes of shrink:

Damaged or spoiled merchandise: If you store products improperly, you may find yourself saddled with damaged or spoiled merchandise. These wasted products can contribute significantly to retail shrink in your store.
Supplier fraud: Sometimes, it's not your own team causing shrink — it's your suppliers. Imagine ordering a batch of high-quality products only to receive a lower-grade version or fewer items than you paid for. That's supplier fraud in action, and it can seriously impact your inventory levels and bottom line.
Operational errors: Despite our best efforts, mistakes happen. In the retail world, inventory management process errors are more common than we'd like. Incorrect data entry or discrepancies in receiving and shipping goods can all lead to shrinkage if left unchecked.
Supply chain issues: Transportation delays, production shortages, or quality control issues upstream can cause headaches downstream, leading to shrinkage as your shelves sit empty.

How To Reduce Retail Shrink

Now that you know the different factors contributing to retail shrink, let’s examine a few measures you can take to address shrinkage:

Strengthen surveillance and security

Installing surveillance cameras, security tags on merchandise, and alarm systems send a clear message: we're watching, and we're not taking any chances.

Related Read: What Is POS Security? 5 Ways To Protect Customer Data
Control access to sensitive areas

Limiting access to high-value or sensitive areas like stockrooms and cash registers to authorized personnel ensures that only those who need to be there can get there.
Train your employees

Your team is your first line of defense against shrinkage. Providing comprehensive training on loss prevention techniques empowers your staff to be vigilant and proactive in protecting your inventory.
Set clear policies and procedures

By developing and enforcing clear policies and procedures for handling returns, exchanges, and refunds, you create a roadblock for would-be fraudsters. When everyone knows the rules, there's no room for shady business.
Get a secure point of sale system

Adopting a secure point of sale (POS) system with advanced security management features adds an extra layer of protection to your transactions. A modern POS system can automate inventory and shrinkage reports and facilitate role-based employee access.

When you invest in a robust point of sale solution, you can monitor your stock levels, restrict employee access to limit employee theft and discrepancies, and improve your inventory management processes.

POS Nation offers an all-in-one point of sale and inventory management solution designed to help you optimize your operations and minimize shrinkage in your store.