Inventory App Builder

Inventory shrinkage: how to measure it, what causes it, and how to reduce it (2026)

How a small shop can calculate its shrink rate, split known from unknown losses, find where stock is going, and the receiving, counting and till controls that reduce it.

Floot ·

Key Takeaways

  • Shrink = book inventory minus physical inventory. Express it as a percentage of sales over the same period so you can compare month to month and with published figures.
  • The last NRF average was 1.6% of sales. The 2023 National Retail Security Survey put average shrink at 1.6% in fiscal 2022. NRF stopped publishing the annual shrink report in 2024, so there is no newer official average.
  • Theft is only part of it. In that survey, process and control failures accounted for 27% of shrink, alongside external theft at 36% and employee theft at 29%.
  • Record known losses so unknown shrink shrinks. Damage, samples and supplier shortages that are logged become known losses with a cause. What remains unexplained is where to focus.
  • Receiving and counting are the cheapest controls. Checking deliveries against the order and counting high-risk items often catch more than any camera.

Quick-Start Prioritization Framework

SymptomMost likely causeFirst control to try
Shortages of whole packs or casesReceiving errors or supplier short-shippingCheck every delivery against the packing slip and purchase order
One variant short, its sibling overWrong variant sold at the tillScan at the till; retrain on variant selection
Small, valuable items short repeatedlyExternal theftMove them to sight lines or behind the counter; count weekly
Shortages cluster around certain shiftsProcess or internal issueIndividual logins; review voids and refunds by user
Damaged goods found, never recordedUnrecorded breakageA damage log with fixed reasons

Shrinkage, or shrink, is the gap between the stock your records say you have and the stock that is really there. Some of it is theft. A surprising amount is paperwork: deliveries that came in short, sales rung up under the wrong item, breakages nobody recorded. This guide shows how to measure shrink properly, what the last published industry figures say about its causes, how to work out which causes apply to your shop, and the practical controls that reduce it without turning the shop into a fortress.

How to measure shrink

You can’t reduce what you don’t measure, and most small shops have never put a number on shrink. It takes a count and two figures from your records.

The formula

Shrink = book inventory − physical inventory. Book inventory is what your system says you should have; physical is what you counted. Value both at cost (or both at retail, but don’t mix).

Shrink rate = shrink ÷ sales for the period. Retail industry surveys report it as a percentage of sales, so using the same basis lets you compare.

Worked example

A shop’s system says it holds $52,400 of stock at cost. A full count finds $51,300. Shrink is $1,100. Sales over the six months since the last full count were $74,000. Shrink rate = 1,100 ÷ 74,000 ≈ 1.5%.

If you value stock at cost and sales at retail, your percentage will look lower than it would at retail values. That’s fine for tracking your own trend; just keep the basis the same every time.

Known vs unknown shrink

Known shrink is loss you recorded with a reason: breakage, spoilage, samples, supplier shortages. Unknown shrink is whatever’s missing that nobody can explain. If the same shop had logged $400 of damages over the period, its unknown shrink is $700. The aim is to move losses from unknown to known, and then reduce both.

What industry figures say, and their limits

For three decades the main US benchmark was the National Retail Federation’s National Retail Security Survey. It is useful context, with caveats.

The last published average

The 2023 survey put average shrink at 1.6% of sales in fiscal 2022, up from 1.4% the year before, equal to $112.1 billion in losses. NRF said external and internal theft together made up nearly two-thirds of the total.

The breakdown by cause

The Loss Prevention Research Council’s summary of the same 2023 survey gives the split for fiscal 2022: external theft 36%, employee theft 29%, process and control failures and errors 27%, unknown 6%, other 1%.

Why there’s no newer figure

Retail Dive reported in January 2025 that NRF ceased publishing its annual shrink report in 2024, after the federation had retracted a claim about organised retail crime’s share of shrink in 2023. NRF’s more recent research, such as The Impact of Retail Theft & Violence 2025, surveys loss prevention executives about theft trends rather than publishing a shrink rate.

The surveyed retailers are mostly large chains. Treat 1.6% as a rough reference point, not a target for a 600-square-foot gift shop. Your own trend matters far more.

The four sources of shrink

Each source needs a different fix, so it helps to name them precisely.

SourceWhat it looks like in a small shopWhere to look
External theftSmall, valuable, easily concealed items going missingCount results for high-risk items; blind spots in the layout
Employee theftUnexplained voids, refunds without a customer, discounts to friends, stock leaving the back doorTill exception reports by user; who receives and who counts
Process and admin errorsDeliveries entered but not checked, wrong variant sold, price changes not applied, returns not restockedReceiving records vs counts; sibling-variant mismatches
Supplier error or fraudCases short, wrong items substituted, invoices for more than was deliveredDelivery checks against packing slips and purchase orders

Admin errors hide as theft

If one size of a T-shirt is always short and another is always over by the same number, nobody is stealing; someone at the till is picking the wrong size. Fix the process and that “shrink” disappears.

Theft hides as admin errors

The reverse also happens. A refund processed with no customer, or a delivery signed for in full when it was short, looks like a paperwork slip. That’s why controls on refunds, voids and receiving matter as much as anything on the shop floor.

Finding where your shrink comes from

A shop-wide shrink number tells you there’s a problem. Breaking it down tells you where.

Split by category and item

Run cycle counts on a schedule and total count adjustments by category every month. Shrink usually concentrates in a few categories and a handful of items.

Look at the shape of the difference

Shortages in multiples of a case point to receiving. Paired over-and-short variants point to the till. Steady single-unit losses on small, valuable items point to theft. Losses that appear after particular deliveries point to the supplier.

Look at timing and people

Compare count adjustments, voids, refunds and no-sale drawer openings by day and by staff login. A pattern isn’t proof of anything, but it tells you where to watch and what to ask about.

Controls that reduce shrink

None of these needs expensive hardware. Most are habits.

Receiving

Count every delivery against the packing slip and the purchase order before anyone signs or shelves it. Note shortages on the delivery paperwork and raise them with the supplier the same day. Where possible, the person who ordered isn’t the only person who receives.

Counting

Cycle-count high-risk and high-value items weekly and everything else at least quarterly. Count blind, recount differences, and record every adjustment with a fixed reason.

At the till

Scan rather than pick from a menu where you can, so the right variant is sold. Give every staff member their own login. Require a manager approval or a reason for refunds without a receipt, voids after payment and large discounts, and review those exceptions weekly.

On the shop floor

Keep small high-value items in sight of the till or in a display case. Avoid tall fixtures that block sight lines. Greet customers when they come in. Keep the back door locked and deliveries supervised.

Recording known losses properly

Every loss you record with a reason is one less mystery at the next count.

A short, fixed list of reasons

Damaged, expired, sample or display use, supplier short, staff use, theft observed. A fixed list means you can total them; free text gives you “broke”, “broken” and “dmg” and no totals.

Make it quick

If logging a broken mug takes two minutes, people won’t do it. A clipboard by the back-room door works. So does a simple form on a phone.

If you’d rather not do this yourself

Many inventory and POS tools record adjustments with reasons. If none fits your shop, an AI app builder such as Floot can build a small app for damage logs, blind cycle counts and a monthly report of adjustments by reason, category and staff member, which you can check against a month of paper records before switching over.

Common mistakes

These keep shrink high, or hide it until year end.

  • Measuring shrink only once a year, when it’s too late to find the cause.
  • Assuming all shrink is shoplifting and ignoring receiving and till errors.
  • Signing for deliveries without counting them.
  • Shared logins at the till, so voids and refunds can’t be traced to anyone.
  • Not recording breakage and samples, so known losses show up as unexplained shrink.
  • Adjusting counts without investigating, so the same item is short every month.
  • Comparing your number with the national average instead of with your own trend.

Frequently Asked Questions

What is inventory shrinkage?

The difference between the inventory your records say you have and what is physically there, caused by theft, administrative errors, damage and supplier problems.

How do you calculate shrinkage rate?

Shrink = book inventory − physical inventory. Shrink rate = shrink ÷ sales for the same period. For example, $1,100 of shrink on $74,000 of sales is about 1.5%.

What is the average retail shrink rate?

The last figure from the NRF’s National Retail Security Survey was 1.6% of sales for fiscal 2022. NRF stopped publishing the annual shrink report in 2024, so there is no newer official average.

What causes most inventory shrinkage?

In the 2023 NRF survey, external theft was 36%, employee theft 29%, and process and control failures 27% of shrink, with the rest unknown or other. In a small shop the mix can be very different, so measure your own.

How can a small shop reduce shrinkage?

Count deliveries against the order, cycle-count high-risk items weekly, give every staff member their own till login, review refunds and voids, keep small valuable items in sight, and record every known loss with a reason.

Is shrinkage the same as theft?

No. Theft is part of it, but shrink also includes paperwork and process errors, unrecorded damage and supplier shortages. In the 2023 NRF survey, process and control failures alone accounted for 27%.

Sources