7 Types of Shrinkage in Retail: How to Identify and Prevent Them

Retail shrink is an inevitable part of owning and operating a business. As quickly as new technology is developed to curb it, thieves are becoming that much more cunning. Managing it can be an uphill battle without the right tools. If you feel like you’re doing everything you can, but physical inventory continues to fly off the shelf unaccounted for; or if you don’t even know where to get started, we can help. Read more to discover:

• How unanswered theft affects your bottom line.
• How to identify the types of retail shrinkage you may be experiencing.
• Adaptable loss prevention strategies to reduce theft.

For a data-driven look at where shrinkage stands today, see our breakdown of the latest retail shrinkage statistics.

How retail shrinkage can affect retail businesses  

According to the Appriss Retail 2026 Total Retail Loss Benchmark Report, U.S. retailers lost $90 billion to shrink last year. Of that, $66 billion is preventable. Rampant theft of goods has a domino effect, creating issues in every step of the supply chain. Most notably, the numbers on your balance sheet won’t quite add up when it’s time to run the numbers, but it can be so much more damaging.

In addition to losing assets, and income from potential sales, businesses will often hike prices to make up for loss, lay off employees to save money, or lock up all of their merchandise. Locking up merchandise creates its own customer experience problem, shoppers who can’t handle a product or have to track down an associate to unlock a display are more likely to walk away from the purchase entirely. If shoppers are sensitive to price changes, it will create a poor customer experience that can push them to shop elsewhere. A store that loses margin faster than it can recover it doesn’t stay competitive for long.

Calculating retail shrink

In basic terms, it’s the difference between how much you should have from selling products vs. how much you actually made at the end of it all after inventory checks, etc. If there’s a big difference in those numbers, then you may be losing money, fast.

Although it’s often shown in a dollar value, it’s better expressed as a percent using the following formula:

(value of lost goods/value of goods sold) x 100 = %
Example: (10,000/250,000) x 100 = 4%*
*Remember, the goal is always to stay under 1% or as close to it as possible.

Types of Retail Shrinkage 

There are a ton of ways retailers can experience inventory loss. Here are 7 of the most common, what to look for, and how to respond to each one.

1. Shoplifting and Organized Retail Crime

Shoplifting is a type of external theft, meaning it’s perpetrated by outside sources (i.e. customers or organized retail crime groups). The National Retail Federation estimates that shoplifting accounts for the most theft at 36%.

More than half of retailers reported an increase in organized retail crime in 2025, according to the NRF’s Impact of Retail Theft and Violence report. ORC incidents rose 57% among retailers tracking organized crime from 2022 to 2023, and transnational criminal groups were involved in thefts at 67% of surveyed retailers.

Organized retail crime groups, as the name suggests, are more organized in their attempts. They can deliberately scout a location or chain for weeks. They often take high quantities of merchandise and sell them to pawn shops, on the black market, or resale sites. They can be extremely hard to stop, especially with policies that forbid employees from engaging with thieves.

83% of retailers reported that levels of aggression and violence tied to shoplifting are the same or higher than the previous year, according to the NRF 2025 report. That changes the stakes for how stores need to think about deterrence, the goal is to prevent the confrontation, not just the theft.

The most effective starting point for most retailers is product-level security, solutions that protect merchandise directly, without relying on associates to monitor every aisle or cameras to document theft after it happens.

InVue’s asset protection solutions cover three primary categories. Merchandise Display Security protects phones, tablets, cameras, laptops, smartwatches, headphones, and powered and non-powered consumer goods on open display. Hanging Merchandise Security secures products on pegboards, slatwalls, and peg hooks with easy customer accessibility built in. Sell-Thru Merchandise Security provides quick-release protection for fast-selling products including bottle locks, soft goods locks, and plastic cases. All of these solutions operate under the OneKEY ecosystem, one key for every secured product across the entire store floor.

For larger operations, these product-level solutions work alongside broader deterrents like surveillance cameras, AI-assisted monitoring, and uniformed security. But for most retailers, the product level is where to start, it’s where the theft actually happens.

InVue specializes in innovative asset protection solutions. Asset protection solutions are technologies and strategies designed to protect retail assets, like merchandise, inventory, and store equipment,  from theft, loss, and unauthorized access while keeping products available to sell.  InVue’s solutions are built to keep merchandise on open display and accessible to customers, while triggering an alarm the moment unauthorized removal is attempted. From health and beauty to grocery and consumer electronics, we have rigorously tested anti-theft devices for your retail store.

Retail security devices not only protect merchandise, but also associates and customers from potentially dangerous interactions with thieves. They are more reliable than staff or cameras alone because they respond at the moment of the event, not after it. Staff observation is inconsistent and creates confrontation risk. Cameras record but don’t prevent. An alarmed display triggers before a theft is completed and before a human has to intervene. They are easily scalable across any number of products or store locations.

2. Employee theft 

Employee theft, also referred to as internal theft or internal shrink across the loss prevention industry, is inventory loss caused by the people inside your organization. It is a close second in contributing to retail shrink at 29%. According to the Appriss Retail 2026 Total Retail Loss Benchmark Report, employee theft costs U.S. retailers $26 billion annually. It also comes in a variety of forms that you can learn about here.

Without proper access control, it can be difficult to spot signs of internal theft. It pays to do your due diligence up front via the hiring process, and to be vigilant of employees showing signs of disengagement. Disengaged employees have less investment in store outcomes and may rationalize theft more easily, particularly in high-turnover environments where attachment to the job is low.

Common forms of employee theft include sweethearting (scanning the wrong item for friends and family), discount abuse, inventory adjustments made directly in the system to cover stolen merchandise, and cash skimming in cash-heavy environments. Sweethearting shows up as unusually high void rates or discounted transactions tied to specific cashiers. Discount abuse appears as a pattern of unauthorized markdowns from a single associate. Inventory adjustments that don’t match physical counts are a direct red flag. Each of these has a signature in your POS and inventory data,  the challenge is knowing where to look and having the audit trail to act on it.

One of the most common and overlooked internal access gaps is shared mechanical keys. When a single key opens multiple displays and gets passed between associates, there’s no record of who accessed what or when. That gap is where internal theft hides and where it compounds undetected. An associate who opens a secured cabinet and removes merchandise has no accountability trail without individual access logging.

Loss prevention strategies for employee theft

Your employees are often your first line of defense in identifying theft and preventing shrinkage. Proper staff training is the foundation of a successful business and makes a significant impact on the efficiency of store operations and the shopper’s experience. The difference between a good experience with a brand and an exceptional one is the customer service you provide.

In addition to training, it’s beneficial to promote a positive company culture and provide incentives for great work via an employee discount, bonuses, or other means of appreciation.

The operational backbone of any internal theft prevention program is access control, specifically, access control that creates an individual audit trail. When every associate has a unique credential tied to every access event, LP teams can see who opened what, when, and where across the entire store. 

InVue’s access control solutions replace the shared mechanical key entirely. Our patented OneKEY ecosystem gives each associate a unique PIN tied to an IR key, creating a timestamped record of every access event across every secured product in the store. You can also set limitations on which areas employees can access. For operations requiring a higher level of connectivity, InVue’s LIVE Locks, including the LIVE Cam Lock, LIVE Plunger Lock, and LIVE Slider Lock, use NFC and Bluetooth technology to deliver real-time access data and centralized audit trails across swing-out doors, sliding glass cases, drawers, and open storage areas. Every fixture type has a specific InVue lock designed for it.OneKEY can be used with a majority of InVue solutions, so as you scale your retail business, your security solution can scale with you.

The results speak for themselves. MediaMarkt moved from a key ring of 10 keys to a single OneKEY across all showcases and alarm systems. Best Buy eliminated the need to replace 50 padlocks per year due to lost keys or combinations and reported no theft from their secured cages after installation.

3. Administrative errors 

Administrative errors in the retail industry are also known as paper shrink. They include mislabeling items, accidental markdowns on the wrong products, errors in cycle counts, and data-entry errors. They can be intentional or honest mistakes, but still contribute to inventory loss.

According to the Appriss Retail 2026 report, inventory errors account for 21% of total U.S. shrink, $19 billion annually. Operational inefficiencies add another 13% ($12 billion). Combined, these two categories represent $31 billion in largely preventable losses that rarely show up in theft-focused loss prevention programs.

Some ways to prevent administrative error include proper training, automating tasks where appropriate, having a checks and balances system, and using proper point of sale software.

Regular cycle counts on high-shrink SKUs, validating received inventory against purchase orders, and reviewing POS overrides and adjustments on a consistent schedule are the operational habits that catch these errors before they compound.

4. Vendor fraud 

Vendor fraud is a major risk to retailers. It is also known as embezzlement and according to the ACFE, business lose around 5% of their profits to these fraud scams. The goal is to divert money away from your business and send it to a third-party account via payment scams, tampering with checks, wiring money through a shell company, or employees receiving incentives from a vendor for information.

These scams can be very intricate and can go on unnoticed for an extended period of time. For example, sending duplicate payments is a form of vendor fraud, but in most instances, it is genuinely just human error. If it’s happening often, it is definitely something to look into more closely.

To prevent vendor fraud, it is best to properly vet all new vendors. If their contact information is vague or hard to find, it’s a sign they may not be reputable. Closely study invoices and their numbering to ensure they follow a pattern. Does the vendor request payments in unusual ways that are difficult to track? Are all invoices only in whole dollar amounts?

Internally, it is important to implement checks and balances among employees tasked with managing inventory, money, invoices, and other sensitive documents. Remember to always do routine check of your balance sheet so you spot any issues before it turns into something major.

Requiring vendors to submit an Advanced Shipping Notice before shipment gives your receiving team a baseline to check incoming inventory against. Any discrepancy above a threshold you define should trigger a formal review before the shipment is accepted.

5. Fraudulent returns 

According to the Appriss Retail 2026 Total Retail Loss Benchmark Report, consumers made $706 billion in returns last year. Of that, $100 billion is preventable loss due to returns fraud and abuse, with returns fraud specifically accounting for $14 billion. The NRF estimates that approximately 9% of all returns are fraudulent.

Fake returns result in significant inventory losses and come in a variety of forms including; falsely claiming an item is defective, using fake receipts, returning stolen goods, returning empty boxes, claiming that you did not authorize a certain purchase, falsely claiming damage during shipping, and more.  

Omnichannel retailers face an additional exposure. The Appriss 2026 report found $4 billion in cross-channel fraud stemming specifically from buy-online-return-in-store transactions, where customers exploit the gap between online and in-store policy enforcement.

If your initial solution is to create a strict return policy, you may want to think again. Having lenient return policies is important to many shoppers and can help you remain competitive. It’s important to do your due diligence up front.

For example, if you sell online, make sure products are photographed and described in great detail. For brick-and-mortar locations the best way to limit fraud is through top-tier customer assistance and a seamless in-store experience.

Make sure staff are greeting customers and offering assistance. John is less likely to return a device if an associate shows him all of the features and explains how to use it before he heads to the register. Also, if a customer is planning on purchasing a lot of items with the intent to commit return fraud, they likely won’t under the watchful and helpful eye of employees.

There are also more advanced solutions like return merchandise authorization systems (RMAs) that track return patterns to prevent fraudulent returns before they happen, but they aren’t 100% and add a lot of friction to the customer experience. It’s up to you as a retailer what you need and can afford.

One finding worth noting from the Appriss research: most customers engaging in abusive return behavior don’t realize they’re doing anything wrong. Targeted education before enforcement, rather than blanket restrictive policies, reduces abuse without alienating your best customers.

6. Damaged, Spoiled, or Expired Goods

Not all shrinkage comes from theft or fraud. Products that are damaged in handling, spoiled before they sell, or returned to the sales floor when they should have been quarantined all create inventory gaps that don’t show up in theft reports but still hit the bottom line.

Common causes include handling damage where items are discarded without being scanned out as damaged, leaving your inventory system with phantom stock. Spoilage is a major factor for any retailer carrying perishable goods. Return-to-stock errors, where items are put back on the shelf rather than quarantined, create a second round of loss when the product eventually has to be written off.

According to the Appriss Retail 2026 report, operational inefficiencies including damaged and spoiled merchandise account for 13% of total U.S. shrink, $12 billion annually. In some categories this figure is even higher, with operational losses accounting for up to 70% of store shrink.

The fundamentals here are operational discipline rather than security technology. Store heavy bulk items on floor-level pallets and lightweight or fragile items on eye-level shelving to prevent drops. Use the first-in, first-out rule to move older stock before newer inventory. Create a dedicated return-to-vendor bin to quarantine defective merchandise rather than sending it back to the floor. Train staff on proper receiving procedures, including using safety cutters to unbox incoming shipments and checking for damage before logging inventory into your system.

7. Digital and Ecommerce Fraud

As retail has moved omnichannel, so has shrink. More than half of retailers reported an increase in digital and ecommerce fraud in 2025, according to NRF data. ORC groups are now operating across multiple channels simultaneously — in 2024, digital and ecommerce fraud among retailers tracking ORC activity rose 55%, according to the NRF’s Impact of Retail Theft and Violence 2025 report.

Common forms include chargebacks, also called friendly fraud, where customers make a legitimate purchase and later dispute the charge claiming they never received the item or never authorized the transaction. Account takeover fraud involves criminals signing into a customer’s account to make purchases using stored payment details. Promo abuse, where customers use multiple accounts to repeatedly claim first-time discounts, drains margin without appearing in shrink reports at all.

For omnichannel retailers, the risk compounds because each channel operates with different detection capabilities and different policy enforcement. A customer flagged for suspicious activity online can complete the same transaction in-store with no warning. Unified data across channels is the operational requirement for catching this category of loss.

Clear return and purchase policies with documented proof of delivery reduce chargeback exposure. Encouraging customers to enable two-factor authentication on accounts reduces takeover risk. For promo abuse, monitoring for multiple accounts sharing a shipping address or payment method is a starting point. At scale, behavioral analytics tools that score customer risk across channels are becoming standard practice among larger retailers.

Stop Losing Ground on Shrink You Can Actually Control

The $66 billion in preventable shrink sitting inside that $90 billion total is not a fixed cost of doing business. It’s a gap between where most retailers are and where they could be. The categories above each have a response, and the right combination of product-level security, access control, and operational discipline closes more of that gap than most retailers realize.

InVue works with loss prevention teams at some of the world’s largest retailers, including Home Depot, Lowe’s, Tesco, Meijer, and Carrefour, to build security programs that protect high-value merchandise without slowing the customer experience. If your current program is costing you in ways that don’t show up on the shrink report, that’s probably the right conversation to start.

Contact us today to get solutions that prevent shrinkage and increase sales. 

Frequently Asked Questions About Retail Shrinkage

What is shrink in retail? Shrink in retail is the difference between a store’s recorded inventory value and the inventory that actually exists at the point of audit. It is caused by external theft, employee theft, administrative errors, vendor fraud, fraudulent returns, damaged goods, and digital fraud. According to the Appriss Retail 2026 Total Retail Loss Benchmark Report, U.S. retailers lost $90 billion to shrink last year, with 73% of that figure being preventable.

What are the main types of shrinkage in retail? The seven main types of retail shrinkage are external theft and shoplifting, employee theft, administrative errors, vendor fraud, fraudulent returns, damaged or spoiled goods, and digital and ecommerce fraud. Each requires a different identification approach and a different prevention response.

What is the difference between internal and external shrink? External shrink comes from outside the business, primarily shoplifting and organized retail crime. Internal shrink comes from inside the business, primarily employee theft and administrative errors. Based on NRF data, external theft accounts for approximately 36% of total retail shrinkage and internal or employee theft accounts for approximately 29%. Both categories are addressed differently — external shrink with product-level security and deterrence, internal shrink with access control, audit trails, and operational oversight.

How do you reduce shrinkage in retail stores? Reducing retail shrinkage requires a category-by-category approach. For external theft, InVue’s asset protection solutions cover merchandise displays, hanging merchandise, and sell-thru products across every fixture type, from pegboard hooks to showcase locks to soft goods locks, all operating under a single OneKEY credential.For employee theft, individual access logging through InVue’s OneKEY ecosystem and LIVE Locks creates an audit trail that connects every access event to a specific associate across apparel, fragrances, boxed goods, electronics, and more. For administrative errors, regular cycle counts and POS system audits catch discrepancies before they compound. No single solution addresses all seven types simultaneously.

What is a good shrink rate for a retail store? Industry benchmarks put a healthy shrink rate at under 1% of total retail sales, with the average across the industry sitting at approximately 1.4% to 1.6% based on the last published NRF annual shrink report. A rate above 2% typically signals structural gaps in loss prevention. High-theft categories like consumer electronics, power tools, and health and beauty tend to run higher than the average and require category-specific security responses.

What is the biggest cause of shrink in retail? External theft, including shoplifting and organized retail crime, is the single largest category of retail shrinkage at approximately 36% of total loss, according to NRF data. However, the Appriss Retail 2026 report notes that 73% of all shrink is preventable, meaning the biggest opportunity for most retailers is not identifying what is causing loss but implementing the right operational and security response to each category.

What is internal shrink in retail? Internal shrink is inventory loss caused by sources inside the business, primarily employee theft and administrative or process errors. Employee theft alone accounts for approximately 29% of total U.S. shrink, $26 billion annually, according to the Appriss Retail 2026 report. It takes forms including sweethearting, discount abuse, cash skimming, and manual inventory adjustments made in the system to cover stolen merchandise. Access control systems with individual audit trails are the most effective operational tool for identifying and reducing internal shrink.