Types of Shrinkage in Retail (2026 Guide + Prevention Playbook)

Retail shrink is increasing and getting more complex. A recent report found retailers lost $90 billion worth of inventory last year. Employee theft, shoplifting, administrative errors, vendor fraud, and product damage can leave fewer items in stock than your recorded inventory. The result is stockouts that risk driving customers toward competitors.

Shrinkage is also directly correlated with profit: the higher your shrinkage, the lower your profits. You can’t recover the cost of the merchandise because there is nothing to sell or return.

Some retail businesses may try to cover the cost of shrinkage by raising prices, which can negatively impact customer relationships if customers are price sensitive. 

This guide outlines the types of shrinkage in retail and provides an actionable plan to detect, measure, and reduce each one—without ruining the customer experience.

The main types of shrinkage in retail (with examples) 

1. External theft from shoplifting and ORC
2. Internal employee theft
3. Administrative or process errors
4. Returns fraud and abusive returns
5. Vendor fraud and errors
6. Damaged, spoiled, or expired goods
7. Digital and ecommerce fraud

Retail shrinkage happens for a number of reasons, with some more sinister than others. Let’s explore the most common types of shrinkage in retail, with signals that flag potential inventory losses and prevention levers to limit the damage.

1. External theft from shoplifting and ORC

Shoplifters steal inventory from your retail store without paying for the items. Financial difficulties might drive people to steal everyday essentials from your store. Other opportunists take a chance when they see one. 

But it’s not just everyday people who target retail stores. More than half of retailers in 2025 reported an increase in organized retail crime (ORC)—groups of professionals who target high-value retail stores with sophisticated methods of stealing merchandise. These stolen goods are often resold or returned back to the retailer for a full refund. 

Red flags of external theft include:

• Customers who enter your store and look for blind spots: areas not covered by security cameras or hidden by shelving.
• Finding stashed merchandise in odd places, like high-value electronics hidden behind accessories to be retrieved later.
• Shoppers who create a scene or ask lengthy questions at checkout. They might have an accomplice stealing merchandise while your team is distracted. 
• Excessive layering to conceal items—for example, a padded winter coat in July. 
• Leftover product packaging or hangers littered around the store. 

The domino effect of ORC isn’t just stolen merchandise; your staff’s safety is also at risk. The same report found 83% of respondents said that levels of aggression and violence are the same or higher than the previous year. 

Loss prevention strategies to keep your store and merchandise safe without ruining the retail experience for legitimate customers include:

• Securing valuable inventory inside locked cases
• Moving high-risk products away from blind spots and in direct line of sight from the checkout to deter theft
• Creating staffing zones that give retail teams ownership of a specific area
• Installing surveillance cameras (CCTV) throughout your store and display signage to tell customers their activity is being monitored
• Having store managers conduct inventory audits during the store’s opening hours to show thieves you’re actively protecting your merchandise

2. Internal employee theft

You’d like to think that everyone working in your store is trustworthy, but access to the cash drawer and inventory management system (IMS) can prove tempting. Appriss’s report found that of the $90 billion in shrinkage retailers face, roughly 29% is preventable loss due to employee theft. 

Red flags that point to an internal theft problem include:

• Sweethearting. Retail staff purposely scan the wrong item when friends and family buy products. Watch out for fake scanning or a high number of voided items.
• Discount abuse. Employees approve discount codes for orders that aren’t eligible. Track the “Retail sales by staff at register” report inside Shopify POS to keep an eye on cashiers processing an unusually high volume of discounted transactions.
• Cash skimming. Cashiers steal small amounts from the cash register or short-change a customer and keep the difference. This shows up as unbalanced cash drawers. 
• Inventory adjustments. Retail staff make manual adjustments inside the inventory system to account for the products they’ve stolen. Check for frequent manual overrides in the system or a high volume of goods recorded as damaged, especially if the waste bin is empty.

The best prevention levers to prevent inventory shrinkage from employee theft include:

• Using role-based permissions inside your point of sale system—for example, new cashiers might not be able to apply their employee discount without a manager’s approval 
• Creating a culture of transparency where employees feel comfortable reporting loopholes or theft
• Avoiding an accusatory tone when you suspect internal theft
• Regularly auditing POS reports to find outliers, like cashiers with a high volume of discounted transactions or discrepancies between your POS system and the cash drawer 
• Refine your hiring process and do background checks on staff before giving them access to the POS or inventory 

3. Administrative or process errors

Not all retail losses stem from malicious or illegal behavior. Retail teams can accidentally contribute through administrative errors. 

Process errors are often the largest “invisible” shrink bucket for growing retailers because cashiers and store managers don’t recognize their own mistakes, whether that’s:

• Recording receiving inventory incorrectly in your IMS
• Typing SKUs incorrectly
• Mis-scanning barcodes (or incorrectly labeling products)
• Scanning the wrong number of units at checkout 
• Inaccurate cycle counts
• Transfer mistakes

Administrative errors are, by nature, accidental, but that doesn’t mean they can’t be prevented. 

To debug your workflows:

• Confirm on-hand accuracy through regular cycle counts 
• Validate receiving inventory against your POs
• Validate transfers (if moving stock between multiple locations)
• Validate your returns workflow
• Review adjustments and overrides inside your POS system
• Recount top SKUs

Home goods retailer Simon Pearce leans on Shopify POS to move away from once-daily inventory updates. With real-time tracking across every sales channel and storage location, they’ve improved inventory accuracy and consolidated three systems into one. 

“Publishing a product or updating product details shows up on the web for customers to see, in our customer service team’s UI, and in the point of sale,” explains Kyle Tuttle, director of technical products at Simon Pearce. “It’s one update that hits all channels, which gives the team more confidence about where a product can be found, whether it’s in a specific store or warehouse or anywhere else.”

4. Returns fraud and abusive returns

The National Retail Federation (NRF) estimates that of the $849.9 billion worth of merchandise that was returned to retailers last year, roughly 9% were fraudulent returns. Driving this is the fact that almost half of shoppers think it’s acceptable to “bend the rules.”

Abusive returns can take many forms:

• Bracketing, when the customer buys the same item in multiple sizes, colors, or models with the intent of returning. Newer items are swapped for older, damaged versions of the same product.
• Wardrobing, an issue predominantly affecting apparel stores where shoppers buy an item, wear it once, and return it for a full refund with the tag intact. 
• Receipt fraud, where customers use stolen or fake receipts to get a cash refund for products they never bought.
• Stolen tender returns, which happens when thieves use stolen cards to pay for items. They later return it for a refund, claiming they lost the original payment method and requesting cash or store credit instead. 
• Empty box returns, where fraudsters buy a product and claim the package was empty or damaged. 

The good news: Returns account for 20% of total shrink, according to Appriss’s report, but 14.2% ($100 billion) is preventable loss. 

To keep returns customer-friendly while reducing abuse:

• Only accept retail returns with a verifiable receipt
• Strictly enforce that refunds must go back to the exact card used for purchase
• Ask customers to verify their identity for buy online, pickup in-store orders
• Place large, visible security tags in prominent places on clothing (like the center of a dress) that can’t be hidden while wearing the item
• Require manager’s approval for high-value returns or high-shrink categories
• Set tiered returns privileges for loyal, trusted customers. For example, new customers might have a strict 14-day returns rule while VIP customers get 30 days. 

Tip: Shopify builds a unified customer profile for every shopper. You can see products they’ve ordered and items they’ve returned across both online and offline sales channels, which can help spot serial returners. Plus, if their return is approved, the POS system can refund to their original payment method.

Astrid & Miyu is just one retailer that uses Shopify POS to unify inventory and offer flexible fulfillment options like click and collect and ship to customer. It’s helped the brand grow to 23 stores globally, recording a five-times increase in customers purchasing four or more times when shopping omnichannel (who have 40% higher CLV than those who shop online only.)

5. Vendor fraud and errors

Shrinkage can happen before your inventory even goes onto the shop floor. Dishonest vendors can shortchange you and cause shrinkage through:

• Short-shipping. Sending fewer quantities than you ordered and paid for. 
• Substitution. Shipping a cheaper, lower-quality alternative without adjusting the price or notifying you. 
• Invoice mismatching. Billing for shipment twice or applying a higher price instead of a negotiated promotional rate. 

That said, not every instance of vendor fraud is intentional. A vendor might accidentally pick the wrong products or have inventory damaged in transit, which means the sellable inventory you end up with is less than what you paid for. 

To prevent vendor fraud:

• Request vendors submit an Advanced Shipping Notice (ASN) before shipping so you can match this with your purchase order (PO)
• Spot-check incoming inventory against your POs
• Write service-level agreements (SLAs) to formalize resolution timeframes and penalty fees—for example, you could negotiate a 5% discount if there’s a discrepancy of 3% or more 

Tip: Raise purchase orders inside the Shopify admin. That way, retail associates can easily reference the PO against incoming shipments to check for inventory discrepancies before incorrect details are logged inside your IMS.

6. Damaged, spoiled, or expired goods

Unlike retail theft, this type of shrinkage isn’t about missing inventory. Products are still physically present but have either become unsellable or lost their full retail value.

Reasons include:

• Handling damage. If an item is damaged and tossed in the trash without being scanned out as damaged, your IMS still thinks you have it.
• Spoilage. This happens when a product’s shelf life ends before it’s sold. It’s a major challenge for stores that sell perishable inventory, as such products have strict expiration dates. In the case of groceries, for example, this can be just a few days.
• Return-to-stock quality errors. Items are put back on the shelf when they should have been quarantined or destroyed. The result is a secondary return and dead inventory that makes it look like you have more sellable inventory than you actually do.

To reduce shrinkage from damaged items:

• Use protective packaging for all items in storage
• Store heavy bulk items on floor-level pallets and lightweight, fragile, or high-value items on eye-level shelving to prevent drops
• Use the first-in, first-out (FIFO) rule to sell older stock closer to its expiration date before newer inventory 
• Create a dedicated “return to vendor” bin to quarantine defective inventory
• Offer employee training that teaches staff how to protect inventory—whether that’s using safety cutters to unbox incoming shipments or using “heavy-to-light” stacking on pallets to prevent crushing fragile goods underneath 

Tip: Shopify’s unified data model shows inventory visibility across stores and online. Use this to power apps like Freshly, which can track expiration dates to prevent perishable items from being written off. 

7. Digital and ecommerce fraud

More than half of retailers reported an increase in digital and ecommerce fraud over the past year. Signs of this include a spike in high-risk orders, mismatch patterns, and refund/claim anomalies.

Omnichannel brands, in particular, are at risk of being targeted. Scammers take advantage of generous store policies to claw back money. Take buy online, return in-store initiatives (BORIS) for example: Appriss reported $4 billion in cross-channel fraud that stem from BORIS orders. 

Other factors that impact inventory and margin include:

• Chargebacks (friendly fraud). When customers make a legitimate purchase and later request a chargeback from their bank, claiming they either didn’t receive the product or authorize the transaction. To prevent this, write clear return policies and use order tracking software to record proof of purchase. You could also use chargeback protection tools like Shopify Protect.
• Account takeover. Fraudsters sign into a customer’s online account and make fraudulent purchases using their stored details. If you’re accepting payment from digital wallets, encourage customers to enable two-factor authentication.
• Promo abuse. Customers might use burner email addresses to take advantage of first-time customer discounts or refer themselves for bonus rewards. If you see one shipping address associated with 10 different email addresses all using the same “WELCOME10” code, that’s a red flag for discount abuse.

How to measure shrink in retail

Shrink is an ongoing problem that compounds if you don’t catch leaks in real-time. Regularly track inventory and review key performance indicators (KPIs) to see whether you’re losing money to shrink:

• Inventory accuracy rate. If your accuracy is high but profits are low, retail shrink is likely documented (like spoilage or human error). If your accuracy is low, theft could be to blame.
• $/units adjusted (by reason code). If a specific staff member frequently zeros out high-value items, they may be adjusting the stock in your POS system so it isn’t missed when they take it home.
• Refund or override rate. Compare this to your store’s overall average. Cashiers with higher override rates may be giving unauthorized discounts or lowering prices.
• Return rate + % flagged exceptions. A high volume points to return or stolen tender fraud. If 40% of your returns are tagged as not having a receipt, for instance, shoplifters might be targeting your store’s lenient returns policy. 
• Top 20 shrink SKUs. Flag repeat offenders and identify patterns. Small-high value items could point to a shoplifting issue, while large or bulky items could signal supplier fraud.

Quick-start checklist: 30 days to lower shrink

Retail shrink is an expensive problem, but don’t rush into trying to fix everything overnight. Instead, follow a phased approach that includes setting a baseline, identifying priorities, and reviewing policies. 

Here’s an example of what that might look like: