Shrinkage is the loss of inventory between what a business's records say it should have and what is actually on hand. The gap comes from causes such as theft, damage, administrative mistakes, supplier errors and fraud, and it is usually expressed as a value or as a share of sales.
Shrinkage is typically measured at a stocktake. The business compares expected stock, based on purchases, sales and adjustments recorded in the system, with the physical count. Any shortfall is shrinkage, though the count alone does not say why it happened. Investigating means breaking losses into categories and looking at where, when and in which products they occur.
Common sources include customer theft, employee theft, supplier short deliveries, receiving or pricing errors, breakage and, for food businesses, spoilage and wastage. Retailers often discover that a meaningful part of shrinkage is not theft at all but process error, such as goods sold under the wrong code, unrecorded transfers or damaged items never written off.
A common pitfall is treating shrinkage as a single number without finding the cause. Another is counting too rarely, which means problems run for months before they are noticed. Cycle counts, tighter receiving checks, clean product data, exception reports and a mix of loss prevention technology help narrow down where losses are happening so action can be targeted.
Shrinkage matters because it comes straight off profit and is easy to underestimate. Measuring it consistently over time lets a retailer see whether its controls are working and decide where an investment in security, training or better stock processes is most likely to pay off.