Inventory shrinkage is the difference between the inventory your system records and the inventory that physically exists: units you paid for that can no longer be sold. It can be theft, but it isn't only theft: a significant share comes from process errors nobody sees until someone counts.
How big shrinkage is
The most widely used benchmark is the National Retail Security Survey from the NRF (the US National Retail Federation). In its 2023 edition, covering 177 retail brands that account for 22% of US retail sales, average shrink in 2022 was 1.57% of sales, up from 1.44% in 2021: more than 112 billion dollars, according to CNBC.
Two figures from the same survey matter more than the total:
- External theft accounted for 36% of shrink, and internal theft for 29%. The rest, roughly a third, came from other causes, including damage and vendor error.
- 78% of responding retailers don't include e-commerce in their shrink calculation, and 57% don't include supply chain losses. The NRF itself warns the real figure is likely underreported.
It's a US figure from physical retail. Mexico has no comparable recent public measurement. But the message holds: shrinkage is poorly measured, and it isn't only theft.
The 4 causes of shrinkage
| Cause | What it looks like | Where it starts |
|---|---|---|
| Recording error | The system says 50, there are 48 | Miscounted receiving, undocumented adjustments |
| Damage | Broken, stained or expired product | Putaway, handling, packing, expiration dates |
| Theft | Unexplained shortage | Internal or external |
| Vendor error | Less arrived than was invoiced | Receiving that doesn't check against the purchase order |
Recording error is the most expensive because it's invisible. If receiving records 50 units and 48 arrived, those two units "exist" in your online store. Someone buys them, the order can't be fulfilled, and the shortage shows up weeks later, when nobody knows which receipt it came from.
Damage is the shrinkage of returns. A returned product that isn't inspected in time loses its season, its packaging or its shelf life. What could have been resold becomes a loss.
How to measure your shrinkage
The basic formula:
Shrinkage (%) = (system inventory − physical inventory) ÷ system inventory × 100
Calculate it in value (pesos or dollars), not just units, because losing ten 20-peso units isn't the same as losing two 2,000-peso units. Three rules to make the number mean something:
- Measure it by cause, not just in total. "We lost 1.2%" doesn't say what to fix. "0.8% is receiving error and 0.4% is damage in returns" does.
- Measure it often. If you only count once a year, February's shrinkage is discovered in December. With cycle counting you see it week by week, in time to find the source.
- Separate shrinkage from picking errors. Shipping the wrong size isn't shrinkage, but if the unit that should have shipped isn't deducted from inventory, it becomes a shortage later.
How to reduce it
- Unit-by-unit receiving against the purchase order. It's where recording errors start and where vendor errors are caught. We explain it in inbound receiving at a 3PL.
- A registered location for every product. What has no location isn't lost, it's "around somewhere," and ends up counted as a shortage.
- Rotation by date. For products with an expiration date, shipping what expires first prevents date-related shrinkage. See FIFO vs FEFO.
- Returns processed in days, not weeks. Inspect, document condition with photos and decide quickly whether it goes back on the shelf.
- Inventory adjustments with evidence. Every correction should say who made it, when and why. An unexplained adjustment is hidden shrinkage.
In our operation, every receipt is documented with photos and checked against the purchase order, inventory is verified with weekly cycle counts, and anything that doesn't qualify for resale is declared as shrinkage with evidence. If you want your inventory managed this way, see our warehousing service.
Frequently asked questions
What is inventory shrinkage?
It's the difference between the inventory recorded in the system and the inventory that physically exists. It includes recording errors, damage, theft and vendor errors.
What is a normal shrinkage rate?
In US retail, average shrink was 1.57% of sales in 2022, according to the NRF. In most cases that figure excludes e-commerce, so it isn't a direct benchmark for an online store.
Is shrinkage the same as theft?
No. In the NRF survey, external and internal theft together made up about two thirds of shrink; the rest comes from damage, vendor errors and other causes.