Shrink Impact on Profitability


Shrink Impact On Profitability

Shrink or shrinkage is a business term used to identify inventory or merchandise that is recorded as being present but unavailable or unsaleable in actual means. This can arise from errors (bookkeeping miscue), dishonesty (employee or customer theft) and/or damage during handling of stock.

As we know it loss prevention directly impacts net profit and this business component must be approached seriously, therefore having or maintaining a low shrinkage volume is crucial. While the rate varies from different industrial standards, a normal shrinkage rate is 2.6 % to sales.

Shrinkage impacts profitability of an establishment leads to:

  1. Reduced Profits and Lost Revenue  

If an inventory is lost that equates it to lost revenue and this impacts profits because you cover the cost of acquiring a good and making no money from the investment this will ultimately drag the business below the bottom line.

  1. Price hikes and Lower wages

Most entrepreneurs and business owners will resort to raising consumer goods prices to account for these lost sales; this can put them at a competitive disadvantage. Businesses may also present their employees with low wages, making it hard to retain or attract seasoned and experienced employees.

  1. Internal Trust Issues

Shrinkage from employee theft destroys the trust culture built and employers will be forced to implement employee bag and coat checks and install CCTV in various areas. This introduces a barrier between employees and their employers and guilt by association for those honest employees who are not part of the problem and this impact negatively on morale.

  1. Poor Service

In a retail business, example, a grocery shop, or a supermarket, where shoplifting has been rampant, employees might tend to be less friendly and leery of customers, partially because they are often at the receiving end through reduced wages. The business owner may decide to put up signs requiring customers to surrender their bags and coats and also excessive use of scanners can dissuade people from purchasing in your store.

  1. Slowed business evolution

Managers often get involved when a high shrinkage rate is experienced and more time is used to investigate and strategize countermeasures leaving little time for growth of the business and employee coaching.

There are, however, strategies for reducing shrink in a business, outlining some of the basics:

  • Getting organized, this is the prime step in inventory management and it should be structured to minimize shrink. Use of EAS tags can help.
  • Regular inventory counts, at least once a year for business. This determines the current inventory value. (Cycle Counts).
  • Accurate pricing of items and updating price file regularly.
  • Embracing technology, for example, barcode scanning, point of sale software systems
  • Training, education and employee coaching, as every business and organization has its own set of standards, practices and values that are acceptable and internal culture defines the relationship among employees and employers and also to an extent the customers.

In the long run, prevention is always the key to avoid loss through shrink and improve net profit.

LPDT, LLC offers the only E-Learning training for Retail Loss Prevention at  Check out our awareness posters for shortage and safety at You can follow us on Twitter under LPACADEMYcom and Facebook under Loss Prevention Academy.

Posted by Steven M. Degener, J.D. at 8:33 AM No comments: Links to this post

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Labels: Assets Protection, Loss Prevention, Loss Prevention Academy, Loss Prevention Awareness, Loss Prevention training, retail, Retail Loss Prevention, Shoplifting, shrink, wicklander-zulawski, WZ, WZAcademy


Steven M. Degener, J.D. Clayton, CA, United States Steve has spent over 25 years in Retail Loss Prevention. His last position held was VP of Loss Prevention for a Fortune 500 company. Other positions include Deputy Sheriff and Director of Loss Prevention Services for various Retailers. Our sites include, and Follow us with Twitter at LPACADEMYcom and Facebook at the Loss Prevention Academy.

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