Loss prevention refers to the actions a business takes to reduce theft and fraud. These preventable losses, caused by human error or deliberate efforts, are known as “shrinkage.”

Shoplifting and employee theft make up the bulk of a $61 billion annual problem for the retail industry. The increase in incidents and new ways to steal are encouraging retailers to invest in new technology to reduce inventory shrinkage.

So what preventive measures can you put in place to reduce loss and protect your profits? This guide will walk you through different types of inventory shrinkage, plus strategies and examples to help mitigate risk in your retail business.


Table of Contents


What is loss prevention?

Loss prevention is any practice taken to reduce theft, fraud, and errors in a business. The goal of loss prevention is to eliminate preventable loss and preserve profits. It’s primarily found in retail but also exists in business environments.

Retail loss prevention is responsible for identifying shrinkage causes and following up with solutions. Businesses often will implement strategies like hiring a loss prevention manager or installing security cameras to improve loss prevention and increase profits.

Loss prevention continues to be a challenge on both digital and retail fronts, from skilled cyber criminals to shoplifters who steal low-priced items. The risk has become more of a priority to retailers over the last five years, according to the 2020 National Retail Security Survey:

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Loss, also referred to as shrinkage, robs your retail business of its profits. The higher your shrinkage, the harder it’s going to be for you to stay in business. Addressing loss can lead to unexpected benefits beyond saving money, including better employee training, improved security and prevention measures, and better customer service.

What is shrinkage?

Shrinkage is an accounting term used to describe when a store has fewer items in stock than in its recorded book inventory. Factors contributing to shrinkage include employee theft, shoplifting, administrative errors, vendor fraud, product damage, and more. Shrinkage has a direct correlation with profit: the higher your shrinkage, the lower your profits.

Let’s apply shrinkage to your day-to-day operation: say you receive products to sell from a vendor worth $10,000. You’ll record the dollar value of the inventory on your balance sheet as a current asset. Each time you sell an item, the inventory account is lowered by the cost of the product and you record revenue for the sale.

Say you lose some inventory, for whatever reason. There will be a discrepancy between your physical inventory and book inventory. The difference between the two is shrinkage.

If your book inventory is $10,000 but your physical inventory is only $9,000, then some of that inventory is lost and the shrinkage is $1,000. The big issue?

Some businesses will try to cover the cost of shrinkage by increasing prices for the customer. They now have to carry the weight of theft and inefficiency. If your customers are price sensitive, shrinkage can also damage your customer relationships and sales.


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Types of inventory shrinkage

Now that you understand the basics of loss prevention and its impact on retailers, let’s look at common types of inventory shrinkage:

Shoplifting or theft

Jack L. Hayes International’s 33rd Annual Retail Theft Survey found shoplifting case value increased 13% in 2020. Shoplifting represents the largest single share of retail shrinkage, accounting for over 35% of annual losses.

When you think about shoplifting, you might picture someone walking out the door with a product tucked under their shirt—and that is part of the shoplifting problem.

But it isn’t the whole picture. Shoplifters may steal items ranging in price from $1 to $1,000. They may work alone or in a group of thieves. They may strike once or come back every week.

Shoplifting can take many forms and it can be a problem for any and every retailer. That’s why it’s vital that you take steps to mitigate the potential for shoplifting in your store.

Here are a few ways you can do just that:

Great customer service.

Return fraud

One of the more overlooked causes of retail loss is return fraud. It’s overlooked because return fraud can be tough to spot in the first place—its effects only evident as they add up throughout the year. Return fraud can also take several different forms, including:

Return fraud is harder to curb than shoplifting because of all the ways it can play out. Still, you can combat each form of return fraud with an intelligent return and exchange policy that employees consistently enforce:

Require receipts for cash returns.Train employees to spot return fraud.Require an ID to track returns.

Fortunately, return fraud only makes up about 6% of returns, according to the National Retail Federation. If you want to get the most from your returns policy, read Recurring Refunds: How Retailers Can Deal with ‘Serial Returners.’

Employee theft

Employee theft isn’t something retailers want to have to worry about. It’s easy to say you trust your employees and leave it at that.

Failing to properly prepare for internal theft leaves you vulnerable, however. After all, employee theft makes up 90% of significant theft losses, with businesses losing $50 billion per year as a result.

Employee theft can take many forms, and not all of it looks like the straightforward theft you might envision. Employee theft includes:

So, how can you stop employee theft in your store? You always have the option of placing surveillance cameras throughout employee-only areas, posting signage that employees are being monitored, and checking employees’ bags before leaving. But as you can imagine, that kind of enforcement doesn’t create the best morale or work environment.

Here are a few more practical ways to curb employee theft and fraud:

Audit your hiring practices.Train employees properly.

Shockingly, 75% of employees admit to stealing at least once from their employer. But there are ways to keep employee fraud at bay.


Administrative error

When your bottom line takes a hit, it never feels good. But not all retail losses stem from malicious or illegal behavior. Simple administrative and paperwork errors actually account for as much as 18.8% of annual shrinkage—sometimes called “paper shrink.”

That’s a big chunk of sales you can hold onto just by implementing the right systems to seamlessly and accurately track inventory and sales.

How does an administrative error translate to retail losses? Mistakes like mislabeling, incorrect markdowns, and accounting errors can lead to merchandise being sold for less than it should be or refunded for more than it should be. That means real dollars are lost.

Administrative errors are by nature accidental, but that doesn’t mean they can’t be prevented. Let’s look at how to avoid and catch “paper shrink” before it costs your store:

Employee training.

Vendor fraud

Only about 5% of shrink is due to vendor fraud. This type of inventory shrinkage involves two sides: fraud involving check tampering and billing schemes, or vendors stealing from the store when delivering inventory.

Some ways to combat vendor fraud include:

Conduct rigorous background checks on new vendors.Create an anonymous support line. Authorize specific employees for inventory handling and invoicing.

Unattributed loss

Here’s the most bizarre and frustrating type of shirk: unknown causes. According to the National Retail Security Survey, over 6% of shrinkage cannot be accounted for under the above categories, leaving you and the millions of other retail stores out there in the dark.

Retail loss prevention strategies

Despite the many known (and unknown) causes of inventory shrink, there are useful ways to prevent it. Any mix of the following methods can work:

Audit hiring and training practices

While the latest technology and tools can improve your operations, old-fashioned employee training is making a comeback. Talking about loss prevention during new-hire orientation was up significantly in 2020, with 95% of companies using these tactics respectively.

By taking loss prevention into account during the hiring and training processes, you can impact the two largest of those factors—shoplifting and employee theft.

When it comes to employee theft, you might imagine store workers pocketing merchandise for themselves. But employee theft also includes things like refund abuse and overuse of discounting.

When you hire store workers, what qualities and skills are you looking for? You should be screening for conscientious candidates who conduct themselves with integrity.

Employees who excel in those areas are partners in the loss prevention fight. They’re less likely to abuse their power as employees and be more invested in a retailer’s success. They’re more dedicated to helping you reduce retail shrinkage.

Good employees want to prevent inventory losses, but it’s your job to give them the tools and training they need to make it happen. Employee training to identify and stop shoplifting can make a big difference in your shrinkage.

When it comes to loss prevention training, you have plenty of options. You can try an online course from an organization like the Loss Prevention Academy or Loss Prevention Foundation. Or you can bring in a third-party loss prevention and security expert to train employees in person.

Institute clear policies

A clear policy is essential to reduce inventory shrink. In fact, over 92% of businesses reported using a code of conduct as part of their loss prevention awareness program in 2020. While this doesn’t physically prevent criminal behavior from employees, it communicates your business’s commitment to ethical conduct and sets the expectations for employee behavior.

Create a policy that highlights acceptable use of company property and show it to employees during onboarding. Be clear about the disciplinary actions you’ll take if someone is caught stealing from the business.

It’s important that everyone is held to the same standards. For example, if you don’t want store associates to steal money or use supplies for personal pursuits, don’t let supervisors or managers do it either.

Create strong deterrents

Organized retail crime (ORC) continues to be a serious problem for retailers, with average losses topping $700,000 per $1 billion in sales. Relaxed law enforcement guidelines and decreased penalties have caused an increase in ORC activity, according to the NRF 2020 Organized Retail Crime survey.

Businesses often change their strategies for fighting retail crime, whether it’s employee or customer driven. Giving the appearance of strong security is equally as important as having it. This shows you take losses seriously and can deter people from carrying out bad behavior.

In 2020, the top five loss prevention systems in use were:

Each of these tools saw significant growth from 2019, according to the NRF.

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But those aren’t the only deterrents retailers are using. The same study from the NRF showed big year-over-year jumps in the following five loss prevention systems:

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Point-of-sale analytics and live customer-visible CCTV are becoming widely used tools. On the other hand, retailers continue to rely on the classics like a burglar alarm to deter crime. The question to consider here: what new or emerging technology should you consider exploring?

Small businesses today can leverage tools like CCTV and digital video recorders with ease. For example, garanley-abogados.com partnered with Google and Nest to help merchants use high-tech security cameras at an affordable price.

Rather than install a clunky, expensive security system in your store, you can get up and running with a Nest Cam for just $199. It takes minutes to set up, and with the garanley-abogados.com app, you can monitor in-store activity from anywhere, saving you time and protecting your hard-earned money.