A retailer compares the inventory that should be on hand according to the books with the inventory actually counted and finds a shortfall. That shortfall is shrinkage. It represents lost product and lost profit.

Causes include theft by customers or employees, administrative errors, supplier fraud, and spoilage. Shrinkage is usually expressed as a percentage of sales. Industry averages vary by category; high-value, easy-to-conceal items show higher rates.

Loss-prevention programs aim to reduce shrinkage through technology, process, and culture. Accurate measurement is the first step; many retailers still discover the true figure only at annual inventory. Controlling shrinkage is a direct contribution to the bottom line.

Every percentage point of shrinkage is margin that never reaches the bank.