What Is Shrinkage?

Getting an introductory class to economics, you may find yourself asking what is shrinkage. Shrinkage, as defined by Merriam-Webster, is the loss of goods especially by theft. However, from a financial standpoint, shrinkage more accurately describes product lost from the point of the investor (or manufacturer) to the buyer.

Shrinkage is more than consumer theft. According to many people, stealing is shrinkage, period. Yet, much of the product lost by means of shrinkage is due to inaccurate accounting, employee theft, and loss of inventory. So truly, what defines loss within a company, or investment, is related to a variety of problem, not the smallest of which is just mismanagement. While greed does play the majority role, any sort of loss in product is shrinkage.

According to the National Retail Security Survey, 44% of shrinkage was due to employee theft. This annual survey, as published by the University of Florida, took statistics in 2008 from a variety of shops and stores. This accounts for over $15.9 billion of shrinking investments for that year alone. Shrinkage, as would commonly be ironic for most assumptions, is only 35% caused by shoplifting.

Shoplifting gets more publicity than employee theft, hence more perception of the correlation to shrinking. Due to the widespread media attention from local, national, and public television stations aimed at shoplifters, it is obvious that more subtle employee-related version is less prominent in the public eye. Yet, the billions of dollars in commercial investment lost to employees stealing is something that needs attention.

Smaller factors do have effect. Shrinkage can be attributed, sometimes (albeit less often), to bad shelf-lives of products, loss via transportation, or even administrative and accounting errors. Although taking up less of a percentage, these small problems do exist within the wider scope of "shrinkage".

In the end, employees, manages, and executives can keep their stores running in top condition by focusing on employee-theft. Shoplifting, while large, is overrated in comparison with the product trafficking of many employees. What is shrinkage can often be tricky to find out, as forumlas, percentages, and situations vary by store.