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How Are You Calculating Your Stores Shrink?

Posted on 3/10/15 9:45 AM

“Shrink” is a common term in the retail world. It is a term for the calculations that demonstrate the loss of merchandise in relation to our total inventory sales. We say “calculations,” plural, because there is some flexibility in how it is calculated and the exact nature of the relationship between those items lost and those items sold. Most loss prevention professionals prefer to discuss shrink in terms of loss as a percentage of retail sales, while many finance professionals like speaking in terms of true “cost.” In truth, as long as the reporting method remains consistent from year to year, the three accepted methods of Shrink calculations are all created equal. 

The most prevalent form of shrink calculation is to compare the retail value of the items missing to the retail sales during the inventory period. And as stated, although comparing to “cost” of items lost to the “cost” of items sold or the cost to the retail sales, is acceptable, these other two methods can make benchmarking a challenge. Many  industry statistics, like the NRSS, report industry shrink in “retail,” so if your company uses the cost method you’ll need to convert your number in order to see how you compare to other companies.

To give you a better idea as to how these different methods are the same but different, here are a a couple quick charts of a hypothetical company using all three methods.

CalculatingShrink

Method A – Standard Retail Calculation
Retail value of merchandise lost
Retail Sales
Shrink

Method B
Cost of Merchandise lost
Cost of Merchandise Sales
Shrink

Method C
Cost of Merchandise lost
Retail Sales
Shrink

 

 

Interested in learning more about Sustaining A Profit Improving Loss Prevention Program? Click here to download this free eBook. 

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Topics: loss prevention, Calculating Shrink, LP 101, Shrink

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