What is retail shrink, and how does it differ from theft?

• "Shrink" has come up frequently as retailers like Walmart and Target talk about theft at their stores.
• But shrink is a lot more than theft.
• Shrink accounts for many types of product loss, from milk that goes bad at the store to products stolen by employees.

Executives at retailers like Walmart and Target often mention "shrink" or "shrinkage" when they talk about theft at their stores.

But what, exactly, does that mean?

While it's often mentioned in relation to theft or organized retail crime, shrink has a broader definition: It's the difference between the inventory a retailer has according to its balance sheet and what it actually has.

The term isn't related to "shrinkflation" — a term that describes when companies sell smaller packages of soda or facial tissues as an alternative to raising prices.

Shrink is caused by a variety of factors. Customer theft is one, but other contributors can include theft by employees, products that expire, mistakes when taking inventory at a store, or products that are damaged and have to be written off.

In 2022, retailers lost $122.1 billion in shrink, or 1.6% of all retail sales, according to the National Retail Foundation. External theft represented 36% of shrink that year, while 29% came from employee theft. Another 27% came from "process, control failures and errors," the NRF said in a report.

Retailers have noted the effects of higher shrink on their business over the past year. Many use the term as a synonym for "theft," though few retailers break out exactly how much different factors contribute to their shrinkage.

Target, for instance, talked about rising shrink in the run-up to its decision to close nine stores around the US.

Crime data from the stores that Target is closing suggests that they didn't have a particularly high number of shoplifting incidents or violent crimes, particularly compared to other Target stores that will remain open.

And executives at Dick's Sporting Goods said in August that higher-than-expected shrink from theft pulled the retailer's profits down during its second quarter.

In reality, theft has received a disproportionate amount of attention on earnings calls relative to other drags on shrink and retailers' profits, an investigation by CNBC found.

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