Shrinkage is the rate of loss of products from retailers' stocks as a percentage of profit or sales: the value of products lost between supply and sale as a percentage of sales. The main causes of shrinkage are shoplifting, employee theft, administrative errors and fraud. Of these, shoplifting, employee theft and errors and waste dwarf the other problems.
It can also be useful to look at shrinkage as a percentage of cost of goods sold, or at the current discrepancy between the book value of stock and the actual value (the latter requires a physical check of what is actually there).
The Centre for Retail Research estimates average UK shrinkage to be 1.3% of sales. This is much the same as in other developed countries.
As well as the direct loss, theft (in particular) and fraud impose prevention costs. These are growing and are cause losses comparable with the original problem of theft, but do seem to be effective in reducing shrinkage.
The effect of shrinkage on profits can be very significant, especially for retailers with small margins.
Shrinkage tends to rise during recessions, not only because the motivation to steal rises, but because cost cutting often means reducing the number of staff, making shoplifters less likely to be caught (even staff when employed for customer service, their presence is a deterrent).