Shrinkage — the gap between recorded stock and actual stock — comes from several sources with very different remedies. Businesses that assume it is all theft direct their effort at the wrong problem.
The sources
- Administrative error — receipting mistakes, pricing errors, unrecorded transfers, wrong codes. Frequently the largest single category and entirely fixable.
- Supplier shortfall — goods invoiced but not delivered, or short-delivered and never reconciled.
- Damage and wastage, particularly in food.
- Internal theft.
- External theft.
The first three are process problems. Only the last two are security problems, and businesses that install cameras before fixing their receipting process spend money on the wrong thing.
You cannot manage it without counting
Annual stocktakes reveal an accumulated gap once a year with no way to trace the cause. By then the receipting error, the damaged pallet and the theft are indistinguishable.
Cycle counting — counting a portion of stock continuously, with high-value lines counted most frequently — finds discrepancies while the cause is still traceable. That is the difference between knowing you have a problem and knowing what it is.
Classify stock by value moved. Roughly 20 percent of lines typically drive 80 percent of turnover, and those deserve frequent counting. The long tail can be counted rarely.
Fixing the process side first
- Receipting against the order. Check what arrived matches what was ordered and invoiced, before signing. Short deliveries never reconciled become shrinkage.
- Barcode scanning at receipt and at sale, which eliminates the dominant error class.
- Recording damage and wastage at the time rather than absorbing it, so it appears as a known cost rather than an unexplained gap.
- Controlling transfers between sites with documentation both ends.
- Managing markdowns in the system rather than at the till.
Internal loss
Uncomfortable and real. The controls that work are the same segregation-of-duties principles that apply to cash:
- Whoever receives stock should not be the only person who reconciles it.
- Refunds and voids above a threshold should require a second authorisation.
- Credit notes and write-offs should be reviewed by someone independent, since they are how loss is concealed.
- Staff purchases should go through the till like any other sale.
- Mandatory annual leave with someone else covering the role frequently surfaces issues requiring continuous concealment.
Controls are not an accusation. They protect honest staff from suspicion as much as they prevent dishonesty.
External theft: the safety point comes first
Your health and safety duty to staff outranks the stock.
Violence and aggression from customers is a recognised workplace hazard. A policy that expects or permits staff to physically intervene in a theft increases the risk of assault, and where a worker is injured intervening under an employer’s expectation, the employer’s position is poor.
The loss prevention consensus is observe, record, report — do not intervene physically. Stock is insurable and replaceable.
What actually reduces external loss: store layout and sightlines, high-value stock in supervised areas, staff presence and greeting (consistently the most effective measured deterrent), good CCTV coverage with retrievable footage, and reporting every incident to police so pattern evidence accumulates.
Trespass notices, done properly
Under the Trespass Act an occupier may warn a person to leave and to stay off the premises for a period. For it to be effective it must be given by the occupier or someone authorised, the person must be sufficiently identified, and the warning must be communicated to them. The duration is limited by statute, so a “lifetime ban” is not effective beyond that.
Keep a record of who was trespassed, by whom, when and for how long.
What not to do
Do not publish images of suspected shoplifters. Posting footage to social media or sharing it in retailer groups discloses personal information, can breach the Privacy Act 2020, and can defame someone who turns out to be innocent. Provide footage to police instead.
Note also that facial recognition is now fully within the Biometric Processing Privacy Code, the transition period for existing users having ended on 3 August 2026. It requires a documented proportionality assessment and specific transparency measures.
Measure it as a percentage
Shrinkage as a percentage of sales, tracked over time and by category, tells you whether interventions worked. A single stocktake number does not.
WorkSafe publishes guidance on managing violence and aggression at work, the Office of the Privacy Commissioner publishes CCTV and biometrics guidance, and Retail NZ publishes loss prevention material for members.
General information only, not legal advice.
