What Is Internal Shrink?
What Is Internal Shrink?
Internal shrinking refers to employee loss of inventory, cash, or other business assets. It hurts business operations through theft, fraud, or missing items. It’s a significant issue for businesses, especially in retail.
Internal Shrink directly impacts a company’s profitability, particularly in retail businesses with low margins and high sales volumes.
When inventory is lost due to shrinkage, the business cannot recover the cost of those goods, as there is nothing to sell or return. This loss eats into profits and reduces the bottom line, forcing businesses to find ways to compensate for the financial impact.
Many retailers try to offset shrinkage by increasing product prices and passing lost inventory costs onto consumers. However, this can make products less competitive, especially for price-sensitive customers who may seek alternatives elsewhere.
As a result, shrinkage affects profitability and can lead to a shrinking customer base if pricing adjustments push consumers toward competitors.
Shrinkage can drive up operational costs beyond direct inventory losses. Businesses may need additional security measures, such as surveillance technology, security personnel, or employee theft prevention training.
While these investments help reduce future shrinkage, they add to overall expenses. If these costs are passed on to consumers through price hikes, the business may face further challenges in maintaining customer loyalty and competitiveness.
Managing shrinkage effectively requires a balanced approach that includes loss prevention strategies, employee training, and careful pricing decisions to minimize financial impact without driving customers away.
Let’s illustrate internal shrink with a simple example. Say you own a bakery, and you see cupcakes disappearing mysteriously. Behind the scenes, one of your bakers is sampling too many cupcakes, resulting in product shortages and causing significant damage to your profits.
Short on time? Watch a quick explainer video instead 👇
