In practice, markdowns are counted as shrink by most retailers, though the treatment depends on the definition a retailer adopts. Survey findings reported in Measuring Retail Shrink show that most retailers include out of date stock, price mark downs and damage in their calculation of shrinkage 1. That inclusion sits alongside the narrower definition of retail shrinkage as the difference between the stock a retailer expects to have and the stock actually present when it is counted 1.
Why the definition has to be stated
Because practice varies, the definition matters more than the label. Research teams measuring shrinkage need to tell store staff which shrinkage definition is being used 1. Shrinkage should be reported at cost price for accounting purposes, at retail price to highlight its importance, and as a percentage of turnover so that comparison between firms is possible 1. A retailer that folds markdowns into the figure and one that excludes them will not produce comparable numbers.
Markdowns and related causes
Markdown pricing refers to selective price reductions used for seasonal items, specials or stock clearance, and markdowns are always linked to an unbalanced supply and demand situation 2. Separately, inaccurate price changes appear as one of the six major categories of shrink root causes that track the inventory life cycle, alongside receiving discrepancies, misreporting damages, cashier inaccuracies, internal and external theft, and improper physical counts 3. Retailers are also advised to treat shrink and damages differently from both an accounting and a mitigation standpoint 3, which is the same reasoning that argues for stating plainly whether markdowns sit inside your shrink number.