Shrink is calculated against inventory and then commonly reported against sales, so both denominators appear in practice. The underlying measurement compares stock records with a physical count: retail shrinkage is the difference between the stock a retailer expects to have and what it actually has when counted 1. Shrinkage is the loss of inventory attributed to anything other than sales, with causes including administrative errors, employee theft, shoplifting and supplier fraud 2.
The inventory-based calculation
The retail shrinkage formula is recorded inventory minus actual inventory, divided by recorded inventory, multiplied by 100 3. If a store's system shows $200,000 in inventory and a physical count reveals $196,000, the shrinkage percentage is 2.0% 3. The same structure appears as theoretical inventory minus physical inventory over theoretical inventory 4. Retailers conduct a stocktake each year, quarter or half year and compare the count with the value of inventory on their books, and the difference represents the shrinkage 5.
Reporting shrink against sales
Once collected, the shrinkage metric is presented either as an absolute figure showing the financial value of losses, or placed in context against other business metrics 1. Shrinkage as a percentage of turnover is the standard benchmark quoted by firms and is treated as a way to determine relative performance, allowing comparison between firms 1. Shrinkage should be reported at cost price for accounting purposes and also at retail price to highlight its importance 1. Some guidance also suggests connecting shrinkage to metrics leadership already monitors, such as sales per square foot and gross margin by department 3.