Loss prevention is the set of habits, controls and tools that keep inventory and cash from leaving the business without being paid for. Shoplifting gets the headlines, but shrink also comes from employee theft, vendor and delivery errors, paperwork mistakes and fraud at the register. A program that works looks at all of those sources together, starts with your own numbers, and keeps employees safe while it does it.
What shrink is and where it comes from
Shrink is the difference between the inventory your books say you should have and what is actually on the shelf. The National Retail Federation's most recent National Retail Security Survey reported that the average shrink rate rose to 1.6% of sales in fiscal 2022, up from 1.4% the year before, or roughly $112.1 billion industry-wide. Those figures cover every cause of shrink, not just theft, which is the point: a store that focuses only on shoplifters can miss the larger leaks.
External theft
Shoplifting, organized retail crime, return fraud and robbery. See our guides to shoplifting prevention and organized retail crime.
Internal theft
Merchandise or cash taken by employees, sweethearting (discounts or free goods for friends), refund and void abuse.
Vendor and receiving
Short shipments, substitutions, damaged goods signed for without exception, and direct-store-delivery errors.
Process error
Pricing mistakes, unrecorded markdowns, damaged goods not written off, and counting errors.
Start with your own numbers
Before buying cameras or tags, find out where your losses are. Most point-of-sale and inventory systems can show the data you need; the work is in looking at it regularly.
- Measure shrink by department, category and, for high-value items, by SKU. A store-wide percentage hides the problem areas.
- Run cycle counts on your most-stolen and highest-margin items between full physical inventories.
- Review exception reports weekly: voids, no-sale drawer openings, refunds without receipts, manual price overrides, employee discounts and post-void transactions, broken out by cashier.
- Compare receiving records with purchase orders and vendor invoices (see receiving procedures that prevent shrink).
- Keep an incident log for every theft, attempted theft, robbery or threat, with date, time, location in store and loss amount. Patterns in time and place drive staffing and layout decisions.
| Source of loss | Warning signs | First controls to try |
|---|---|---|
| Shoplifting | Empty packaging, gaps in high-value displays, losses concentrated near exits or blind spots | Customer greeting and floor presence, sightline changes, locked or tethered displays for top items |
| Employee theft | High voids or refunds for one cashier, cash shortages on certain shifts, losses in stockrooms | Refund and void approvals, drawer accountability, bag and exit policies, separation of duties |
| Receiving and vendors | Invoices that do not match counts, frequent credits, vendor reps stocking unsupervised | Count-in at the door, blind receiving, signed exceptions on delivery receipts |
| Process error | Unexplained variances that are not concentrated in theft-prone items | Markdown and damage logs, price audits, count training |
Controls on the sales floor
The most effective floor controls are usually low-tech. Attentive service is a deterrent: people who intend to steal want to go unnoticed, and an employee who greets them and offers help removes that cover.
- Layout and sightlines. Keep shelving and window signs low enough that employees can see across the floor and passersby can see in. Use convex mirrors for corners and aisles that cannot be seen from the register.
- High-risk merchandise. Place it near staffed areas, display one unit with the rest in locked storage, or use locked cases, tethers or source tags.
- Fitting rooms and restrooms. Limit items per visit, issue numbered tags and keep a staffed entry point.
- Cameras and alarms. Cover entrances, registers, stockrooms, receiving and high-value displays. A visible monitor at the entrance tells customers they are being recorded. Our guide to security cameras for retail covers placement and retention.
- Returns. Require a receipt or ID for refunds, track no-receipt returns by customer and employee, and give store credit rather than cash where your policy allows.
Controls behind the counter
Internal losses are harder to see because the people involved know how your systems work. The basics are separation of duties, accountability and review.
- Assign one cashier per drawer and count drawers at the start and end of every shift. See cash handling procedures.
- Require a manager's approval for voids after a sale, refunds above a set amount, price overrides and no-sale openings.
- Do not let the person who orders merchandise also receive it, or the person who receives it also approve the vendor invoice.
- Control keys and alarm codes, change them when a keyholder leaves, and review alarm open and close reports.
- Screen applicants consistently and lawfully, and make your expectations clear in writing at hire. Our employee theft prevention guide goes further.
Keep people safe when theft happens
Merchandise can be replaced; employees cannot. Many retailers now train staff to observe and report rather than confront. OSHA's guidance for late-night retail recommends practical steps that also reduce theft: good interior and exterior lighting, clear visibility into the store, cameras, panic alarms, drop safes with limited cash in registers, signage that cashiers have limited access to cash, and written procedures for robberies and security breaches.
Write down your stop policy. Decide who, if anyone, may approach a suspected shoplifter, what they may say, and when they must stop and call police. State law sets conditions on when and how a merchant may detain someone, and a wrongful stop can lead to claims of false detention or injury. Have an attorney review the policy before you train on it, and train everyone, including seasonal staff.
For threats and violent incidents, see our guide to workplace violence in retail.
Where insurance fits, and where it usually does not
Loss prevention is mostly about losses you will absorb yourself. Everyday shoplifting is frequent and small, so individual incidents usually fall under the property deductible. Many commercial property forms also exclude losses where the only evidence is an inventory shortage, so unexplained shrink is generally not recoverable. Insurance becomes relevant for larger or specific events, and the coverage that responds depends on what happened.
| Event | Coverage that may respond | Common gaps to check |
|---|---|---|
| Burglary or break-in with visible damage | Commercial property (building, stock, equipment) | Deductible, theft sublimits, protective-device conditions such as a working alarm |
| Employee steals cash or merchandise | Commercial crime, employee theft insuring agreement | Property policies generally exclude employee dishonesty; crime limits are often set too low |
| Robbery of cash at the register or on the way to the bank | Commercial crime, money and securities coverage (inside and outside the premises) | Money is generally not covered property under a property policy |
| Counterfeit currency accepted | Commercial crime, money orders and counterfeit money coverage | Often a small sublimit, if included at all |
| Employee hurt during a theft or robbery | Workers' compensation | Return-to-work planning and incident documentation |
| Customer claims a wrongful stop or detention | General liability, personal and advertising injury | Exclusions vary; some policies limit coverage for security activities |
Forms, sublimits and exclusions vary by carrier and policy. A retail package or retail insurance program can combine these coverages, but crime coverage is frequently left out or underinsured.
A practical 90-day plan
- Weeks 1–2: Pull 12 months of shrink, exception and incident data. Identify the top five loss categories and the top five employees by voids and refunds.
- Weeks 3–4: Walk the store with fresh eyes for sightlines, blind spots, exits, stockroom and dock access. Fix lighting and obvious layout problems.
- Month 2: Tighten register controls and approvals, put receiving on a count-in procedure, and finalize your written stop and robbery-response policies.
- Month 3: Train every employee, start weekly exception report reviews, and set a quarterly cycle-count schedule for high-risk items. Compare results against your baseline.
When to call a broker
Talk with us when you open a new location, change your hours, add high-value merchandise or start handling more cash. Those changes affect theft exposure and the limits you need. We can also review whether your crime limits match the cash and inventory one dishonest employee could reach, and whether your property policy carries theft conditions you need to meet.