Understanding retail loss in the new era of high inflation – KEY FACTS

• A 10% rise in loss volumes increases shrink by 20bps
• A 10% fall in sales increases shrink by 22bps
• Combined 10% sales fall and rise in loss increases shrink by 44bps
• Inflation alone doesn’t raise shrink when losses use sales-price valuation
• Absorbing inflation can increase shrink by up to +63bps under cost-based valuation

Shrink rises fast when unknown losses increase

Even small changes in unknown retail loss can have an outsized impact on shrink.

When unknown loss units rise by 10%, and nothing else changes, retail loss as a percentage of sales increases by 20 basis points, moving from 2.00% to 2.20%.

It’s a sharp reminder that even modest increases in loss volumes can meaningfully inflate shrink.

Falling sales inflate shrink too… a 10% drop adds 22bps

Shrink rises not only when losses increase but also when sales fall.

When sales units fall by 10%, with losses and inflation unchanged, retail loss as a percentage of sales increases by 22 basis points.

Lower sales volumes make any fixed level of loss feel bigger, pushing shrink up even when stores aren’t losing more stock.

The “double whammy” effect can push shrink up by 44bps

When losses rise and sales fall at the same time, a scenario many retailers face, the impact compounds.

A 10% rise in unknown loss units combined with a 10% fall in sales increases retail loss as a percentage of sales by 44 basis points, from 2.00% to 2.44%.

This shows how quickly shrink escalates when pressure builds on both sides of the ledger.

Inflation alone doesn’t increase shrink, valuation method matters

Our modelling shows that when losses are valued at sales price, inflation alone does not increase retail loss as a percentage of sales.

Even the “triple whammy” scenario of 10% inflation, 10% more loss and 10% fewer sales still results in a 44bps rise. Identical to the double whammy.

This means inflation itself doesn’t drive shrink higher; unit movements do.

Absorbing inflation can make shrink look worse by up to +63bps

If retailers choose to absorb inflation rather than pass it through to customers, shrink becomes more sensitive to valuation methods.

Under cost-based approaches such as FIFO, WAV or LIFO, retail loss as a percentage of sales rises much faster: by as much as 63bps under LIFO in the same inflation scenario.

How a retailer values inventory has a major impact on how shrink appears to move.

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