Combating Retail Shrinkage with Technology and Social Interventions

This Week’s Focus: The Retail Shrinkage Dilemma

The growing challenge of retail shrinkage—the loss of inventory due to theft, damage, or errors—has a significant impact on both businesses and customers. From the restrictions imposed by legislation like the Combat Methamphetamine Epidemic Act and Proposition 36 to the rise in shoplifting, retailers are locking up products and requesting harsher punishments. However, this approach often creates frustrating barriers for honest customers, driving many to opt for online shopping. In today’s article, we delve into how retailers are leveraging technology and social interventions to balance theft prevention with customer satisfaction, drawing insights from academic research that sheds light on this complex issue.

Recently, while in San Francisco, I visited a local Walgreens to purchase congestion medication. As I was still recovering from the flu, all I wanted was to quickly locate, purchase the product, and head to the hotel. However, what should have been a simple transaction turned into an exercise in frustration. 

Once at the right aisle, I realized the medication was locked in a glass case, and attempting to unlock it proved quite an ordeal! Unable to find the button for assistance, I sought help at the cashier, who sent me back to try and locate the button once again. Eventually, a visibly annoyed associate came to open the case, who became even more annoyed when he showed me where the button was, and I pushed it. 

I’m pretty sure that part of this has to do with the Combat Methamphetamine Epidemic Act of 2005 (CMEA) which requires products containing pseudoephedrine to be placed out of direct customer access, and part of it is a response to retail shrinkage —a term used to describe the difference between a store’s recorded and actual inventory mainly due to theft, damage, or administrative errors— as medication like the one I needed can be used for illegal purposes. 

Nevertheless, this cumbersome interaction soured my shopping experience, which is representative of a broader tension in retail: While locking up products may deter theft, it also creates friction for honest customers and reduces the overall appeal of in-store shopping. Frustrated by these barriers, many consumers shift to online platforms like Amazon, further undermining brick-and-mortar stores. For example, one of the products always locked away is Gillette razors, and I hardly remembered that until now as I almost exclusively buy them online.

Retail shrinkage is not new, but as theft and shoplifting incidents become more common, its visibility increases. Retailers are experimenting with technologies ranging from mobile apps to advanced surveillance to curb losses while preserving customer satisfaction. With this as our baseline, in today’s article we will explore how firms use technology and social interventions to combat theft, drawing on three pivotal studies that help illuminate the problem.

Statistical Insights into Shrinkage

Let’s start with the basics. 

Shrinkage is a costly challenge for retailers, accounting for 1–2% of sales, a figure that rivals pre-tax profits.

Shrinkage isn’t new and doesn’t seem to increase significantly:

It’s hard to find definitive statistics, but based on the following graph, it seems that external theft is not the main reason for shrinkage: 

It’s interesting that shrinkage has remained underexplored in academic literature despite its financial significance. 

The paper “A Statistical Investigation of Inventory Shrinkage in a Large Retail Chain” by Howell and Proudlove explores which operational and demographic factors are correlated with shrinkage.

Using regression analysis, the authors analyze 421 variables from over 600 stores in the UK to identify correlations between shrinkage and factors like store layout, staffing, and local demographics.

A critical quantitative result of the study is the negative correlation between stock turnover and shrinkage. Stores with higher inventory turnover rates consistently reported lower shrinkage levels. The authors propose a “time constant risk” model, wherein faster stock movement reduces the opportunity for theft or loss. A one-unit increase in stock turnover was associated with a 3.5% reduction in shrinkage, holding other variables constant. The implications are clear: encouraging rapid inventory cycles through targeted promotions or streamlined supply chain practices can significantly mitigate shrinkage.

The study also highlights the protective effect of crowded environments, where high customer and staff densities create a psychological perception of surveillance. Stores in the upper quartile of customer and staff density exhibited shrinkage rates 2.8 percentage points lower than stores in the bottom quartile.

Contrary to conventional wisdom, CCTV presence showed no statistically significant impact on shrinkage reduction in the regression analysis. This finding challenges the prevailing reliance on CCTV as a primary theft prevention measure. The coefficient for CCTV presence in the regression model was not statistically significant. However, In stores with low staff density, the presence of CCTV had a marginal positive effect on shrinkage reduction, though this was not significant overall.

Demographic variables, such as the age of employees and customers, were significant predictors of shrinkage levels. Older demographic profiles were associated with lower shrinkage rates. A one-year increase in the average age of employees was linked to a 0.25% decrease in shrinkage.

Overall, the results of Howell and Proudlove’s study offer several actionable insights for retailers: Encouraging high stock turnover and optimizing store layouts for density can yield significant reductions in shrinkage. 

Understanding Shrinkage Through Organizational Capability

While the previous paper looks at shrinkage as an operational issue, there’s a clear aspect of security and criminal action that must be addressed. 

The paper “Retail Inventory Shrinkage, Sensing Weak Security Breach Signals, and Organizational Structure” by Su, Rungtusanatham, and Linderman asks: How does the ability to sense weak signals of security breaches impact shrinkage, and what roles do centralization and formalization in organizational structure play in enhancing or dampening this ability?

Their key findings are quite interesting: 

The Role of Sensing Weak Signals: Stores with a heightened ability to sense weak signals of security breaches experienced a significant reduction in shrinkage. 

Weak signals refer to subtle, early indicators of potential theft or inventory loss, such as unusual transaction patterns, discrepancies between inventory records and on-hand counts, or behaviors by employees or customers that deviate from the norm. These signals are typically fragmented, faint, and require contextual analysis to interpret and act upon effectively. Detecting and responding to these signals proactively allows retailers to address vulnerabilities before they escalate, optimizing processes and reducing shrinkage. However, distinguishing weak signals from noise is challenging and often requires a combination of advanced analytics, employee training, and well-defined protocols to mitigate risks early and strategically.

On average, a one-unit improvement in this sensing capability corresponded to a 7.89% decrease in shrinkage. This finding highlights the critical importance of proactive detection systems over reactive measures.

The Impact of Formalization: Formalized processes and protocols for identifying and addressing security breaches amplified the effectiveness of weak signal detection. Structured workflows likely reduce ambiguity, ensuring that detected signals are consistently acted upon.
Suggestion: Retailers should develop and document standardized protocols for security breach management. This includes clear escalation procedures, regular employee training, and technology-assisted monitoring systems.

The Negative Effect of Centralization: Centralized decision-making dampened the benefits of sensing weak signals. When authority is concentrated at higher organizational levels, local store employees may lack the autonomy to respond promptly to emerging threats.
Suggestion: Decentralized decision-making models that empower frontline employees are critical for effective theft prevention. These models enable rapid responses to security breaches, leveraging the proximity and contextual knowledge of local staff.

The paper highlights the importance of complimenting detection capabilities with the organizational agility to act on them. For example, technologies like self-checkout systems equipped with real-time anomaly detection can sense potential breaches. However, these technologies must be paired with protocols enabling swift intervention.

The results suggest that while formalized processes are essential, excessive centralization can stifle responsiveness. Retailers operating large store networks should consider hybrid models that blend central oversight with local autonomy. For instance, a centralized analytics system could flag anomalies, but local staff should have the authority to investigate and resolve them.

Finally, while the results emphasize organizational capabilities, they also imply that technology should support rather than replace human judgment. Tools like AI-powered surveillance, inventory tracking, and transaction monitoring enhance the ability to sense weak signals but require skilled employees to interpret and act on the data.

The Criminogenic Potential of Self-Checkout

Long time readers know my hate-hate relationship with self-checkouts. 

So I didn’t find it at all surprising that many tend to blame self-checkout systems for enabling theft. 

But given the additional efficiency they bring; it seems self-checkouts are here to stay. 

At a conference in Australia, the chairman of a leading supermarket chain shared insights into how analytics and vision recognition systems are being leveraged to reduce shrinkage at self checkouts.

One prevalent issue was the tendency of otherwise honest customers to “forget” items placed underneath their carts, such as bottled water or diapers. Inflation pressures have exacerbated this issue, as normative consumers may rationalize such acts as minor lapses in the face of rising costs. 

To counteract this, the supermarket implemented a vision recognition system that identifies unscanned items in carts and nudges customers with reminders to scan them. While the system is not perfect—it occasionally misidentifies items like baby car seats—it has significantly reduced instances of unscanned products.

I wasn’t sure if this is anecdotal or based on deep analytics, so I was surprised that there’s even a term for it! “SWIPERS”: Seemingly Well-Intentioned Patrons Engaging in Routine Shoplifting (by the way, this is why I love writing this newsletter. I get to read more interesting papers, and learn so much more than ever before). 

The paper “Supermarket Self-Checkouts and Retail Theft: The Curious Case of the SWIPERS” by Taylor asks whether Self Checkout (SCO) technology has increased theft, who the offenders exploiting it are, and how do perceptions of opportunity and risk shape theft patterns in the SCO context.

Taylor synthesizes industry surveys, media reports, and anecdotal evidence to develop a typology of SWIPERS and analyze their behaviors and motivations.

Taylor cites surveys indicating that SCOs are associated with significantly higher rates of theft compared to traditional cashier systems. Anecdotal evidence from retailers supports this trend, with some claiming that theft at SCOs is up to five times higher than at staffed checkouts. Surveys show that 19–30% of shoppers admitted to stealing items during self-checkout. A survey by VoucherCodesPro found that nearly 57% of respondents who stole at SCOs did so after initially “accidentally” failing to scan an item. SCO systems reduce perceived risks of detection, normalizing theft among otherwise honest customers. Retailers must address this normalization through a combination of technology and behavioral interventions.

Taylor highlights the financial impact of theft through SCO systems, emphasizing that these losses are not limited to minor, inexpensive items. The average value of stolen goods via SCOs is estimated at £15 per month per offender, amounting to approximately £1.6 billion annually in lost revenue in the UK alone. While SCOs save labor costs, the losses from theft may outweigh these savings if preventive measures are not implemented.

The study categorizes SWIPERS into five types, with motivations ranging from frustration to opportunism. Quantitative data from surveys adds depth to these categories: 

The high percentage of accidental offenders highlights the importance of designing systems that prevent unintentional theft and deter repeated abuse.

Taylor notes that certain items are more likely to be stolen due to their size, value, or ease of concealment. Commonly stolen items include fruit, vegetables, and baked goods (67%), with customers misrepresenting high-value items (e.g., scanning cherries as carrots). Theft of these items often involves selecting cheaper alternatives on SCO menus, a behavior described as “discount theft.” 

The study ties theft behavior to the criminological concept of “opportunity.” The low perceived risk of detection at SCOs plays a significant role in encouraging theft. Studies suggest that typical offenders engage in 95 offenses before being apprehended, while only 1 in 20–40 shoplifters are caught. In the UK, 86% of supermarkets with SCOs reported shoplifting incidents compared to 52% without SCOs. The minimal perceived risk at SCOs underscores the need for visible deterrents, such as staff presence, cameras, or nudges to encourage honest behavior.

The insights from Taylor’s study highlight both the risks and opportunities associated with SCO systems:

System Design Improvements: Technologies like computer vision can verify scanned items against their appearance, reducing opportunities for “discount theft.” Enhanced user interfaces can minimize accidental errors, reducing the normalization of theft among accidental SWIPERS.

Behavioral Nudges: Visual or auditory cues reminding customers to scan items can deter theft. Regular prompts to review the transaction before checkout could prevent both accidental and intentional omissions.

Increased Surveillance: Placing SCO systems in areas with high visibility to staff or cameras may deter theft by increasing perceived risks. 

Taylor’s findings show that theft at SCOs is both a technical and behavioral problem. While the financial impact of theft is significant, the real challenge lies in addressing the systemic factors that enable it.

Proposition 36: Addressing Retail Theft in California

A recent battle in California illustrates that the implications of retail theft go well beyond just financial losses. 

California’s Proposition 36, recently passed by voters, aims to increase penalties for repeat offenders and expand the scope of theft-related felonies. This measure represents a response to growing public frustration over retail crime, with high-profile incidents such as large-scale thefts and viral videos of shoplifting fueling perceptions of a retail theft crisis.

The backdrop for this legislation is a 2014 law that downgraded certain nonviolent crimes, including theft under $950, from felonies to misdemeanors. While the 2014 reform aimed to reduce incarceration rates, critics argue that it inadvertently emboldened shoplifters and organized retail crime rings. Proposition 36 reverses parts of this reform, enabling tougher penalties and empowering judges to mandate treatment for offenders with substance abuse issues.

Whether retail theft has significantly increased in California remains difficult to quantify. Local data on the issue is scarce, making it hard to assess whether theft rates have risen dramatically or if the problem is simply becoming more visible. 

However, visibility itself has amplified public concern. Videos of organized retail theft, such as coordinated smash-and-grab operations, often go viral, creating a perception of lawlessness. Such images evoke strong emotional reactions, making retail theft feel like an epidemic regardless of whether the data supports that view.

Retailers have also contributed to this heightened visibility. High-profile measures, such as locking up everyday items like detergent or toothpaste, send an implicit message that theft is a pervasive issue. For shoppers, these visible deterrents serve as constant reminders of the problem, even if they don’t personally witness shoplifting.

The visibility of theft poses unique challenges for policymakers and retailers alike. Even if data shows a steady trend, the public’s perception of worsening crime can lead to demands for stricter laws like Proposition 36. While these laws may help address organized retail theft, they risk disproportionately targeting low-level offenders or those with substance abuse problems, potentially exacerbating societal inequities.

For retailers, balancing theft prevention with customer experience is critical. Locking up products may deter shoplifters but frustrates honest customers, who may turn to e-commerce for convenience. This trade-off highlights the tension between addressing theft and maintaining a welcoming shopping environment.

The passage of Proposition 36 shows how deeply retail theft resonates with both voters and businesses. However, the heightened visibility of the issue risks oversimplifying its causes and consequences. 

Ultimately, the challenge is not just to reduce theft but to do so in a way that avoids alienating customers, overburdening the justice system, or ignoring the socioeconomic realities that drive crime. 

Conclusion: Technology as Both a Solution and a Challenge

Walmart recently introduced an app-based system allowing shoppers to unlock security cases via their smartphones. This innovation reduces the delays often associated with locked products, enhancing the shopping experience while deterring theft. By integrating this feature with their loyalty program, Walmart could simultaneously improve customer satisfaction and gain valuable data insights. However, this solution depends on customer adoption and may still pose challenges for less tech-savvy shoppers, illustrating the trade-offs between technological convenience and accessibility.

But retail shrinkage is not just a technical, criminal, or social issue—it intersects all three domains. The challenge lies in creating a shopping environment that feels neither overly permissive of theft nor excessively punitive or restrictive. Both extremes leave poor impressions on customers.

A store that feels insecure may create a perception of chaos and disorganization, undermining trust.

Conversely, an overly secure environment, with locked cases and heavy surveillance, can feel unwelcoming and alienating.

The ultimate solution must balance these tensions. Retailers need technologies like Walmart’s app or Australia’s vision recognition systems, but they must also address the broader social and psychological factors that drive theft. Transparent communication, staff training, and a welcoming store design can complement technological interventions, creating an environment where theft is discouraged without compromising customer experience.

Retailers must move beyond one-size-fits-all solutions, leveraging data-driven insights and adaptive technologies to address shrinkage while preserving the shopping experience. Whether these efforts succeed will depend on their ability to integrate human, technological, and structural factors seamlessly—a challenge that remains open for further research and innovation.

Shopping shouldn’t feel like an escape room challenge—because the prize at the end isn’t a grand treasure…just cold and flu medicine.