Known and unknown shrinkage: challenges for brands

Shrinkage is the negative discrepancy between what you should have in stock and what the inventory actually reveals. Breakage, expiration, theft, management errors... these losses affect every link in the retail chain, and your brand is no exception.

‍Yet, the issue is almost always approached solely from the distributor's perspective. This is a mistake: when your products disappear from the shelves, your volumes—and sometimes your margins—evaporate.

‍This article covers everything you need to know: the definition of known and unknown shrinkage, a step-by-step calculation, the shrinkage rate, and what you can concretely put in place, both on your own and with your distributors, to reduce losses.

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Definitions of known and unknown shrinkage

During the physical inventory that takes place at least once a year, it is common to find a discrepancy between the actual stock and the theoretical stock.

‍Shrinkage expresses the finding of a negative discrepancy between a counted (actual) stock and the theoretical stock. 

‍But let's start by defining these two concepts:

• Actual stock = stock present in the store + stock in reserve;

• Theoretical stock = initial stock + quantity purchased - quantity sold.‍

The formula below evaluates shrinkage in quantities.

Total shrinkage = actual stock - theoretical stock.

[We will illustrate the formulas with concrete examples a bit further down in the article]. 

We can then determine the lost earnings in value, and evaluate it as a percentage of revenue. This is the shrinkage rate (see the dedicated section).

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What is known shrinkage?

Known shrinkage measures the number or value of unsold products that are no longer in actual stock due to identified and recorded events in the shrinkage log.

The shrinkage log is a document in which products unfit for sale are reported.‍

Known shrinkage is linked to multiple causes: 

• Breakage;

• Product damage during transport;

• Product expiration;

• Demonstration products;

• Products used for in-store tastings;

• Sales;

• Promotions.

Price reductions are considered part of known shrinkage when looking at losses in value (revenue). In this case, shrinkage is not a problem, as it is generally strategic to sell off end-of-line products or those with short shelf lives. However, manufacturers and distributors can attempt to optimize stock to avoid having to lower retail prices.

Retail players generally use the term “breakage rate” because "damaged" products often make up a significant portion of known shrinkage.

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What is unknown shrinkage and how is it calculated?

Unknown shrinkage corresponds to products that have not been sold and no longer appear in stock for unidentified reasons. This is therefore the loss of merchandise whose origin is not recorded.

‍This phenomenon is far from anecdotal and is rapidly worsening: according to a survey conducted in early 2025 by the collective RAS LE VOL, 82% of retailers surveyed were victims of theft in 2024, representing a 15.5% increase compared to 2023. On the official side, the Ministry of the Interior recorded more than 42,000 reported cases of shoplifting. This is an especially telling signal given that only one in two retailers still files a complaint, suggesting that the reality exceeds the reported figures.

‍It is calculated as follows:

Unknown shrinkage = total shrinkage - known shrinkage.

‍The most common causes of unknown shrinkage are:

• Theft, which accounts for 75% of unknown shrinkage;

• In-store consumption of the product;

• Labeling errors;

• Logistics issues.

‍You will find the detailed, step-by-step calculation in the example below!

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How to calculate known and unknown shrinkage: example

Let's analyze a specific item using an inventory report.

‍Initial data:

• Products on shelf: 50

• Products in reserve: 180

• Theoretical stock: 245 units‍

1. Calculate the actual stock

Actual stock = shelf stock + reserve stock

Actual stock = 50 + 180 = 230 units

2. Retrieve the theoretical stock

Theoretical stock is what you should have in stock based on your recorded movements, prior to any physical inventory.

Theoretical stock = initial stock + quantity purchased − quantity sold

Theoretical stock = 145 + 700 − 600 = 245 units

Here, inflows and outflows are illustrative: what matters is that they result in the theoretical stock of 245, which you then compare to the actual stock.

3. Deduct total shrinkage

Total shrinkage = actual stock − theoretical stock

Total shrinkage = 230 − 245 = -15 units, meaning 15 missing units.

4. Add up the known shrinkage

Refer back to the shrinkage log:

• Breakage: 7 units

• Demonstration products: 1 unit

Known shrinkage = 7 + 1 = 8 units

5. Isolate the unknown shrinkage

Unknown shrinkage = total shrinkage − known shrinkage

Out of the 15 missing units, 8 are identified. The remaining 7 have no known cause.

Unknown shrinkage = 15 − 8 = 7 units, or -7.

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How to calculate and interpret the shrinkage rate

Counting missing units is not enough for management: 15 lost units do not carry the same weight depending on whether the product is $0.50 or $50. Converting shrinkage into value, and then comparing it to revenue, gives the shrinkage rate, which is the metric distributors and manufacturers actually track to compare departments, stores, or periods.

‍Let's go back to the previous example. With a retail unit price of $2.50 and a revenue of $5,500 over the period for this item:

• Total shrinkage in value: 15 × $2.50 = $37.50

‍Shrinkage rate = revenue losses due to shrinkage / revenue × 100

Shrinkage rate = 37.50 / 5,500 × 100 = 0.68%

‍Be careful not to confuse three indicators that are often mixed up on the ground:

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Track these three rates separately: a rising breakage rate points to a handling or packaging problem, whereas a high unknown shrinkage rate points more toward theft or process failures.

‍The basics are in place. Now let's see what shrinkage concretely implies for your brand, and how to take action at your level.

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Shrinkage in grocery retail: disparities across industries

Before asking how your brand can take action on product losses related to logistics, storage, or product shelving, it's worth noting an important point: the shrinkage rate, as well as the nature and origin of inventory discrepancies, differ depending on the products you offer for sale.

Electronic products and jewelry are highly exposed to theft, due to their generally high price points. 

Fashion and apparel are also subject to this type of shrinkage, which must also factor in merchandise returns.

‍We can also mention health products, whose smaller dimensions tend to "facilitate" shoplifting. 

‍It's worth noting that the inflation observed across nearly all sectors in recent years has been accompanied by an increase in supermarket theft.

‍In the food sector, shrinkage is generally related to product expiration, whether fresh or non-perishable. The breakage rate is higher in fresh departments than in others. Perishable foods lead to a high breakage rate due to the expiration of sell-by dates, hence the increased frequency of promotions. The EGalim 3 Law excludes fruits and vegetables from the threshold of resale at a loss, set at 10% of the effective purchase price of the products. 

‍In other sectors, breakage represents the largest share of shrinkage. For example, household appliances often include fragile technological components, increasing the risk of damage during transport. Additionally, it is common to display products for demonstration, and these are often sold at a discount because they have already been unpacked, handled, etc.

‍Finally, let's remember that some industries experience seasonal shrinkage cycles, such as the toy department. During the Christmas season, theft and breakage are much more common than the rest of the year.

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Fighting against known and unknown shrinkage

While your distributors (retail banners as well as points of sale) have more or less effective processes and habits for managing and reducing known or unknown shrinkage, you are fully justified in looking into the matter. After all, they are your products that are disappearing, and the distribution agreement can in some cases require you to assume or financially contribute to the missing revenue!

‍However, if your area managers are trained in best practices for reducing product loss, they can report them and work with department managers and other in-store teams to improve the measures set up (or lack thereof) for this purpose.

‍While in-store shrinkage cannot be completely avoided, it is always possible to reduce it. Beyond protecting yourself against potential economic losses, you also show your commercial partners that you are proactive in improving distribution processes and increasing profitability.

‍Generally speaking, it is important for your brand to anticipate shrinkage phenomena. Although most incidents or commercial events that generate loss happen at the distributor's end, you should take action on three levels: 

1. Anticipation and negotiation: shrinkage is built into the distribution contract, and some retailers may ask you to contribute. Be vigilant and make sure you fully understand the terms; 

2. Daily operations: define effective processes and train teams;

3. Verify that processes are followed, report and analyze the results.

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Known shrinkage: causes and solutions

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Unknown shrinkage: causes and solutions

You are now familiar with each component of shrinkage in retail, whether known or unknown. While stores remain on the front line of these issues, you can act to limit losses for your brand and establish a win-win collaboration with your distributors. This will help combat shrinkage and show your commitment to achieving a shared goal: retail sales performance. For this, your ability to collaborate proactively with the distributor will play an essential role.