Retail shrink is rising as retailers reported higher loss rates for 2016 than they did for previous years. The news comes as traditional retailers are struggling as consumers shift their spending online and many brick-and-mortar retailers are struggling to stay afloat.

Average retail shrink rate rises to 1.44%

The University of Florida and the National Retail Federation released their 2017 National Retail Security Survey focusing on loss rates reported by major retailers. Researchers found the average retail shrink rate to be 1.44% for 2016 as the total U.S. retail economy lost $48.9 billion worth of products. Retail shrink is loss of inventory due to various reasons, such as theft, vendor fraud, damaged products, or cashier or administrative error.

The NRF survey also found that retail shrink is worsening for nearly half of the industry. Twenty-three percent of retailers said their shrink rate is 2% or higher, compared to just 17.1% of retailers in 2015. Interestingly, the number of retailers reporting a shrink rate of less than 1% also increased, rising to 42.3% from 34.2% in 2015.

Fifteen of the 26 apparel retailers that participated in the survey reported that shrink had increased, while eight of them said it had declined “slightly,” the NRF said.

Shoplifting is the top source of retail shrink

The survey found that shoplifting remained the top source of retail shrink, surpassing theft by employees, although the NRF added that both of these sources have declined slightly since 2015. Administrative or paperwork errors as a cause of retail shrink is on the rise, with 21.3% of the shrink coming from such errors in 2016, versus only 16.8% the year before.

retail shrink

Apparel retailers bucked the broader trends in the industry, as shoplifting and employee theft were much higher than the industry average at 41% and 35.5%, respectively. Administrative and paperwork errors among apparel retailers were much lower than the industry average at 12.8%.

Loss prevention budgets not enough to deal with worsening shrink

As the broader retail industry struggles, with many traditional retailers struggling just to keep the doors open, loss prevention budgets are on the decline. According to the NRF, 7.9% of loss prevention departments will see their budgets slashed by more than 20% this year. The organization added that this is a lot higher than the percentage of retailers with similar declines over the last two years.

retail shrink

Only four of the 22 apparel retailers that responded are planning to increase their loss prevention budget this year while nine of them expect their budgets to stay the same and two expect “significant” budget cuts for loss prevention.

The NRF also found a huge gap between the number of loss prevention employees that are needed and the number that are expected. The organization said the average loss prevention team has 43.6 employees for every $1 billion in sales. Among apparel retailers, the average team has only 19.5 employees per $1 billion in sales, another clear correlation between higher shoplifting and employee theft and low loss prevention numbers. It certainly seems that apparel retailers should spend more than they do on loss prevention if they’re going to battle these two sources of retail shrink.

The NRF added that all survey respondents reported that to be successful, they needed 6.9 more loss prevention employees, on average, than what they had.

Shock waves through the retail industry

The worsening retail shrink is part of a bigger picture that illustrates how traditional retailers are struggling. NBC News reported earlier this month that more than 1,000 brick-and-mortar stores shut down in one week, and Forbes reported in March that 21 retailers announced closures for nearly 3,600 stores this year. At a time when consumers are spending more online and less at brick-and-mortar stores, traditional retailers can ill afford growing retail shrink. Every last dollar is being squeezed. Workers are being affected too, as the Bureau of Labor Statistics found a decline in the number of people whose jobs were retail salespeople, even as the overall unemployment rate declined.

Amazon’s announced acquisition of Whole Foods expanded the concern beyond other types of retail stores to supermarkets. Shares of grocery store chains like Supervalu plunged on the news as investors began to worry that after taking out department store chains like Sears and J.C. Penney, Amazon now has its sights set on grocery stores.

E-commerce retailers such as Amazon don’t have to battle shoplifting because they don’t have physical stores that allow consumers the opportunity to steal things, which eliminates one huge source of shrink. Amazon has been shifting into brick-and-mortar retail gradually, first with its own bookstores and now with the Whole Foods purchase. As a result, it will have to deal with the issue of shoplifting, but with so much of its business being online, shoplifting is likely to remain only a small piece of the shrink Amazon experiences.