What are retail shrink and organized retail crime?

For several years, the terms shrink, retail crime and organized retail theft have echoed from the mouths of politicians, police officers, trade groups and the country’s most prominent retail executives.

Politicians and police departments have sounded the alarm about rising retail theft, and are calling for stricter enforcement and prosecution to fight it. 

Trade groups and retailers have griped about shrink’s effect on profits, and warned it could lead to store closures, employee-retention issues, safety concerns and reduced investment returns over time. 

All of these parties have urged passage of legislation they say would better equip law enforcement officials to crack down on the growing trend and catch those responsible. 

What is shrink, anyway? And how does it differ from retail crime and organized retail theft?

Here’s everything you need to know about the topic. CNBC gathered this information using interviews with trade associations, retailers, law enforcement officials and publicly available records, including securities filings, survey data and transcripts from retail earnings’ calls.

When retailers use the term shrink, they’re referring to the difference between inventory they’re supposed to have on their balance sheets and their actual inventory. 

Shrink captures the loss of inventory from a variety of factors, including employee theft, shoplifting, administrative or cashier error, damage or vendor fraud. 

For example, a retailer could have $1 billion in inventory on its balance sheet, but a count could show only $900 million in merchandise, indicating it lost $100 million in shrink. 

But it is difficult to figure out how the items were lost. Shrink could refer to anything from expired food to a broken jar of pickles, from cosmetics that a cashier rang up incorrectly to a bottle of aspirin that was stolen and later resold online. 

Shrink, including shoplifting and organized retail crime, cost retailers $94.5 billion in 2021, up from $90.8 billion in 2020, according to a 2021 study conducted by the National Retail Federation that used data from 63 retailers. That is the most recent data available. 

The companies polled for the survey estimated that retail theft accounted for 37% of those losses, employee or internal theft 28.5% and process and control failures 25.7%. Unknown loss and other sources accounted for the rest. 

However, those figures are largely estimates because of how difficult it is for retailers to figure out whether an item was stolen, lost or missing for other reasons. It’s not like thieves inform retailers about the merchandise they’re taking with them. 

Retailers with commercial property insurance can be covered for unforeseen losses such as theft, depending on the policy. It’s unclear which retailers have such insurance and if they do, how much it covers.