How to Calculate Inventory Shrinkage and Damaged Goods: 2025 Guide for Australian Retailers

Inventory shrinkage and damaged goods continue to rapidly erode profitability for Australian retailers, making retail loss prevention an increasingly important priority. With your latest stocktake complete, now is the ideal time to calculate these critical rates, as you will never have better figures. Good inventory control transforms a retail business.

Inventory Shrinkage and Damaged Goods

Let's define what we are talking about first. Inventory shrinkage refers to the loss of stock that occurs when actual inventory levels are lower than what your computer records indicate, which we refer to as the perpetual stock. Common causes of losses include theft, administrative errors, and other similar issues.

Goods that, due to damage, cannot be sold at full price are classified as damaged goods.

Calculating your Inventory Shrinkage rate

To accurately determine your inventory shrinkage rate, follow this process that leverages your POS system's inventory management tools.

Begin by establishing your perpetual stock value. This figure represents your theoretical inventory level, as reported by your POS software, before any physical stocktake.

Now you have the physical stocktake that you have just done.

In our POS system, we have a comparison report that automatically provides the figures for losses. Focus exclusively on products physically carried in your store, excluding non-stock sales such as lottery tickets or service revenue, to ensure the calculation accurately reflects inventory movement. We can do something similar with your lotto system, as lotto does have a report of what you should have sold. I will address this in a separate post.

The shrinkage formula is as follows:

=(Perpetual Stock Value) - (Physically Counted Inventory Value)/(Perpetual Stock Value) x 100%

Example

A retailer with a perpetual stock value of $100,000 in a department finds, after the stocktake, that their stock is $98,500, and sales of stock products total $70,000 for the period. The shrinkage rate would be:

=(100,000 - 98,500)/100,000 x 100 = 1.5%

This calculation shows that 1.5% of the stock was lost to shrinkage. That rate, unfortunately, is not uncommon. Some of you may be surprised by how high your figures are. Shrinkage rates have increased this year. They increased the previous year as well.

Industry Benchmark for 2025

The retail shrinkage rate for Australian retailers is about 1.4%.

Every 1% shrinkage causes about a 3.5% drop in profit.

A rate above 2% highlights the need for immediate investigation and remedial action.

Calculating Damaged Goods

The calculation for damaged goods is as follows:

=(Damage Stock Value)/(Cost of Stock Product) x 100%

We refer to this as the damage rate, another significant contributor to inventory loss. These damaged goods cannot be sold at full price.

Looking at them, we can often determine the cause.

Inventory Management and Loss Prevention Strategies

Effective inventory management is crucial for minimising both shrinkage and damaged goods. Analysing losses by category, department, or location allows you to pinpoint where problems are occurring. Recording the reasons for missing or damaged items—such as theft, receiving errors, or poor storage—provides actionable insights for process improvement.

With a modern POS inventory management system, you at least have real-time tracking of the problem.

Conclusion

After determining the overall measurements of your inventory shrinkage and damaged goods, you may want to dive deeper into specific departments by performing this analysis across departments, as well as consider doing it by key items and locations. Using this, you can pinpoint areas of concern. 

Written by:

Bernard Zimmermann is the founding director of POS Solutions, a leading point-of-sale system company with 45 years of industry experience, now retired and seeking new opportunities. He consults with various organisations, from small businesses to large retailers and government institutions. Bernard is passionate about helping companies optimise their operations through innovative POS technology and enabling seamless customer experiences through effective software solutions.

Have you ever wondered where your stock disappears? You're not alone. Many retailers do not know. Yet, understanding stock shrinkage and damage rate is crucial for retailers. Let's dive into these KPIs. It will only take a few minutes to find out. Then maybe it can transform your business.

Shrinkage and Damage

Imagine this: You've just finished a stocktake, but the numbers did not add up. Sound familiar? That is shrinkage. And those damaged gifts at the back of the shop now? That's damage eating into your profits.

Quick Definitions:

• Shrinkage: Stock that's gone missing
• Damage: Stock that's no longer sellable without discounting

Crunching the Numbers

Let's get our hands dirty with some calculations. A full and detailed explanation is available here.  After a stocktake, working through the calculations should take a few minutes.

Some real-world case studies

Case Study 1: The Vanishing Vitamins

A pharmacy in Brisbane was losing $5,000 worth of vitamins each month. After calculating their shrinkage (2.5%), they discovered employee theft was the culprit. By implementing stricter controls, they reduced shrinkage to 0.8%.

Case Study 2: A newsagent in Sydney

They found that their margins on stationery were, in theory, about 50%. Yet they found that their margin was more like 32%. This is due to the theft rate. They rearranged many of the stationery and put it behind the counter, which boosted their profits dramatically.

Industry Benchmarks

I can give you some typical figures quoted, but almost everyone I ask tells me that these figures are educated guesses. Most quote a figure of 1% to 2% and then give a disclaimer to say they believe it is too much higher. Figures typically quoted are 1.5% shrinkage with a damage rate of 0.4%; here are some details. How do your numbers compare? If they're higher, panic!

What we do know is that since COVID, shoplifting rates have jumped. You can read about it here in every state; we are looking now at about a 20% to 40% increase. This is a worldwide trend; for example, in the UK, it was a 37% increase. 

Yesterday figures from the Victorian Crime Statistics were released for the year ending March 2024 here there is a concerning 17% increase in theft offences recorded for the period to March 2024, driven by the highest ever numbers of incidents from retail stores. They I think confirm an early report that shoplifting is at highest level ever here. I am sure the oother states will becoming out soon with similar figures. Shoplifting since COVID has been a disaster.

The Why Behind the Numbers

Shrinkage causes:

1. Sticky-fingered shoppers (shoplifting): One pet shop told me that the small items for the pets too often disappear.
2. Employees with light hands (internal theft): Lott is often a big problem here. An employee gets the sudden urge to grab and rub a scratchie, and it loses, so they put it down. 
3. Paperwork nightmares (administrative errors) - Often, lousy data entry has errors.
4. Dodgy dealings (supplier fraud) - I suspect this is all too common in newsagencies. I find it hard to believe that these errors we pick up are entirely accidents.

Damage Demons:

1. Clumsy handling 
2. Storage snafus
3. Time's Cruel March (expired products)
4. Rough rides (transport damage)
5. Sun causes the item to fade over time.

Ideas for Prevention

1. Regular Stock Audits: Don't wait for year-end surprises. Implement cycle counting to catch issues early.
2. Set SMART Goals: Use your percentages to set Specific, Measurable, Achievable, Relevant, and Time-bound targets. I discussed how to do them here yesterday. 
3. Train Your Team: Get your staff involved.
4. Upgrade Your Tech: A modern POS software and a camera system can be your best ally in the fight against shrinkage and damage.
5. Secure Your Space: Precious items should be behind the counter or under lock.

POS Systems: Your Secret Weapon

A robust Point of Sale system isn't just a glorified cash register. It's your 24/7 stock guardian. Here's how:

• Real-time Tracking: Know your stock levels at a glance
• Automated Alerts: Get notified of suspicious patterns
• Easy Auditing: Simplify your stocktakes
• Data Insights: Spot trends and make smarter decisions

From Numbers to Action: Implementing Change

1. Set Your Baseline: Calculate your current shrinkage and damage percentages.
2. Benchmark: Compare your figures to industry standards.
3. Identify Hotspots: Which products or areas are most affected?
4. Strategise: Develop targeted prevention strategies.
5. Monitor: Regularly check your percentages to track progress.
6. Adjust: Refine your changes based on results.

Loss Prevention Strategies That Work

1. The Power of Light: Well-lit shops deter thieves and reduce accidents.
2. Look for dead areas: Design your stock layout to minimise blind spots. Have cameras and mirrors there.
3. Inventory Management Software: Use technology to track stock movements accurately.
4. Get your employees involved: Often, they can pick up suspicious people. 
5. Customer Service Focus: Attentive staff naturally deter shoplifting.
6. Grandmother: This idea works. Have the grandmother at the front of the shop personally welcome everyone into the shop. 

The Bottom Line Boost

Reducing shrinkage and damage isn't just about preventing losses but unlocking profits. Here's the impact:

• Increased Revenue: Every item saved is an item sold.
• Better Cash Flow: Less money tied up in replacement stock.
• Enhanced Customer Experience: Your POS system will know the stock that you have.
• Improved Forecasting: Accurate stock levels lead to smarter buying decisions.

Your Next Steps

1. Calculate your current shrinkage and damage percentages.
2. Set realistic targets for improvement.
3. Implement at least one new prevention strategy this month.
4. Use your POS system to automate tracking.
5. Schedule reviews on loss prevention.

Remember, every small improvement adds up. A 1% reduction in shrinkage on a million dollar turnover business, at 30% margin is about $10,000 profit to you.

By tackling shrinkage and damage head-on, you're not just protecting your stock – you're safeguarding your success. It's time to turn those missing items and damaged goods into profit on your bottom line.