Unknown shrinkage in retail: accounting and department steering

Quick answer. In large retail, shrinkage is the gap between expected and actual stock. Known shrinkage (breakage, expiry, promotions) is booked as an operating expense (account 6037). Unknown shrinkage (theft, errors) is found at inventory and booked as a loss (account 6718). Sector barometers put it around 1 to 1.5 % of revenue, with a steering target often set below 1 %.

In a food store or a supermarket, every pallet that enters the back room is supposed to leave through the checkout. Between the two, a share of the goods disappears without leaving a usable trace: that is shrinkage. The issue is not so much that it exists, since it is unavoidable, but that it usually stays invisible until the annual inventory, that is, until it is too late to act on the financial year. We regularly see managers discover a hole of tens of thousands of euros at year-end, with nothing in the monthly reporting to warn them.

This topic is neither purely accounting nor purely operational: it sits exactly at the border of the two, where the chartered accountant adds the most value by turning an operational reality into figures you can steer.

Shrinkage measures the loss of goods between stock entry and sale. We distinguish two families, which are not booked the same way.

• Known shrinkage covers identified, traced losses: breakage, expired products, donations, promotional withdrawals. It is documented as it happens and booked as an operating expense, in account 6037 (change in inventory of goods).
• Unknown shrinkage covers unexplained losses, revealed only at inventory by the gap between theoretical stock (rebuilt from recorded purchases and sales) and the physical stock actually counted. It is booked as a loss, in account 6718 (other exceptional expenses on operations) at inventory.

Unknown shrinkage mostly covers theft (customer and internal), checkout errors, receiving errors and inventory errors. Part of what looks "unknown" is in fact known shrinkage that was poorly traced: a broken product thrown away without a record, a mis-recorded promotion. This is a key steering distinction, because reducing unknown shrinkage often starts with better documenting known shrinkage.

No text sets a shrinkage "standard": it is a management indicator, not a regulatory obligation. Professional loss-prevention barometers put unknown shrinkage around 1 to 1.5 % of revenue in large retail, with spikes on sensitive departments. A steering target is often set below 1 %.

The most exposed departments recur from one store to another:

• spirits and wine;
• cosmetics and perfumery;
• electronics, small appliances, tech accessories;
• deli and cheese counters, where weighing errors add to theft.

What matters is not the absolute figure but the trend. A rate that durably drifts above the store or banner average reveals a process problem, not an inevitability. Conversely, a one-off high rate on a department after a poorly framed promotion does not carry the same meaning as a slow, continuous drift across the whole store.

Hayot Expertise tip. Never compare your raw shrinkage rate with a neighbour's without looking at the department mix. A store heavily exposed to spirits and tech will mechanically start higher than a store dominated by dry grocery. The right benchmark is your own history, department by department, month after month.

In large retail, net margin is thin and profit is built on high volumes at low rates. One extra point of shrinkage cannot be recovered through trade margin: it translates almost entirely into lost operating result.

Take a store with 10 million euros of revenue. Moving from 1 % to 1.5 % shrinkage means 50,000 euros of result gone over the year. Compare that with the commercial effort needed to generate another 50,000 euros of result: on a net margin of a few points, that represents several hundred thousand euros of additional revenue. This is precisely the calculation that justifies investing in prevention.

That is why we treat shrinkage as a margin line in its own right, not as an inventory accident discovered at year-end. A retail margin and profitability simulator quickly quantifies what one point of shrinkage costs on your margin structure, and a break-even simulator measures how much extra revenue would offset the loss. It is the best argument for deciding on a prevention plan.

Waiting for the annual inventory to discover shrinkage means acting a year too late. Steering rests on a simple logic: bring the stock gap closer to the moment it forms, and at the most granular level possible. We recommend a four-step approach.

1. Set up a rolling inventory by product family rather than a single annual count. Sensitive departments are counted more often than dry grocery.
2. Build a monthly follow-up by department to isolate the ones drifting before they contaminate the overall result.
3. Cross-reference checkout data: ticket voids, unusual manual discounts, cash-float gaps, badge operations. Part of internal shrinkage shows up in these signals.
4. Deploy targeted actions by department: anti-theft on sensitive references, training of receiving and checkout teams, more reliable delivery notes and stock entries.

This turns a suffered annual figure into an actionable monthly indicator. It assumes clean stock data, which often points to a prior project to make receiving and pricing reliable.

In a supermarket file we support, the manager saw an annual "global" shrinkage of around 1.6 % of revenue every year, without being able to explain it. The follow-up was limited to the annual inventory gap, a single figure that said nothing about the causes. We broke this shrinkage down by department over the past twelve months, rebuilding theoretical stock from purchases and sales. The result: two departments (spirits and toiletries-perfumery) alone concentrated most of the gap, while the rest of the store stayed below 1 %.

The issue was therefore not "the store shrinks too much", but "two specific departments have a process problem". The answer was operational, not accounting: physical repositioning of sensitive references, double-checking at receiving, monthly rolling counts on those two families. The firm's role was not to cut theft in the manager's place, but to give the quantified reading that let him target his action.

That is our conviction here: unknown shrinkage is won or lost in operational processes, but it only becomes steerable once it is made readable, monthly and split by department. A definitions aggregator will tell you which account to use; it will not tell you which two departments to look at first in your store. That is where the support of a chartered accountant specialised in large retail makes the difference, alongside the broader steering of retail trade.

A few situations deserve specific attention:

• Growth through multiple stores. When a group runs several outlets, shrinkage must be consolidated without being flattened: a healthy store can mask a drifting one. This consolidation need ties into the issues of a multi-store holding under tax consolidation.
• Promotions and the resale-below-cost threshold. Withdrawals and breakage linked to promotions are known shrinkage, but they interact with pricing rules, notably the resale-below-cost threshold and the EGalim framework. A poorly framed promotion inflates known shrinkage without a volume offset.
• Internal shrinkage. When signals point to gaps linked to staff, the topic shifts onto employment and disciplinary ground, to be handled with care and formalism. The firm helps make the gaps objective; the consequences fall to social dialogue and, where relevant, legal advice.

• Do not confuse unknown shrinkage with a simple stock entry error: part of the inventory gap comes from mis-recorded entries, not real losses.
• Shrinkage that suddenly collapses is not always good news: it can signal a rushed inventory or a loose stock adjustment.
• Account 6718 is an exceptional expense account: a significant, recurring amount draws attention during review and deserves to be documented.
• The traceability of known shrinkage is the condition for reliable steering. Without breakage and withdrawal records, the unknown gap is artificially inflated.