What does the term 'shrinkage' refer to in retail?

The term 'shrinkage' in retail specifically refers to the loss of inventory that can occur for various reasons, including theft (shoplifting or employee violation), errors in record-keeping, or obsolescence, where items become outdated or unsellable. Understanding shrinkage is critical for retailers since it directly impacts profitability. By identifying and addressing the causes of shrinkage, retail managers can implement strategies to minimize these losses and improve their overall inventory management. This concept is essential in ensuring a healthy bottom line, as excessive shrinkage can lead to significant financial losses and hinder a retailer's operational efficiency and effectiveness.