The New Reality of Retail Shrink: From Smash‑and‑Grab to Return Fraud at a Historic High

Retail Shrink and Return Fraud Impact on Gross Margin

According to a recent analysis, retailers are bracing for a staggering $850 billion in merchandise returns in 2025—a volume so high it erases a significant portion of annual sales before profits ever materialize. Even more troubling, 9% of those returns are now estimated to be fraudulent, accounting for tens of billions of dollars in direct shrink stemming from scams like wardrobing, fake receipts, and item switching.

Finance chiefs now describe returns as “a second cost of goods sold,” a burden layered on top of the original inventory cost. Fraudulent returns have shifted from a customer‑service inconvenience to a major security and profitability risk.

This surge is reshaping industry expectations and forcing retailers to rewrite the social contract of shopping by:

• Tightening return windows
• Adding return fees
• Implementing AI‑based verification
• Reintroducing friction to deter abuse

As the article emphasizes, this isn’t just a leaky bucket—it’s one that many perpetrators have learned to puncture on purpose.

Why This Matters for Merchandise Financial Planning

Shrink is no longer just about theft and operational errors. Today, return fraud and abusive return behavior must be modeled directly into merchandise financial plans to maintain accurate gross margin forecasting.

Failing to plan shrink appropriately leads to:

• Overstated gross margin
• Inflated open‑to‑buy budgets
• Poor inventory accuracy
• Misaligned finance and merchandising strategies

With nearly 16% of annual sales expected to boomerang back through returns and 9% of those returns being fraudulent, shrink planning has become a core financial discipline—not an afterthought.

Traditional Shrink Still Matters—But the Landscape Has Shifted

Even before the rise in fraudulent returns, retailers were dealing with increasing shrink:

• NRF highlights shrink as a measurement of inventory loss that varies by retail segment and doesn’t always capture indirect costs like workers’ comp claims or store damage.
• Target recently announced closing stores due to theft‑related challenges.
• Smash‑and‑grab incidents continue to rise nationwide.

Retailers like Costco have kept shrink low through controlled checkout models. Their shrink rate remains well below industry averages, with theft accounting for roughly 1 basis point of inventory—compared to 4 basis points at retailers with widespread self‑checkout. This demonstrates how operational design directly impacts shrink outcomes.

The Bottom Line: Shrink Is Now a Multidimensional Threat

Retailers no longer face shrink from one direction. Today, shrink includes:

• Organized retail crime
• Casual shoplifting
• Operational errors
• Self‑checkout losses
• And now, massive return‑based fraud

With $850B in returns and 9% fraud rates threatening margins, retailers must integrate shrink forecasting directly into merchandise financial planning and gross margin models to maintain financial accuracy.

Shrink is no longer a KPI to track—it’s a strategic pillar that determines profitability.