For several years, the terms shrinkage, retail crime and organized retail theft have been ringing around in 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 the rise in retail theft and called for more enforcement and prosecution to combat theft.
Trade groups and retailers have been complaining about the impact of the shrinkage on profits, warning that over time it could lead to store closures, staff retention issues, safety concerns and lower returns on investment.
All of these parties have urged passage of legislation they say will better equip law enforcement officers to fight the growing trend and catch those responsible.
What exactly is shrinkage? How is it different from retail crime and organized retail theft?
Here’s everything you need to know on the subject. CNBC gathered this information through interviews with trade associations, retailers, law enforcement officials and publicly available records, including securities filings, investigative data and transcripts of retail earnings conference calls.
What is a retail contraction?
When retailers use the word “shrinkage,” they’re referring to the difference between what should be on the balance sheet and what is actually in stock.
Shrink captures inventory loss from a variety of factors, including employee theft, shoplifting, administrative or cashier errors, damage, or supplier fraud.
For example, a retailer may have $1 billion in inventory on its balance sheet, but the count may only show $900 million in merchandise, indicating that it has lost $100 million in shrinkage.
But it’s hard to figure out how the items got lost. Shrunk can refer to anything from expired food to a broken pickle jar, from cosmetics that a cashier misdialed to a bottle of aspirin that was stolen and then resold online.
Lock items at Target stores in Queens, New York, to prevent theft.
Lindsay Nicholson | Universal Image Group | Getty Images
The contraction, which includes shoplifting and organized retail crime, cost retailers $94.5 billion in 2021, up from 2020, according to a 2021 study by the National Retail Federation using data from 63 retailers. $90.8 billion. This is the latest available data.
The companies surveyed estimated that retail theft accounted for 37 percent of these losses, employee or internal theft 28.5 percent, and process and control failures 25.7 percent. Unknown losses and other sources account for the remainder.
However, these figures are mostly estimates because it can be difficult for retailers to figure out if an item has been stolen, lost or lost for other reasons. It’s not like thieves are going to tell retailers what they’re taking.
Retailers with commercial property insurance can cover unforeseen losses, such as theft, depending on the policy. It’s unclear which retailers have such insurance and, if so, how much it covers.
Which retailers cite shrinking and retail theft as problems?
Over the past few years, retailers have blamed retail theft, shrinkage and organized retail theft for lower-than-expected profits. The problem didn’t go away this earnings season.
in May, Target, dollar tree, The Home Depot, TJ Max, Cole’s and locker All cited shrinkage, retail theft, or both as reasons for lower profits or lower gross margins.
Target lost about $763 million in shrink last fiscal year and said it expects the drawdown to cut more than $1 billion in profits this fiscal year.
Foot Locker said deep discounting and an increase in retail theft contributed to a 4 percentage point drop in its profit margin in the first quarter compared with a year earlier. The hit to merchandise margins was “driven by higher promotions,” the company said. It’s unclear how much retail theft affected the results, or whether promotions were the main reason for the lost profits.
Home Depot said its gross margin declined slightly due to “increased pressure from contraction.”
in the past, walmart, Best Buy, walgreens, Lowes and CV Both cited shrinkage and retail theft as a problem.
In January, Walmart CEO Doug McMillan told CNBC that theft was “higher” than it had historically been. “If the situation is not corrected over time, prices will be higher and/or stores will close,” he said.
Still, others say the problem has stabilized.
Best Buy, which has previously spoken out about retail theft, said the level of contraction had stabilized at pre-pandemic levels. The company said its stores were secured against theft because of the expensive electronics it sells.
In January, Walgreens Chief Financial Officer James Kehoe said the company’s concerns may be overblown after contraction plateaued over the past year.
“Maybe we cried too much last year,” Kehoe said on an earnings call with investors.
Sales shrunk by about 3.5% last year, Kehoe said, but that figure was closer to the “mid-range” as of January. He also said the company would consider not hiring private security.
What is organized retail theft and how is it different from shoplifting?
The Homeland Security Investigations, the main federal agency dealing with organized retail theft, defines the activity as “the joint act of two or more persons, through theft and/or fraud, as part of a criminal enterprise, to unlawfully obtain, from a retail establishment, an items of value”
The NRF defines organized retail theft as “the large-scale theft of retail goods with the intent to resell them for financial gain.” It typically involves a multi-layered criminal enterprise, the trade group said.
At the bottom are boosters, who are people who steal from shops. They then hand those items over to Fencer, who pays the booster for a fraction of the product’s cost.
A group robbed a jewelry store in what law enforcement says was an organized retail theft
police handout
Fencers then resell these items. They often sell their wares online, at informal street markets or even at other retailers. Sometimes, products are exported abroad.
The line between organized retail theft and shoplifting can be blurry, but They are distinctly different.
Organized retail theft involves larger criminal enterprises. Traditional shoplifting is usually based on need or for other reasons that don’t involve working with others to carefully resell merchandise.
An example of retail theft or shoplifting might be a teenager stealing a T-shirt or a poor person stealing food.
What is the impact of retail theft? Why is it so serious now?
Shoplifting and coordinated theft are ancient crimes, but many experts say organized retail theft has grown with the rise of online shopping, allowing groups to reach more customers.
In the past, fencers often unloaded their loot at informal venues such as flea markets or disreputable small retail stores.but with With the rise of online marketplaces, criminal groups now have access to a wide range of consumers.
E-commerce has become the main way consumers shop after the Covid-19 pandemic led to widespread store closures and lockdowns, leading to an increase in organized retail theft, some experts say.
“With Covid, more consumers are shopping online than in stores, so criminals are getting more profit from their illegal activities, so that’s only going to exacerbate the problem,” Lisa LaBruno Says Senior Executive Vice President The Retail Business of the Retail Industry Leaders Association.
“It goes all the way back to a lack of accountability and the huge profits criminals make because they can hide behind computer screens,” she said.
Organized retail theft has also increased because it is less risky than other criminal activities such as armed robbery or drug dealing.
For example, New York charges petty larceny when an individual steals merchandise worth less than $1,000. If convicted, the defendant faces up to a year in prison. But in addition to restitution, they can get probation, community service and fines.
Also, thanks to recent criminal justice reforms to the state’s bail laws, people charged with petty theft in New York are almost always released automatically after arrest.
In contrast, armed robbery is a felony in New York and carries far harsher penalties.
Manhattan DA Alvin Bragg is pictured during a news conference related to reducing shoplifting in Manhattan, New York, Wednesday, May 17, 2023.
Barry Williams | New York Daily News | Getty Images
Supervising Special Agent in Charge John Willis, who is part of the Organized Retail Theft Task Force in Homeland Security Investigations’ Charlotte field office, said the people he arrested for the practice used the low-risk nature of the crime as a way of committing the crime. the cause of the crime.
“When I first came to Charlotte, I arrested people who were drug dealers and violent criminals before they committed (organized retail crime) offenses and they spent time in state and federal prisons. for a period of time, for violent crime and drug dealing,” Willis told CNBC.
“They just say, ‘I’m making more money. If I get caught, nothing will really happen to me.’ So they come out and say, ‘We learned our lesson, let’s not use drugs to hurt people, let’s Start stealing,'” he said.
Additionally, many retail security guards take a “hands-off” approach when they witness a theft, added Special Agent Willie Caswell, who is part of the same task force. Security guards are often instructed to call law enforcement as soon as they notice a theft.
“If the booster knows he can go in, he can rip them off, and he doesn’t run into any type of resistance while he’s doing it, then of course his risk versus reward goes up. He knows that’s where he needs to be. . He doesn’t have to steal this from someone’s backyard, he could get shot. He knows he can get into the store, he can rip them off,” Carswell said.
Which items are often stolen?
The most common items stolen by organized theft gangs tend to be the items shoppers need most.
When consumers are in the amazon and eBayIt is highly likely that certain items came from organized theft groups.
Law enforcement sources told CNBC that over-the-counter medications are by far the largest category of items stolen and resold online, while allergy medications are the largest subcategory. The sources requested anonymity because they were not authorized to speak on the matter.
A customer makes a purchase at a Walgreens in Niles, Illinois.
Tim Boyle | Getty Images
In 2022, one retailer lost just $2.9 million worth of allergy medication, the sources said.
Consumers should be cautious about buying Zyrtec, 60 or 90 tablets, Allegra and Claritin when shopping in online marketplaces. Other over-the-counter medications that may have been stolen included Prilosec, Nexium, CQ10, Advil, Tylenol and Prevagen, the sources said.
Face creams are also currently being targeted, including products from drugstore brands such as Olay, Neutrogena, Roc and L’Oreal, the sources said.
– Supplementary report CNBC’s Melissa Repko