Retail theft up 19% year-over-year

Business owners beware: Shoplifters' activity is up, posing a threat not just to your bottom line but increasingly also to the wellbeing of your employees and customers.

Shrink, the commonly-used term for theft and other forms of inventory financial loss, exceeded $112 billion in 2022, up 19% from nearly $94 billion in 2021, according to a September 2023 study for fiscal year 2022 by the National Retail Federation and the Loss Prevention Security Council.

The theft problem is obvious, according to Ben Wolthuizen, an equity analyst who follows the retail industry for Cavanal Hill Investment Management, Inc. "People stealing is the one shrink variable that is appreciably on the rise—since we're not seeing greater instances of dropped merchandise or similarly traditional incidents," he said.

Most concerning are the news accounts and social media posts documenting losses due to organized retail crime (ORC). ORC is known for its group involvement and intent for resale or "fencing"—that is, selling goods at a profit. It is different from traditional theft done by individuals for personal consumption.

These easily consumable, sellable or portable goods are targeted most often by ORC groups:

Fashion accessories
Clothing
Electronics
Food and Beverage
Footwear
Health and beauty
Home furnishings or improvement
Infant care

Organized attacks have become more brazen in recent years. Nearly 90% of retailers reported that incidents have become more aggressive year-over-year, with 35% reporting that violent thefts are more common than before, according to the NRF study.

Houston, Denver, Albuquerque and Dallas-Fort Worth ranked among the top 11 cities affected by ORC in the last two years.

Since some ORC incidents involve weapons, many retailers are taking a more hands-off approach than they used to, said Kati Christ, corporate banking manager at Bank of Oklahoma. Retail clients tell her they are prioritizing the safety of their associates and the risks to innocent bystanders, be they employees or customers.

Tracking the 'shrink'

Shrink is a broad category and not limited to highly visible ORC theft acts. It includes:

External theft, non-employee in nature, and inclusive of ORC or smash-and-grab events, 36%.
Internal theft, largely involving employees, 29%.
Process control failures and errors, which are largely operational or systematic, 27%.
Other/unknown – to include expired goods, spillage, waste or vendor related, 7%.

Shrink often appears on the company's income statement within Cost of Goods Sold (CGS) and reduces inventory value on the balance sheet. For 2022, it represented 1.6% of retail sales.

Given the mixed-element nature of shrink (which often excludes ecommerce and supply chain-related losses) and its opacity within financials, a number for theft is difficult to pinpoint, said Wolthuizen. "It's hard to find on financials," he said. "Theft is booked at an item's cost, not sell price. It can get lost in inventory adjustments or may appear within quarterly numbers of a 200-page 10K report, which lags six to eight months anyway."

Retailers are also seeing higher insurance premiums, which some might deduce are a result of rising shrink losses, but that's not the case, according to Christ, whose clients include a high-profile retailer with locations in 48 states.

"Clients have told me that losses less than deductibles don't warrant filing a claim," she said. "It's the catastrophic property and liability losses, along with workmen's comp claims, that are behind the surge in premiums."

Although theft is impacting businesses of all shapes and sizes, the most significant shrink levels have been reported by publicly owned and highly visible big brands like Lowe's, Target and Dick's Sporting Goods. They've recently reported quarterly or annual shrink losses from $27 million to nearly $1 billion.

"Anecdotally, it's the companies who sell the $50 to $200 items that people want for discretionary reasons," Wolthuizen said.

Though shrink can have less financial effect than other business activities like poor merchandising, inventory write-downs and even reduced credit card revenue, its impacts are felt broadly, primarily through reduced gross margins and profitability.

Consequences for consumers and associates

The rise of theft and ORC has led to changes in operations and policies, and even life-altering results. Merchants have reduced store hours, initiated store closings (nine announced by Target in fall 2023) or directed employees to stay safe by taking a hands-off approach to obvious theft.

A rising number of NRF survey respondents, nearly 42%, now say that no employees are authorized to apprehend a suspect and are largely leaving that to contracted security personnel or off-duty police. In one instance, fashion retailer Lululemon fired two Atlanta associates who violated the company's zero-tolerance policy for intervening with an in-progress crime. At an Atlanta Walmart, local police will have an on-site workspace when the store reopens in 2024. It was closed due to arson that was set to distract from thieving.

Of concern to smaller business owners should be the "trickle-down" effect that perpetrators can impose on merchants by selling similarly handy and desirable merchandise. "Some big cities are completely ignoring victimless crime, not holding people accountable, even though they should be," Wolthuizen said.

The effects on consumers will be ongoing, he said.

“The only person who gets penalized is the everyday consumer in the form of higher overall prices. The people who pay are the people who pay.”

- Ben Wolthuizen, an equity analyst for Cavanal Hill Investment Management, Inc.

Ironically, security providers are benefiting from the uptick in crime, or even the perceived threats. Potential security upgrades include hiring security personnel or third-party observers, installing indoor and outdoor surveillance cameras, facial recognition software, enhanced employee training and body-worn cameras—which all add expenses for business owners.

Tighter security

Besides internal security efforts, retailers are increasingly partnering with local law enforcement and public policy officials for enhanced penalties, consistent law enforcement across jurisdictions and greater funding to deter or oppose the ORC element.

However rampant the crime level, a consensus among clients Christ spoke to is that they're looking to take action. She quoted one as saying, "We continue to have the best equipment and training we can provide our employees. We prosecute criminals in the jurisdictions we are able to."

Given shrink's growth and threats, business owners may consider allocating more budget to security or potential losses as their 2024 plans take shape.