Organized Retail Crime: How Theft Impacts Retailers and the Challenges of Measurement
Introduction
This article is part one of a three-part series on organized retail crime. The following sections will explore the impact of theft on retailers’ profitability, the difficulty in verifying retailers’ claims, and the lack of transparency surrounding the issue. Make sure to check out parts two and three later this week for more insights.
Retailers’ Increasing Focus on Organized Retail Theft
Retailers, including Target, Dollar General, Foot Locker, and Ulta, have identified organized retail theft as a major concern that affects their profits. However, accurately quantifying the impact of stolen goods on their bottom lines is challenging and confirming their claims is even tougher.
The Connection Between Retail Theft and Lower Profits
In their financial earnings reports from May and June, many retailers attributed their profit outlook cuts or lower margins to retail theft. They often lumped organized theft with heavy discounting, soft sales, and macroeconomic conditions as factors affecting their profitability.
Although organized retail theft is a genuine concern, verifying the claims made by retailers is nearly impossible. Companies are not obligated to disclose their losses from stolen goods, making it hard to accurately count and track this metric. As a result, industry stakeholders, investors, and policymakers have no choice but to rely on retailers’ word.
Understanding Shrink and Its Measurement
Shrink is a term used in the retail industry to refer to lost inventory. It can result from various factors such as shoplifting, vendor fraud, employee theft, administrative errors, and inventory damage. While retailers often attribute shrinking to organized theft, they rarely provide detailed breakdowns of the exact impact of crime versus other causes.
Shrink’s Inclusion in “Cost of Goods Sold”
Retailers tend to withhold specific information about shrink as it is considered unflattering. Losses from shrink are typically hidden within the “cost of goods sold” category, affecting retailers’ gross margins. Retailers refrain from revealing shrink numbers due to the reliance on estimates and the potential negative perception it may create.
Disclosure Requirements and Reporting
Except for exceptionally large losses that may be material to investors, companies are not required to disclose shrink losses. This lack of transparency in reporting prevents accurate assessments of the problem’s severity and its impact on companies’ profitability.
The Rise of Organized Retail Crime and Data Limitations
Industry executives often claim that organized theft is on the rise, citing a study by the National Retail Federation (NRF) released in September. However, data on inventory losses in recent years, particularly from the first half of this year, are inconclusive.
The NRF’s Study and Its Limitations
The NRF study estimates that losses from shrink increased from $90.8 billion in 2020 to $94.5 billion in 2021, with 37% attributed to external theft. However, the data, anonymized and based on estimates, isn’t definitive. The study relies on participants reporting their inventory shrink as a percentage of sales, which averaged at 1.4% in 2021. The NRF then applies this average to total retail sales reported to the U.S. Census Bureau. It’s important to note that final retail sales figures were lower, resulting in estimated shrink losses potentially $600 million less than initially reported by the NRF.
The actual amount lost to shrink by American retailers in 2021, as well as changes over time, remain unknown. The FBI’s national crime data shows a steady decline in larceny offenses from 1985 to 2020, with most theft incidents occurring in homes rather than stores. However, the FBI’s statistics lack data from all law enforcement agencies, and many theft incidents, particularly those in retail locations, go unreported.
Measuring shrink has its challenges, with retailers relying on estimates and educated guesses to determine the causes of inventory loss. They consider factors such as sales patterns, inventory trends, historical data, and surveillance footage to infer theft. However, estimating the impact of stolen goods on profitability remains an imperfect science.
Target’s Example and the Difficulties in Calculation
Target’s estimation that it might lose over $1 billion from shrink this year highlights the difficulty of accurately measuring theft’s impact. Although Target attributes its inventory losses to organized retail theft, it acknowledges the challenges in calculating theft and shrink overall.
Target mentions “signals” that indicate rising retail theft, such as criminal justice reforms, news reports on crime increase, commentary from other retailers experiencing higher theft rates, and documented increases in violence and fraud. However, these trends and data points do not definitively prove that organized retail crime directly fuels Target’s losses.
Between 2019 and 2022, Target saw a nearly 100% increase in the total retail value of merchandise lost to shrink. The company associates this rise with a simultaneous increase in organized retail crime. However, Target does not provide a breakdown of all shrink sources and acknowledges that factors like damage and administrative errors contribute as well.
Complexity and Uncertainty in Shrink Measurement
Shrink remains an incredibly complex metric to track and measure, primarily due to its various causes and reliance on estimates. Retailers must infer theft based on anomalies in sales data, but it is challenging to determine precise numbers. As a result, accurately gauging the impact of organized retail crime on profits remains a difficult task.
