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Shoplifting has become such a problem that many stores lock up their wares. Above paints in an anti-theft cabinet in a hardware store.
Alami
Theft in shops is on the rise, but companies are fighting.
Goal
(ticker: TGT) sent a shock wave through the industry last earnings season when it estimated that inventory shrinkage — the industry’s expression for missing inventory — would cut profitability by $500 million. At least eight other retailers, including
DIY store
(HD),
walmart
(WMT),
Money tree
(DLTR),
TJX Cos
.
(TJX), and
Ultimate beauty
(ULTA), followed suit, citing higher shrink in their most recent earnings call.
“The contraction was the thing that surprised us in the quarter, and that’s really the driver as we think about the operating margin adjustment for the year,” Scott Settersten, Ulta’s chief financial officer, said while speaking with investors in May. Ulta lowered its operating margin guidance for the fiscal year.
Shoplifting is nothing new, but in recent months theft has become more “brutal and more common,” said Greg Portell, lead partner at retail consultancy Kearney.
The National Retail Federation estimates that shrinkage accounted for nearly $95 billion in losses in 2021, up from $90.8 billion in 2020. While shrinkage includes a variety of inventory loss, including theft from customers and employees, clerical errors and damage, theft by organized retail crime drove the 2021 surge, the NRF said. The groups behind this type of crime consist of professional shoplifters who resell stolen goods at lower prices, often on third-party marketplaces, which became more common after the rise of e-commerce in the pandemic era.
With theft eroding margins and impacting employees and customers, retailers are now on the offensive and looking for ways to address the problem.
“I think the biggest challenge the retail industry is facing right now is the ability to keep their stores profitable, but more importantly, keep their employees and our customers safe. And I think that’s actually been the real turning point,” said Deborah Weinswig, CEO of retail research firm Coresight Research.
Some companies are trying to avoid the problem by closing stores in places with higher shrink rates. Those who continue to invest in new strategies to avoid loss. According to a recent survey conducted by the NRF, nearly half of retailers said their theft prevention budget increased in 2022 compared to the previous year.
An approach is what
Money tree
CEO Richard Dreiling mentioned “defensive merchandising” during a May call with investors. This strategy is what shoppers are most familiar with: packing perfumes or razor blades in plastic boxes, tying electronics to shelves with metal cords, or locking items in clear drawers that only employees can open.
Retailers have also expanded their security teams and hired private security firms or off-duty police officers. Nearly 40% of retailers said they will hire more people for their loss prevention teams by 2022, the NRF found. Some companies are also doubling down on policies that prevent store employees from coming into contact with shoplifters to reduce instances of potentially violent encounters. (
Others invest in theft detection technology.
DIY store
,
for example, is spending more on machine learning and data analytics tools to identify which regions or product categories are most at risk, CEO Edward Decker said at the company’s annual shareholder meeting in May.
One of the most popular loss prevention technologies is RFID, which uses radio waves to identify objects tagged with special readers. This is especially useful for tracking valuable items, says Matthew Guiste, Global Retail Technology strategist at Zebra Technologies. AI-based video analytics software is another popular tool as it helps retailers identify repeat offenders or potential threats at checkouts or parking lots.
Businesses are also lobbying legislators at both the local and national levels to pass rules that make it easier to prosecute organized retail crime. Many retailers, including Home Depot, support the Combating Organized Retail Crime Act, a bipartisan bill making its way through Congress that would allow federal law enforcement to become involved in the prosecution of retail organized crime groups. Last year, the Biden administration asked Congress to pass legislation encouraging online marketplaces to curb the sale of stolen goods on their platforms.
It will take some time for any of these new theft reduction strategies to show up in the bottom line. In fact, the costs of implementing them can weigh on profits in the short term.
Walgreens Boots Alliance
(WBA) chief financial officer James Kehoe said in January that the company spent “a fair amount” on theft prevention in 2022, which could have led to the “disconnections” in higher spending on selling, general and administrative expenses in that quarter.
“Maybe we cried too much last year,” Kehoe said, adding that the company took a step back from spending so much on security.
But the investment helped. In January, the company’s inventory decline was about 2.5% of sales, up from 3.5% a year earlier, he added. from Baron has previously reported that having a strong inventory reduction strategy in place companies such as
Costco wholesale
(COST) a competitive advantage.
“If employees and consumers don’t feel comfortable going into a store, it will have a dramatic impact on the bottom line,” said Kearney’s Portell. “So retailers will have to deal with it — or close shop.”
Write to Sabrina Escobar at sabrina.escobar@barrons.com
