A year ago, America’s stores declared a shoplifting epidemic. They closed stores in major cities, hired extra security, locked up key merchandise and declared big losses in their financial statements.
This year, retailers are telling a very different story — or no story at all. It’s as if the shoplifting crisis suddenly vanished.
Take Target, for example.
Last year, Target said a scourge of petty theft and organized groups stealing merchandise dented its profit by more than $500 million. Target also closed nine stores, saying “theft and organized retail crime” threatened worker and customer safety and made business unsustainable.
But now, Target is sounding a different message as it gets a better grip on lost merchandise, known as shrink. (Shrink and theft are often used interchangeably, although shrink also accounts for inventory losses from employee theft, damaged and spoiled products, administrative errors, vendor fraud and other factors.)
“We’re ahead of where we expected to be in terms of progress on shrink,” Target chief operating officer chief Michael Fiddelke said on an analyst call last month.
Other retailers have also shifted. Many retailers’ merchandise losses have stabilized or improved, and chains have publicly dialed back their rhetoric. Mentions of “shrink” on companies’ earnings calls dropped 20% during the first two quarters of 2024 compared with the same period last year, according to an analysis by FactSet.
Shrink has been improving in large part because companies’ accounting of their merchandise has gotten more accurate.
At first, retailers underestimated how much merchandise they were losing. When they adjusted their metrics to compensate, they overestimated their original losses in some cases.
Stores have also added ways to prevent theft, which may have been effective at reducing the problem, even if they frustrated shoppers. Companies locked up products and removed self-checkout stations.
And retailers are getting more assistance from many local and state governments, which are devoting additional resources and passing legislation to crack down on theft and organized crime. In California, for example, Gov. Gavin Newsom last month signed legislation creating stricter penalties for retail theft, including longer sentences for large-scale theft rings and lower thresholds for prosecutors to charge people for felony thefts.
“Retailers talked about it a lot more and that called attention to the problem. That worked a little bit,” said Michael Baker, a retail analyst at DA Davidson.
The change in retailers’ messaging around shrink this year shows that their efforts to address the problems are working. But it also raises questions about how severe their shoplifting problems were in the first place.
Shoplifting became a highly-politicized issue coming out of the pandemic in 2020. Videos of thieves smashing store windows and grabbing merchandise rocketed across the news and social media. Stores locked up toothpaste, deodorant and other items. Former president and GOP presidential nominee Donald Trump called for shoplifters to be shot, and lawmakers in both political parties vowed to crack down.
But the narrative that shoplifting exploded nationwide has been mostly unfounded. In reality, retail crime has not meaningfully gone up nationwide in the past few years, and it has even gone down in many places.
Some retail analysts have suggested companies may have overblown the impact of shrink and theft to mask other problems. William Blair analysts last year suggested that chains had “overexaggerated” the impact, using it as an excuse for inventory mismanagement and strategic mistakes. Walgreens’ then-chief financial officer James Kehoe indicated last year that the company may have gone too far: “Maybe we cried too much” about theft and other losses, he said.
“It suggests that some of the alarm bells that sounded last year were false warnings,” Neil Saunders, a retail analyst at GlobalData, told CNN. “That’s not to say that there wasn’t an issue, just that the magnitude was exaggerated a little.”
There’s a reason, though, that it’s called “shrink” and not simply “theft.” It’s impossible for retailers to know the exact cause of every item they lose.
Their shrink rate — lost inventory as a percentage of sales — is their best estimate for items that go missing. The metric is the gap between products retailers physically have on-hand at stores and warehouses during an inventory check and what they purchased. Customer and employee theft drive roughly two-thirds of shrink, retailers estimate, on top of damaged or spoiled products, administrative errors, vendor fraud, and other factors.
Companies calculate their shrink rate based on a physical count of their inventory on hand, which most take once or twice a year, according to the National Retail Federation, a trade group for the industry.
Shrink dipped in 2020 as stores closed during the pandemic and customers shopped online.
When stores began reopening, retailers underestimated their shrink rate, Baker said.
When they took physical inventories in 2022, they were missing more products than they expected, so they increased their shrink estimate and took a steeper hit to profit.
The average shrink rate in 2022 for retailers increased to 1.6%, up from 1.4% in 2021, according to a National Retail Federation survey of companies. Still, that rate was in line with pre-pandemic levels. (The organization has not released data yet for 2023 or 2024.)
Helping reduce shrink: Many retailers have less inventory than they did in 2022 and 2023, when they loaded up on merchandise to meet consumer demand.
Total inventory levels, excluding autos, were down 1.3% in June, the 14th month in a row of annual declines, according to the latest data from the Census Bureau.
“If you have less inventory, you have less shrink,” Baker said.
But just because retailers’ shrink has gone down doesn’t mean theft or organized retail crime has gone away, David Johnston, the vice president of asset protection and retail operations at the National Retail Federation, told CNN.
Shrink is just one part of the story, he said, and does not factor in other concerns stemming from theft like violence against workers, physical damage to stores and customer and employee perceptions of store safety.
“Theft and loss can still be an issue even if shrinkage is leveling off,” he said.
In fact, the shoplifting rate during the first half of 2024 in major cities was 24% higher, on average, than the same period last year, according to a recent analysis by the Council on Criminal Justice, a nonpartisan criminal justice policy organization. The shoplifting rate in the first half of 2024 was also 10% higher than in the first half of 2019.
Ernesto Lopez, a senior research specialist at the Council on Criminal Justice and co-author of the report, cautioned that it was unclear how much of the change was due to an actual rise in shoplifting incidents or an increase in businesses reporting incidents to law enforcement.
Retailers have also taken several steps to minimize theft and prevent losses, such as such as locking up products behind glass cases, removing self-checkout stations and, in some cases, equipping workers with body-worn cameras.
Shoppers are frustrated by locked product displays, however, said Edgar Dworsky, a consumer lawyer and founder of the website Consumer World. They don’t want to flag down a clerk when a product they want to buy is locked up, and it’s harder to compare items and read labels in different cases, he said. An online survey of more than 1,000 Consumer World readers found that 55% said they try to buy a product elsewhere when the one they want is locked up.
Retailers are also working more closely with law enforcement and devoting more internal resources to fighting and investigating theft.
“We’ve seen positive progress in our continued efforts to address the growing problem of organized retail crime,” a Home Depot spokesperson told CNN. “It’s important to note that the environment around this organized and brazen criminal activity is not improving, but rather we are seeing our initiatives working.”
Ulta Beauty said that its shrink rate is flat from last year. On its latest earnings call, it said it has installed new fixtures to prevent small fragrances from being stolen, and it’s helping reduce losses.
“What we’ve seen over the last year plus is retailers have gone and added layers of security to reduce theft,” Johnston said.
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Publish date : 2024-09-12 23:00:00
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