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Confused about SHRINK and THEFT

Opportunity, Motivation and Rationalization are the three factors contributing to employee theft. Or for theft in general.

People working in Retail are familiar with the terms "Shrink" and "Theft" and they can be big indicators used within the business but always in the context that we imagine. Often, I see them define "Theft" as the loss of goods by an external method such as shoplifting and "Shrink" as a result of perishable goods actually perishing while on the shelf.

But it is bigger than that, much bigger and if not truly mitigated dramatically increases your costs. For example, you sell a bottle of sauce for 1 dollar and make 10 cents on that sale, but you only sell one bottle per day. Now someone decides to steal a bottle of your sauce (no sale, no profit) it will take you 9 days of steady sales selling 9 bottles of sauce before you are back in a break-even position.

Self-Serve Checkout Staff Meeting

When I speak with organizations outside of retail and inquire if they have concerns about shrink and theft, I get the typical response that their product is not conducive to theft. Huh??? if people are willing to pay for your product, they that makes the product vulnerable for theft or at least components of it.

If you are on the shop in a manufacturing environment you will often hear about "Government" jobs, no not real jobs to support the government but rather a favour to help a peer or an executive. This is Theft we are diverting labor and perhaps materials to provide a solution. During a summer job while I was working at a sheet metal company that made enclosures during the night shift there operated a stealth business making fire pit screens, lots of them. Designs had been programmed into the CNC punch presses, the welders had plans and drawings, the material to make them was easily accessible ... the Theft Triangle lived until got caught:

  • Opportunity, little to no supervision and plenty of free machine time available.

  • Motivation, they were a cool design and many people wanted one and the price was right

  • Justification, we have the time, and nobody will miss the material.

Not many of us that have worked in Manufacturing can look in the mirror with a clean conscience and say they did not benefit of a "Government" job or participated in one.

Every Day in the News we hear stories about Thefts, brazen thefts, but I am sure we feel sorry for the victims while calming ourselves that it will never happen to us, perhaps not but we still need to become aware and diligent.

Read on to hear about how Retail deals with the topic and then look at it through your lens and apply it to your business to see are you vulnerable.

While the bulk of shrink is internal, industry groups and individual retailers have maintained a spotlight on outside theft, and law enforcement and politicians are under pressure to respond to mounting complaints. Alarming videos of often violent, smash-and-grab incidents at stores have gone viral. But their impact in terms of frequency, scale and financial loss isn’t well known. 

“Theft has increased and is becoming more of an issue in some locations. It also seems to have become more brazen, which poses a risk to staff,” Global Data Managing Director Neil Saunders said by email. “Retailers are eager to point this out. I think some are frustrated that more is not done to punish gangs and shoplifters.”

as we resolve one issue with technology it creates a completely different problem sometimes bigger than the one, we tried to resolve. As readers, you know that I am not a fan of self-checkouts. I loved a post I read recently where a shopper took his cart of goods through the cashier and total came to $587.00, however not happy with that amount he decided to get a second opinion and scanned them through a self-checkout where that total became only $87.00. I know it was meant as a joke, but i think it happens more often in reality than we think ...

Here are other issues that complicate the discussion of shrink and retail theft.

1. Self-checkout is an inventory sieve.

Lost merchandise from self-checkout causes more shrink than organized retail crime in many stores, according to Congressional testimony last year from CCIA’s Wagener. A 2022 study from the University of Leicester in England estimated that self-checkout in the U.S. and elsewhere causes between one-fifth and nearly one-quarter of all unknown store losses.

There may be various reasons for this. New technologies designed to foster convenience can sometimes also make things easier for thieves. Button starters made it easier to steal cars, for example, and self-checkout tech has similarly enabled theft from stores, according to Lawlor. Losses come from clumsy customers accidentally failing to scan an item as well as outright stealing, Wagener told Retail Dive.

“Increased staffing is absolutely one of the top three or four things that you should almost immediately do to combat theft. Higher prosecution is maybe number 10 on my list.”

Lee Peterson EVP of Thought Leadership and Marketing, WD Partners

Plus, a store with fewer workers can be encouraging to thieves, Lawlor and others said. Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, has decades of experience in retail, including once managing stores. Reducing store staff gives potential thieves the edge in the age-old “cat-and-mouse game” of theft deterrence, he said by phone.

“Retailers are faced with less traffic and their stores have just not been as profitable as they were the previous 15 years or even 30 years, really. And so to make them more profitable, the first thing to go is payroll,” he said. “Increased staffing is absolutely one of the top three or four things that you should almost immediately do to combat theft. Higher prosecution is maybe number 10 on my list.”

Unlike the high-profile smash-and-grab incidents that can net thieves tens of thousands of dollars' worth of goods at a time, self-checkout theft is often unseen and, per incident, possibly less lucrative. But nearly 40% of all thefts within grocery stores occur at self-checkout, which last year became the dominant checkout format in the segment, according to reports from sister publication Grocery Dive.

“There’s a premium on automation, so a lot of the checkouts are self-checkout, which is very logical,” Lawlor said. “But one of the downsides of that is you have fewer and fewer people working the front of the store. So it’s easy just to walk around and through the door, and you don’t have to go by any person to do that.”

In September, Costco CFO Richard Galanti blamed a small uptick in shrink a few years ago to the company’s rollout of self-checkout, and said that, at that point, shrink was up by less than a basis point. Last year Walmart pulled self-checkout from at least two stores in New Mexico, according to the Albuquerque Journal, joining several retailers in scaling back or rethinking self-checkout.

2. Employees steal more goods and money than any other type of theft.

Theft by employee's accounts for nearly a third of all shrinks, and the NRF considers it “just as concerning for retailers as other forms of theft. Employees have more access to merchandise and monies; more control over security measures and processes; and opportunities not available to outsiders,” according to its report. 

Costco enjoys below-industry shrink rates, and has attributed that to its store layout, limited entrances and membership model, as well as its higher wages, which the company said leads to higher employee satisfaction and lower internal theft.

After implementing RFID sensor technology to detect theft, Macy’s discovered that even some longtime employees were stealing, including someone who had worked there for more than six decades, according to Joe Coll, Macy’s vice president of asset protection operations and strategy.

“I like to think they were not stealing for 62 years,” Coll said during a presentation at the NRF’s conference this month. “But they were stealing from us, and they had been working for us for 62 years.”

Employee theft and process errors are major worries for retailers, accounting for nearly two-thirds of total inventory loss.

The top reasons for shrink in 2022, according to the National Retail Federation

By contrast, an emptier store — where workers are fewer and farther between, lower paid and less satisfied — may be more vulnerable to theft by both customers and employees, according to Lawlor. Especially if it’s a chain that seems disconnected from the community, he said. In 2022, the average reported dollar loss from employee theft (including merchandise theft, refund fraud, cash theft or passing merchandise to friends) was $2,180, in line with 2021 and 2020 levels, according to the NRF’s report. 

“In the good old days, a lot of stores were family-owned, the owner was right there,” he said. “You knew them or the family, you had a personal relationship, or you might just feel more of an obligation and be protective of the inventory and the business. So all this kind of builds upon itself.”

3. Shrink isn’t the biggest hit to margins, even at retailers citing it as a major problem.

In recent quarters, more executives have proactively mentioned shrink and/or theft or been asked about it. In August, Dick’s Sporting Goods said shrink is an “increasingly serious issue.” In May, Ulta said it would lock up some merchandise to combat theft, later reporting that it paid off

Target has repeatedly pinpointed its issue in concrete terms. Last year the retailer cited theft as the reason for closing nine stores, although some of those landlords disputed that, saying Target provided other reasons for the closures, according to Bloomberg’s reporting. Moreover, crime rates were much lower at stores that Target closed than at those it has kept open, even at locations near the closures, according to a report from CNBC. 

In November, Target executives said that shrink losses would end the year better than expected, though still probably worse compared to 2022.

Markdowns, inventory impairment, fulfillment costs and other factors outpace shrink in their impacts on gross margin at Target.

Target is seeing bigger margin hits from e-commerce fulfillment and markdowns. In its 2022 annual report, the retailer said its gross margin fell to 23.6% from 28.3% in 2021, with shrink contributing 0.7% to the decline. That’s less than the impact of fulfillment of online orders and supply chain issues (a 0.8% hit) and merchandising issues including higher clearance and promotional markdowns, merchandise costs and freight costs (3.4%).

4. Many related costs are not factored into shrink or theft reports.

Target said it lost sales in the second quarter after it removed Pride merchandise and altered some displays when people destroyed items and put store workers at risk. 

The expense of cleanup or repair after theft or vandalism aren’t accounted for in shrink or retail theft statistics, according to CCIA’s Wagener. It’s possible that the financial consequences of theft are up significantly, even if actual crime rates or shrink levels aren’t. There also may be costs from preventive measures like beefing up security personnel or technology.

“A smash and grab can impose economic costs an order of magnitude larger than the inventory loss that occurs,” he said. “We don’t think that the amount of goods being taken is actually changing much. There’s a possibility that could be consistent with what we’re hearing from retailers, which may not actually indicate a rise in shoplifting or theft, but a shift in tactics that could impose larger economic costs on retailers. As far as I know, that’s not being measured in any systematic way.”

5. The threat of violence is a major risk that complicates loss prevention.

The prevalence of guns in the U.S. makes confronting thieves in stores potentially deadly, complicating retailers’ approaches to loss prevention, according to a number of crime and retail experts. 

“It’s scary — a guy could brandish a gun, so some stores have a policy that, if somebody’s stealing something, let them go, don’t chase after them or don’t confront them,” Peterson said. “Thieves have figured that out in like five seconds.”

In August, Target CEO Brian Cornell told analysts that in the first five months of 2023, Target stores had a 120% increase in theft incidents involving violence or threats of violence. During an October press conference in Washington, D.C., following meetings with members of Congress, NRF CEO Matthew Shay said that organized retail crime is “not only about the dollars involved here, it is about, in some cases, the tragic loss of life, the violence, the aggression, that’s playing out in these retail locations.” 

The level of theft and violence impacts store workers and customers, hampers retailers’ ability to hire and retain workers and leads to worries about safety, the NRF said in its latest report. In 2022, the NRF said “the current climate of active assailants and gun violence add to retailers’ concerns about being able to keep employees and customers safe.”

According to the most recent research, retailers’ views around violence have actually tempered somewhat, but most still view it as a major risk, with 72.3% concerned about violence during a criminal act; 65.6% concerned about mass violence or an active assailant; and 65.2% concerned about guest-on-associate violence.

Given such worries, it’s understandable that the policy at most retailers is for staff to let shoplifting and other theft slide, Lawlor said. Still, that can embolden thieves and complicate any response from law enforcement, he said.

6. Cargo theft is an under-appreciated aspect of retail crime.

The NRF includes cargo theft within its assessment of organized retail crime. Cargo theft is escalating and is likely under-appreciated, according to supply chain risk management firm Overhaul. 

Cargo theft has been on the rise in the U.S. following the supply chain disruptions of the pandemic, Overhaul Intelligence and Response Manager Danny Ramon said by email. Losses can occur at various points in the supply chain, including invoice errors, warehouse losses or cargo theft, and aren’t always attributed accurately. 

In the U.S. and Canada in 2022, there were 1,778 supply chain risk events of various types, up 15% year over year, according to CargoNet, a network that collects and shares information with law enforcement and cargo theft victims. In 2023, incidents escalated, with the number in the second quarter up 57% year over year in the region, per CargoNet. 

In the U.S. alone in the second quarter of 2023, there were 132 cargo thefts, up 15% year over year, with an average loss value of more than $428,000 — up 55% from the previous quarter, according to Overhaul data.

“Discrepancies in inventory are often attributed to retail shrink or theft, but they may also be due to cargo theft,” Ramon said. 

we all work hard to improve processes to reduce cost and by reducing cost we can increase Value to our valid purchaser. Scrap reduction is a good way to increase value, but perhaps Theft and Shrink is another significant profit growth opportunity.

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