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What are retail shrink and organized retail crime?

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For several years, the terms shrink, retail crime and organized retail theft have echoed from the mouths of politicians, police officers, trade groups and the country’s most prominent retail executives.

Politicians and police departments have sounded the alarm about rising retail theft, and are calling for stricter enforcement and prosecution to fight it. 

Trade groups and retailers have griped about shrink’s effect on profits, and warned it could lead to store closures, employee-retention issues, safety concerns and reduced investment returns over time. 

All of these parties have urged passage of legislation they say would better equip law enforcement officials to crack down on the growing trend and catch those responsible. 

What is shrink, anyway? And how does it differ from retail crime and organized retail theft?

Here’s everything you need to know about the topic. CNBC gathered this information using interviews with trade associations, retailers, law enforcement officials and publicly available records, including securities filings, survey data and transcripts from retail earnings’ calls.

What is retail shrink?

When retailers use the term shrink, they’re referring to the difference between inventory they’re supposed to have on their balance sheets and their actual inventory. 

Shrink captures the loss of inventory from a variety of factors, including employee theft, shoplifting, administrative or cashier error, damage or vendor fraud. 

For example, a retailer could have $1 billion in inventory on its balance sheet, but a count could show only $900 million in merchandise, indicating it lost $100 million in shrink. 

But it is difficult to figure out how the items were lost. Shrink could refer to anything from expired food to a broken jar of pickles, from cosmetics that a cashier rang up incorrectly to a bottle of aspirin that was stolen and later resold online. 

Locked up merchandise, to prevent theft in Target store, Queens, New York. 

Lindsey Nicholson | Universal Images Group | Getty Images

Shrink, including shoplifting and organized retail crime, cost retailers $94.5 billion in 2021, up from $90.8 billion in 2020, according to a 2021 study conducted by the National Retail Federation that used data from 63 retailers. That is the most recent data available. 

The companies polled for the survey estimated that retail theft accounted for 37% of those losses, employee or internal theft 28.5% and process and control failures 25.7%. Unknown loss and other sources accounted for the rest. 

However, those figures are largely estimates because of how difficult it is for retailers to figure out whether an item was stolen, lost or missing for other reasons. It’s not like thieves inform retailers about the merchandise they’re taking with them. 

Retailers with commercial property insurance can be covered for unforeseen losses such as theft, depending on the policy. It’s unclear which retailers have such insurance and if they do, how much it covers.

Which retailers have cited shrink and retail theft as a problem?

For the last couple of years, retailers have blamed smaller than expected profits on retail theft, shrink and organized retail theft. And the problem hasn’t gone away this earnings season. 

In May, Target, Dollar Tree, Home Depot, T.J. Maxx, Kohl’s and Foot Locker all cited shrink, retail theft or both as a reason for lower profits or hits to gross margins. 

Target lost about $763 million from shrink in its last fiscal year, and said shrink is expected to shave more than $1 billion off its profits in its current fiscal year.

Foot Locker said heavy discounting, and an uptick in retail theft, shaved 4 percentage points off its margins in the first quarter compared to the prior-year period. The hit to merchandise margins was “driven by higher promotions,” the company said. It’s not clear how big of an effect retail theft had on the results, or if promotions were the primary reason for the profit loss.

Home Depot said its gross margins fell slightly due to “increased pressure from shrink.”

In the past, Walmart, Best Buy, Walgreens, Lowes and CVS have all cited shrink and retail theft as an issue.

In January, Walmart’s CEO Doug McMillon told CNBC theft is “higher” than it has been historically.  “If that’s not corrected over time, prices will be higher, and/or stores will close,” he said. 

Still, others have said the problem has stabilized.

Best Buy, which previously spoke out about retail theft, said shrink levels have stabilized to pre-pandemic levels. Because of the pricey electronic goods it sells, its stores were already fortified against thieves, the company said.

In January, Walgreens’ Chief Financial Officer James Kehoe said the company’s concerns may have been overblown after shrinkage stabilized over the past year. 

“Maybe we cried too much last year,” Kehoe said on an earnings call with investors.

Shrinkage was about 3.5% of sales last year, but as of January, the number was closer to the “mid-twos,” said Kehoe. He also said the company would consider moving away from hiring private security guards.

What is organized retail theft and how is it different from shoplifting?

Homeland Security Investigations, the primary federal agency that tackles organized retail theft, defines the activity as “the association of two or more persons engaged in illegally obtaining items of value from retail establishments, through theft and/or fraud, as part of a criminal enterprise.”

The NRF defines organized retail theft as the “large-scale theft of retail merchandise with the intent to resell the items for financial…

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What are retail shrink and organized retail crime?

2023-05-31 12:35:14

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