This earnings season, executives from Walmart, Home Depot, and Target all talked about the problem of inventory shrinking.
The only trouble isn’t porch pirates. Thieves are going right to where the goods are made.
US stores still have a lot of trouble with inventory shrinkage, which is the loss of items due to retail theft, organized crime, damage, vendor fraud, and other things. At least, that’s what big stores like Home Depot (HD), Target (TGT), Walmart (WMT), and others said on their earnings calls last week.
Target CEO Brian Cornell said on Wednesday that the store has to deal with “an unacceptable amount of retail theft and organized retail crime.” Last November, Target’s CFO Michael Fiddelke said that missing items cost the store’s gross profit margin $400 million for the year.
Cornell said in the company’s Q2 earnings call, “Shrink in the second quarter was in line with our expectations, but well above the level where we expect to operate over time.”
“Shrink has gone up a little bit this year,” said John Furner, the CEO of Walmart US. Last year, it went up. It’s not the same all over the country.”
Theft in stores also hurt business margins. Ask anyone at Home Depot.
On the earnings call, Home Depot CFO Richard McPhail said that the company’s gross profit was 33% in the second quarter, which was down 8 basis points from the same time last year. This was mostly due to pressure from shrinkage. “Over the last few quarters and even the last few years, shrink has been a constant pressure. We do something about it every day.”
Retailers ‘not crying wolf’
The National Retail Federation’s (NRF) National Retail Security Survey found that retail shrink cost the business almost $100 billion in 2021, the last year for which data was collected. The price went up from $45.2 billion in 2015 to more than $100 billion.
David Johnston, the NRF’s vice president of asset security and retail operations, told Yahoo Finance, “I’ve never seen anything like what I’m seeing today.” “The stores are not making a false alarm. They are drawing attention to a big problem out there.”
The NRF says that it’s not just shoplifting that is a big problem. Organized retail crime and employee theft are also on the rise.
Violence is also a bigger problem. According to Cornell, in the first five months of 2023, thefts that involved violence or threats of violence rose by 120%.
Marty Andrews, vice president of loss prevention at VF Corporation (VFC), told Yahoo Finance, “The threat really starts when it leaves the warehouse and continues until it gets to the retail store.”
Black Law Enforcement Alliance director of political affairs and public relations and former NYPD officer Marq Claxton told Yahoo Finance that “successful outcomes for the thieves” are making the situation worse. Claxton expressed concern that burglars are “becoming more violent, more aggressive, and more frequent with more people.”
The situation received further attention this weekend after a “flash rob” at a California Nordstrom (JWN) left the criminals with almost $300,000 in items.
“They’re in a position now where these types of flash robberies, these smash-and-grabs — or they’ve been called’mobberies’ — are very lucrative and very successful for them,” Claxton added. Therefore, until measures are taken to lessen the impact of or counteract the current upsurge, these kinds of actions are only likely to increase.
Locked-up merchandise ‘a fine line’
The issue has negative consequences for both businesses and customers.
While it’s good that more stores are protecting their more expensive merchandise with plexiglass and cameras, these precautions aren’t without their drawbacks.
Doug McMillon, Walmart’s CEO, has stated that the corporation would rather “never lock anything up” because doing so is bad for business and hinders user participation.
What that does, Andrews says, is affect the customer interaction. Because of this, “it’s a fine line of how do you get that great consumer experience, but how do you protect your product?” “That’s why people are going to retail stores; they want to be around the merchandise; they want to touch it; they want to have those interactions.”
However, there are many who argue that these measures are essential.
While it’s true that locked goods can be an annoyance, “think of the opposite when the mother of a newborn tries to go get formula and the merchandise isn’t there because it was just shelf-swept,” NRF’s Johnston argued.
As businesses concentrate on preventable sources of shrinkage, Walmart’s McMillon noted that some governments need to do more to combat retail-related crime.
For instance, it has come to light that self-checkout machines are a leading cause of stock shrinkage. Customers have been seen to not pay for things in self-checkout transactions in several tests and publications, or to swap price tags for cheaper goods when scanning more expensive items.
However, the scale of theft via automated checkouts is not understood. Costco (COST) CEO Richard Galanti said in a May investor call that inventory shrink “fluctuated… 3 basis points up, really before COVID, as we rolled out self-checkout, and since then, it’s come back down a little bit.”
McMillon mentioned the correlation between large inventory and theft at the company’s annual meeting in June. The company reduced inventory growth by 5.54% annually.
But in the end, it will take a team effort to stop stealing.
Johnston remarked that “what we’re seeing today requires action on the part of the government, the community, the retailer, everyone… including the consumer.”
More than a dozen state attorneys general have established organized retail crime task groups to facilitate communication and cooperation between retailers and prosecutors, as reported by the Retail Industry Leaders Association (RILA).
In addition, in June 2023, Congress passed a law requiring the FTC to implement new baseline requirements for online marketplaces to collect, verify, and disclose certain information about high-volume third-party sellers. These sellers must have made 200 or “more separate sales or transactions of new or unused consumer products and $5,000 or more in gross revenues in any continuous 12-month period during the past 24 months.”
All online markets, from the smallest to the largest, where stolen products might be resold are under surveillance.
The FTC’s Bureau of Consumer Protection attorney Carl Settlemyer put it this way: “it’s sort of a running obligation… for the high-volume sellers.” He also said that users and platform administrators have a responsibility to report suspicious behavior and identify “bad actors who get through the net.”
“If you can take a designer handbag and resell it for 30% off online… the consumer has to be a little concerned about that,” Johnston said.
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