The Supply Side: Retail fraud, theft losses continue to rise

The United States may be out of the pandemic. Still, the effects of COVID-19 continue to reveal unforeseen impacts across the retail industry, with theft and shrink ballooning to nearly $100 billion problem for the industry, according to the National Retail Federation.

The NRF surveys retailers annually about loss prevention and security initiatives to draw attention to the ongoing trends in organized retail crime as well as shrink or unexplained loss of inventory. The 2022 study completed at the end of 2021 found that the average shrink for the retail industry was 1.4% last year. When taken as a percentage of total retail sales, that represents $94.5 billion in losses, up from $90.8 billion in 2020.

The survey found that COVID created more challenges for retailers. A reported 87.7% of respondents said the pandemic increased the overall risk for their organization. Again 89.3% of retailers specifically cited an increase in violence, and 73.2% reported more shoplifting, with 71.4% citing increased organized retail crime and employee theft as a result of the pandemic. The study cites labor shortages, employee retention and hiring challenges, masking and maintaining COVID precautions have also contributed to the rise in crime incidents year-over-year.

“The factors contributing to retail shrink have multiplied in recent years, and organized retail crime (ORC) is a burgeoning threat within the retail industry,” said Mark Matthews, NRF vice president for research development and industry analysis. “These highly sophisticated criminal rings jeopardize employee and customer safety and disrupt store operations. Retailers are bolstering security efforts to counteract these increasingly dangerous and aggressive criminal activities.”

Research indicates ORC groups target easily concealable, removable, available, valuable, enjoyable and disposable items. Crime experts said apparel, health and beauty, electronics, accessories, food and beverage, footwear, home furnishings, eyewear, office supplies, infant care and toys and the most targeted by ORC.

“Reducing instances of violent crime, particularly those affiliated with ORC, is a key priority among retailers because it directly and immediately impacts employees in numerous capacities,” said Cory Lowe, a scientist with the Loss Prevention Research Council. “In many cases, it is difficult to measure the full extent of these crimes without being investigated internally and in coordination with law enforcement.”

The survey also found that large and small retailers are trying to ramp up the number of loss prevention teams. At about $20 billion in revenue, retailers the size of Kohl’s have an average of 735 people in their organizations focused on loss prevention. The largest retailers like Walmart, Costco and Home Depot have an average of more than 2,000 employees working on loss prevention within their organizations. Roughly one-third of the retailers surveyed said they planned to add up to 10% more employees for loss prevention this year. Just 6% said they would reduce loss prevention staff by up to 10% in 2022.

The retailers taking part in the NRF survey were also asked to assess the skills they needed to strengthen their loss prevention and asset protection teams. A majority of 62.3% admitted they need better investigative capabilities, 44.3% cited a need for more cyber experts, and the same number said they could benefit from better leadership. A whopping 88.5% said they needed more analytics to help them better recognize and predict the threats.

While retailers are struggling with compressed margins, 44.5% said they were increasing their loss prevention budget this year over 2021. About a third of the group said the budget increase would be just shy of 10%.

Most of the respondents in the survey said they are spending more on technology and equipment such as cameras and artificial intelligence applications. One-third of the respondents said they were hiring more guards, and nearly 43% said they were spending more on employee education and prevention training.

On average, the survey found retailers attribute the most significant portion of shrink to external theft, including organized crime, at 37% of their losses. Employee theft represented 28.5% of the total shrink, and 25.7% blamed on process or control failures, including bad checks, fraudulent returns or fake coupon usage.

Crime experts say shoplifting and inventory shrink continues to increase annually mainly because of too few authorized loss prevention personnel to apprehend shoplifters and no dollar-value prosecution thresholds for either internal or external incidents. With fewer people watching, fraud continues to rise, with 69% of survey respondents citing higher in-store fraud and 61.1% indicating e-commerce fraud during the past year. Also, 53.9% said omnichannel fraud incidents were also higher in 2021 relative to 2020.

Cargo theft of products en route from a distribution center to a store increased, according to 47.4% of respondents. About 42% said they had cargo stolen at stores, and about one-third cited cargo being stolen en route from manufacturers to distribution centers, at the distribution center or third-party warehousing and partners.

More retailers are considering using radio frequency identification (RFID) tracking in supply chains, artificial intelligence at the point of sale with self-checkout video analytics, license plate recognition, and self-service locking cases or lockers for high-risk items like electronic games. About 40% of retailers in the survey said they used RFID technology in their loss prevention strategy.

Walmart said the smart recording cameras in its self-checkout corrals could detect the difference between items scanned and those in view of the cameras. For instance, if the shopper rings up a yellow onion and has a more expensive red onion or organic variety, the camera can detect it. The employee working in the area will be dispatched to the register.

Walmart and other retailers also have numerous cameras in their parking lots; some can capture license plate numbers. The company can use that tactic in addition to retailers with theft prosecution and loss prevention.

While numerous technologies are available to help retailers with loss prevention, the number of those actually using them to their full extent remains low. Only 14% said they use AI-based perimeter surveillance or face recognition technology. With more severe threats, just 7% said they have the technology to detect gunshots on the premises, and no retailer is yet using drones for surveillance or tracking purposes.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.