The Supply Side: Theft continues to take bite out of retail profits

Theft continues to plague retailers, and while not a new problem, it is a persistent bottom-line threat. The retail industry is poised to lose $100 billion this year due to retail theft and cost the average household $500 from higher prices, according to the National Retail Federation.

Retail shrinkage escalated during the pandemic, and now it’s being fueled by inflation and rising economic fears, according to the Loss Prevention Research Council. Walmart CEO Doug McMillon said during a recent earnings call that theft was a growing problem.

“It’s higher than what it’s historically been,” he said. “We’ve got safety measures, security measures that we’ve put in place by store location, and good relationship with law enforcement plays a big part of Walmart’s strategy.”

Walmart has more than 100 million shoppers in its U.S. stores weekly. McMillon said if the rising store theft doesn’t correct itself, prices will be higher, and stores could close. Walmart U.S. CEO John Furner recently said shrink has been challenging for Walmart and the entire retail industry. He said Walmart is going to actively manage this issue and take steps that are reasonable and required to ensure customers, employees, assets and inventory are protected.

“We know a lot of communities have been affected by this, but it’s also important to note that retail can’t solve this issue all on its own. It’ll take communities stepping up and enforcing the law to be able to bring this issue back under control,” Furner said.

Target CEO Brian Cornell recently said the theft would lower net income by $500 million this year. This comes on the heels of a $700 million profit hit last year from retail shrinkage largely due to organized retail crime and theft.

“The unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry. And when products are stolen, simply put, they are no longer available for guests who depend on them,” Cornell said on a recent earnings call with reporters. “Left unchecked, organized retail theft crime degrades the communities we call home. As we work to address this problem, the safety of our guests and our team members will always be our primary concern. Beyond safety concerns, worsening shrink rates are putting significant pressure on our financial results.”

Scott Glen, vice president of asset protection at Home Depot, said the building goods retailer is fighting back. He said organized retail crime has gotten worse in recent years, and it’s not going away.

“We are a big victim and are going after it aggressively. The online aspect is out of control. While it does drive growth in the consumer side of the business, it also provides anonymous ways for people to resell products that were either taken from our stores, diverted through our supply chain, or counterfeited as one of our private brands. Online provides a whole different level of challenge for the asset protection world,” Glen said in mid-2022.

He said Home Depot has large stores with lots of doors in and out which makes it a prime target. He said the company also watches for internal theft with multiple safeguards in place. Home Depot has also invested in technology like locking smart carts, motion sensors, locking metal barriers and advanced RFID (radio frequency identity) tags on power drills and other mechanical tools often targeted by thieves.

Lowe’s also recently talked about the problems with retail shrink, saying the levels of theft increased massively during the pandemic. Lowe’s also recently launched “project unlock” similar to the RFID technology used by Home Depot. Just like with gift cards, the products must be activated at the point of sale to work.

Lowe’s loss prevention executive Scott Draher said having to activate the product before it works is the most promising deterrent. In the manufacturing process, a manufacturer embeds a wireless RFID chip into a powered product such as a drill or power saw. The tag is preloaded with that item’s unique serial number — which is also embedded in the box’s barcode — and the product is set to inoperable. At the store, a customer takes the product to the register, gets the barcode scanned, and pays. A point-of-sale RFID scanner reads all tags in range, finds the tool with the correct serial number, and writes a unique secret key value that activates the tool for use. Only products legitimately purchased are activated. If a power tool is stolen, it won’t work, which makes it less valuable to steal, Lowe’s notes on its website.

Other ways retailers are trying to deter theft include putting high-risk inventory behind locked plexiglass panels, installing motion-sensing monitors, placing security cameras around the stores and parking areas, and hiring more security guards to work inside the stores.

The Loss Prevention Research Council reports 53% of surveyed retailers said they reduced in-store products because of theft, and 38% said they had reduced store hours. A whopping 77% said they were locking up some products, while 21% said they had closed stores.

Store closures are a last resort for retailers. But areas like San Francisco continue to see retailers pull up stakes and leave the city in part because of theft and organized retail crime. Walgreens, Amazon, Abercrombie & Fitch, Nordstrom, Office Depot and Saks OFF 5th are among 17 retailers closing stores near Union Square in central San Francisco over the past two years.

Nordstrom said in January the cost of increased security, along with high rents and incidents of looting had forced it to close stores and open stores in lower crime areas outside metro San Francisco.

The Loss Prevention Research Council reports 71% of retailers said retail crime had increased in the past two years. That rose to 100% of retailers operating in California, Maryland, New Jersey and Pennsylvania. Retailers said 40% of stores in Arkansas had seen higher crime in the same period. The report also found the crime often goes unreported to police. In Arkansas, the report estimated 30% of thefts go unreported. That rose to 50% in Oregon and nine other states. The biggest reason retailers said they don’t report theft is because the police will not respond and jurisdictions won’t prosecute.

The Retail Leaders Industry Association said it’s in a community’s best interests to deter crime and prosecute thieves because retail theft costs federal and state governments nearly $15 billion in lost sales tax revenue annually.

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.