The Supply Side: Retail shrink is more than theft, may be overstated

The media headlines in the past several months have featured retailers like Target, Dick’s Sporting Goods and Dollar Tree blaming retail “shrink” for poor financial results.

According to Brand Elverston, CEO of Bentonville firm Elverston Consulting, retail shrink is inventory loss that drains profits. Elverston spent 22 years at Walmart in asset protection, which deals with loss prevention.

He said it’s more than theft or organized retail crime that has some retailers closing stores, locking up products and discontinuing some products. Target was one of the first retailers to call out “shrink” this year; others have joined in. Target estimated that shrink would ding its earnings by $1.2 billion this year and recently announced the closure of nine stores because of theft.

Walgreens also sang a similar tune but has since dialed back the rhetoric, saying that theft was likely overstated. Meanwhile, Lowe’s CEO Marvin Ellison noted that better-staffed stores with well-trained personnel to help customers better is his answer for addressing shrink.

In a recent report, the National Retail Federation (NRF) noted that the average shrink rate in fiscal 2022 increased to 1.6% from 1.4% the previous year. Shrink percentages can vary significantly by retail segment. On par with previous years, internal and external theft accounted for nearly two-thirds (65%) of retailers’ shrink, the trade group said. From its annual survey, NRF reports shrink totaled $112.1 billion in retailer losses last year.

NRF gets its data from an annual survey that retailers complete. Elverston said he completed the survey for Walmart for two decades, and the data is a best guess because retailers only count their inventory once a year. They need to monitor their on-hand inventory regularly. He said that even with all the technology Walmart and large retailers have, they do not have a granular view of their inventory at any given time.

Elverston does not believe theft accounts for 65% of shrink, saying it’s more likely around 50%. He said shrink losses can vary from store to store. The NRF calculation at 65% is 65 cents out of every $1 of sales. He said each retailer and every store gets their annual “shrink” figure after the inventory count that a third party does. Even at the 65% rate reported by NRF, Elverston said the year-over-year increase was 0.2%, a slight overall increase compared to the number of headline reports from retailers this year.

Elverston said theft is a part of shrink, but so are the under-reported accounting errors that start from creating a retailer purchase order. He said mistakes can happen at the manufacturer who ships the wrong number of widgets. Some transportation carriers take the product to retailer distribution centers or cross docks, and no one is counting the items along the way. The retailer will drop the order at the back door of a store, and most retailers only do random item counts. According to Elverston, most products entering the retailer’s backroom are not counted.

Shipment shortages are an area where shrink occurs, and it’s not detected until the retailer’s year-end count against the point of sales data. Retailer mark-downs of perishable goods are another area where shrink occurs.

Elverston said shrink has been part of retail since its origins. He said perishable goods managers who do not accurately remove the tossed goods from the inventory count will show shrink losses at year-end. Elverston said retailers who manage their inventory well, execute at the store level and adequately staff their stores will have less shrink, less theft and fewer purchase order mistakes.

Elverston said shrink increases are typically cyclical. He said the rise in shrink some retailers are reporting is likely tied to the massive changes in operations brought on by the pandemic. He said stores that were allowed to open reduced their hours and had fewer employees cleaning stores and counting customers. Fast forward to 2023, and retailers have primarily not staffed their stores back to pre-pandemic levels partly because they survived with fewer people and profited during the pandemic.

“A well-staffed store is a theft deterrent,” he said. “But what is happening is some retailers are locking up products behind glass for items desired by thieves, and that’s a pain for the 95% of honest shoppers who want to go to the store to make a purchase. They now have to wait for someone to open the case, and it’s easier to order one online from their phone from Amazon while they are waiting,” Elverston said.

Adding cameras to aisles and self-check areas is another retailer’s attempt to deter shoplifters. However, most times, the cameras recording shoppers’ activity are not being monitored by anyone. Elverston said thieves know it, and that tactic won’t likely stop them.

“Have we arrived at our 2023 Asset Protection/Loss Prevention Sputnik moment? Will today’s troubling state of affairs precipitate real change, real investment, and real leadership in risk-mitigation solution R&D, or will we hope for the best and lock up some merchandise, temp-hire a few off-duty police officers, hang a few signs and cameras, create a few bewildering PowerPoint decks and checklists and call it good?” Elverston noted in a recent social media post.

He told the Northwest Arkansas Business Journal that the retail industry has a golden opportunity for seriously disruptive change, which will take investment and a culture shift from the C-suite down. Elverston said Lowe’s is a retailer benefiting from a strategy shift and investment in people and technology to address shrink. He said other retailers looking to trim shrink should follow suit.

One area where the retail industry is focused is stricter laws for offenders. Elverston said the lack of enforcement of the laws on the books is one reason organized retail crime persists. He said if the state has a $1,500 threshold for felony theft, thieves will steal $1,499 worth of goods they can sell on secondary markets.

Secondly, he said retailers need to invest in next-gen solutions that work. Lowe’s did that with their Project Unlock with power drills. The drills are not behind a glass case but will not work unless activated at the point of sale. Lowe’s uses new technology with its product manufacturer that combines low-cost RFID chips and IoT sensors to activate power tools at the point of purchase while creating a secure, publicly accessible and anonymized record of legitimate purchases on the blockchain.

Elverston praised this solution, saying Lowe’s also posted blunt signs in its stores and warned thieves the product wouldn’t work unless purchased. He said Macy’s is also using RFID technology to count and track its inventory in real-time, an investment others have not been willing to make.

Lastly, Elverston said top executive engagement must integrate risk management more effectively in all operational initiatives. He said Walmart CEO Doug McMillon and Lowe’s CEO Marvin Ellison are dialed into operational efficiency and are managing shrink with multiple strategies.

Elverston agreed that violent crimes around theft have escalated in recent years. He said the safety of staff and customers has become the No. 1 priority for retailers. He said Zero Eyes has technology available to alert stores and businesses that a shooter is within 150 feet of the building exterior. The technology detects a firearm, automatically calls 911 and alerts management before a shooter enters the building. Only schools and non-retail businesses have adopted the technology.

“Retailers are seeing unprecedented levels of theft coupled with rampant crime in their stores, and the situation is only becoming more dire,” said NRF Vice President for Asset Protection and Retail Operations David Johnston.

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 Firebend.