Shrinkage is growing
panic! panic! panic!
Shrinkage is growing. Yes, you heard me right. Shrinkage is growing! It’s reaching unprecedented levels. If you don’t know what shrinkage is - now is not the time to ask. Now is the time to panic. Head for the bunker!
Okay, now that you’re in a bunker, here’s the deal. Shrinkage is a retail industry term that describes inventory that was lost or stolen. Anything which exits the store but not through checkout. Have you ever taken down a top-shelf bottle of olive oil just to feel, for a moment, what it would be like to have $48 to burn on olive oil? Then you drop it and you have to find a way to tell the store manager that you just created a ton of work for someone but also, like, you don’t plan to pay for it. That’s shrinkage. Also shrinkage is shoplifting. The US National Retail Federation estimates that about ⅔ of shrinkage comes from theft:
How much shrinkage is there?
Of course it depends on what type of retailer and where it’s located, but 1% of sales is a good rule of thumb for normal shrinkage. That doesn’t seem like a lot, but if you’re a small grocery store, profits might only be 4% of sales. That means ~20% of your earnings is walking out the door.
Shrinkage is growing
During COVID Walgreen’s executives became really vocal about rising rates of shrinkage. Here’s their Global CFO, James Kehoe (edited for clarity):
We estimate the shrink is about 40% to 50% higher on a percentage basis than it was prior to '20. And it's a real issue for us as with all of our peers.
“We’ve experienced a 300% increase in retail theft from our stores since the pandemic began.”
And Kayleigh Painter, a representative of Dollar Tree and Family Dollar, said their stores have seen “increasing instances of theft.”
Growing shrinkage appears to be a national, if not global, problem. The US Annual Retail Theft Survey reported that essential retails saw thefts increase double-digits in 2020.
There’s three main reasons why shrinkage is growing. The simplest explanation is that theft rises in economically challenging times. Here’s a quote from Jeff Zisner, CEO of a workplace security firm:
“We’re seeing an increase in low-impact crimes. It’s not a whole lot of people going in, grabbing TVs and running out the front door. It’s a very different kind of crime — it’s people stealing consumables and items associated with children and babies.”
Obviously the past three years have been turbulent times for the economy. The US Department of Agriculture estimated that food insecurity increased 45% between 2019 and 2020. This year inflation has effectively lowered incomes. Then there’s unemployment, which spiked massively early in COVID before coming down to historic lows, but has recently started ticking up again. Fabien Tiburce, CEO of a loss prevention software company, pointed out that
“there is a well-known historical correlation between unemployment and theft.”
This would also explain why the US wasn’t the only country to see an uptick in shrinkage during COVID. Clicks, a large South African retailer, reported massive inventory losses. Britain’s largest grocers have called on police to prioritize shoplifting this year.
The second, and more sinister, explanation for shrinkage is organized crime. Here’s James Kehoe from Walgreen’s again:
“It's organized crime. This is not petty theft. It's not somebody who can't afford to eat tomorrow. These are gangs that actually go in and empty our stores of beauty products. And honestly, I think Congress needs to step up a little bit here because the magnitude of the problem is enormous.”
Anecdotally, organized retail crime appears to be contributing to the shrinkage spree. Best Buy’s CEO Corie Barry, for example, highlighted a spike in thefts by gangs of thieves. CNN broke down this phenomenon in more detail. It seems that coordinated groups break into a store (sometimes during shopping hours) and steal huge piles of merchandise. They usually go for high cost-per-pound inventory: power tools, makeup, expensive clothes, Whole Foods hot bar lasagna. These items usually find their way onto the internet. Mr. Kehoe called on the government to act, and it seems like the government is responding (slowly). Earlier this year a congressional act was introduced. Also, as an aside, color me shocked, absolutely shocked, that locking up condoms behind plexiglass shields isn’t an effective security measure for Walgreens.
The last explanation is technology. Kids are playing Grand Theft Auto and listening to Spotify and next thing we know they’re throwing a brick through a Walgreen’s window to steal lipstick. Actually, this time it’s retail technology. Online sales have disrupted the retail landscape, and offline stores have responded by adopting new technology and reducing the number of workers. While this is cost-saving and makes for a better shopping experience, it may mean more theft. Take a self-checkout. Can anyone reading this honestly say they’ve never cheated the system? You know, nobody’s watching, you put those organic bananas on the scale, you mark them as regular bananas and strut out feeling like Guy Fawkes. You’re not alone. Industry groups have highlighted the theft risk of self-checkout. Recently, Pennsylvania grocer Wegman’s canceled a self-checkout app because the shoplifting was out of control.
The first two categories are solvable. A better economy will reduce theft. Organized crime can be taken down (it’s how every Martin Scorcese movie ends). The last category, technology, may not be solvable. As more sales shift online the physical retail landscape will evolve. Stores, not as profitable as they once were, have to cut back on employees, especially as wages rise and labor gets scarcer. New technology will continue to replace labor. Employees stationed around the store to help customers can be swapped out for touchscreens. Cashiers with self-checkout lanes. Warehouse workers with superstrength robots that could easily vaporize the customers, but definitely, definitely won’t. Less oversight means more opportunity for theft. Lower risk of getting caught increases the incentive for crime. Isn’t it realistic that shoplifting rates increase at least a little?
Maybe this is acceptable. If savings from technology outweigh the incremental cost of theft, then shoplifting is just the price of doing business. Sure, retailers could invest in cutting-edge anti-theft tech. Or they could just hire more employees and security guards. That’s expensive. Instead, maybe they throw up, as a deterrent, grainy CCTV cameras that have never, in the history of television crime dramas, assisted any investigation. Then watch as sales rise. Sure, there’s a slight uptick in shrinkage, but that’s an acceptable tradeoff. The optimal solution may just be to accept higher rates of shoplifting. Retailers will be more profitable, small-time criminal masterminds get an organic banana at the price of a pesticide-infested one, and everybody is happy.
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