Brick-and-mortar retail’s indisputable edge over e-commerce is that consumers can get what they want immediately, and can touch and feel the product before buying it. Rising theft—and stores’ measures to prevent it—could dull that edge.
The National Retail Federation estimates that shrink—an industry term for loss in inventory—amounted to roughly 1.4% of retail revenue in 2021, or roughly $94.5 billion. Most of that shrink is caused by theft. In a CNBC interview earlier this month, Walmart Chief Executive Doug McMillon said...
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Brick-and-mortar retail’s indisputable edge over e-commerce is that consumers can get what they want immediately, and can touch and feel the product before buying it. Rising theft—and stores’ measures to prevent it—could dull that edge.
The National Retail Federation estimates that shrink—an industry term for loss in inventory—amounted to roughly 1.4% of retail revenue in 2021, or roughly $94.5 billion. Most of that shrink is caused by theft. In a CNBC interview earlier this month, Walmart Chief Executive Doug McMillon said that if the retail theft issue is not addressed over time, “prices will be higher and/or stores will have to close.”
Although shrink is a perennial problem in retail, it really took off when the pandemic hit. In the five years leading up to 2019, retail shrink grew at a compound annual growth rate of roughly 7%, according to data from the NRF. In 2020, it jumped 47%, and rose another 4% on top of that huge jump in 2021. Some retailers, including Ulta Beauty and Target, have said that shrink has gotten worse again this year. “When times get tough, shrink goes up,” Ulta Beauty Chief Financial Officer Scott Settersten said on the company’s earnings call on Dec. 1. We’ve seen that in retail over a long period of time.”
Retailers surveyed by the NRF said Covid-19 has worsened the risk of crime, partly because labor shortages have made it difficult to fully staff stores. Moreover, supply-chain shortages made certain products more susceptible to theft because they fetched high value in secondary markets, according to Mark Mathews, vice president of research development and industry analysis at NRF. Supply-chain delays during the pandemic also meant more cargo was sitting around, leaving it more vulnerable to theft.
Shrink can have a substantial impact on already thin retail margins. Target said that the rise in shrink, including theft, reduced its gross profit by more than $400 million in the first three quarters of its fiscal year, compared with a year prior. For the full fiscal year, it estimates that its gross profit will take a $600 million hit. Dollar Tree in its November earnings call said that shrink and inflationary cost pressures shaved 1 percentage point off its operating margin at its namesake stores in its most recent quarter and 1.7 percentage points at its Family Dollar stores, which tend to be located in more urban areas. That is substantial for a company whose consolidated operating margin was 5.5% in the quarter.
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Drugstores are especially susceptible because they are located and designed for convenience, said Read Hayes, a research scientist for the Loss Prevention Research Council. “It’s a quick in, quick out [layout] with valuable electronics, over-the-counter drugs, cosmetics and beauty care, which are desirable and mobile items,” he said. Drugstores also tend to have fewer employees.
Walgreens Boots Alliance’s CFO James Kehoe said on an earnings call in January that shrink was expected to hit net income “in excess of $0.15 a share” this fiscal year compared with prior expectations. He estimated that shrink amounts to 3.25% of the company’s revenue, up from the historical norm of just a little over 2% In its last earnings call, Walgreens said its mitigation efforts have helped improve shrink rates. Rite Aid said in September that its shrink was $5 million larger in its quarter ended Aug. 27 compared with a year earlier.
Mitigation measures can range from the most basic physical ones—such as locking up items—to more technologically sophisticated ones, such as video surveillance with facial recognition. Some measures are designed to make the product less valuable for theft. These include ink tags, which stain clothes when removed, and products that must be activated by the cashier in order to be used. Some cordless power tools will only start functioning if the firmware is activated at the point of sale, for example, according to Mr. Hayes of the Loss Prevention Research Council.
More subtle measures include placing high-value items further away from the entrance or having employees stand close to those products. Scott Mushkin,
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equity analyst at R5 Capital, said Walmart’s store layout stands out. “They have a good funnel in, funnel out system without deteriorating the store experience so much that it’s a problem,” he said.
E-commerce may be an unwitting beneficiary of physical retail’s woes. Nothing dampens a physical shopping experience quite like having to summon staff to unlock each item. Or walking into an electronics store to try out different types of headphones, only to find QR codes to scan. Earlier this year, Mr. Mushkin placed a “sell” rating on Best Buy stock after visiting more than 35 stores and observing that in many stores, products were locked up or removed from the floor.
Online marketplaces such as Amazon and eBay can be secondary markets of choice for many offenders to quickly convert goods into cash. Some 95% of retailers surveyed by the NRF said they found stolen gift cards sold online. That tension between bricks and clicks came to a head last year, when retailers pushed for legislation to require more disclosure from sellers on online marketplaces.
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Amazon and eBay opposed an earlier version of that bill, saying that it favors large brick-and-mortar retailers at the expense of small businesses that sell online. Both companies, however, said they support a revised version of the bill—known as the Inform Consumers Act—that passed in the House in November. EBay said in a press release in late 2021 that it supported the updated bill because it removes some burdensome requirements, such as collecting sellers’ drivers’ licenses. It also noted that the timeline for verification was extended to lessen the burden on sellers.
Retailers will ultimately pay for shrink risk in some form or another—either on the top line if they want to keep stores completely accessible or on the bottom line if they spend heavily on labor and mitigation measures. Finding the right balance will be key to preserving brick-and-mortar businesses.
Write to Jinjoo Lee at jinjoo.lee@wsj.com