Executives at Walmart, Home Depot, Target all weighed in on the inventory shrink issue this earnings season.
Porch pirates aren't the only problem. Thieves are going straight to the source.
Inventory shrinkage — the loss of items to retail theft, organized crime, damage, vendor fraud, and other factors — is still a major headache for US retailers. At least, that was a common thread heard on recent earnings calls from Home Depot (HD), Target (TGT), Walmart (WMT), and other large retailers last week.
On Wednesday, Target CEO Brian Cornell said the retailer is up against "an unacceptable amount of retail theft and organized retail crime." Last November, Target CFO Michael Fiddelke said the disappearance of merchandise caused a $400 million hit to the retailer's gross profit margin for the year.
"Shrink in the second quarter remained consistent with our expectations but well above the sustainable level where we expect to operate over time," Cornell said in the company's Q2 earnings call.
Walmart US CEO John Furner echoed that sentiment, saying: "Shrink has increased a bit this year. It increased last year. It's uneven across the country."
Retail theft weighed profit margins too. Just ask Home Depot.
"In the second quarter, our gross margin was 33%, a decrease of 8 basis points from the second quarter last year, primarily driven by pressure from shrink," Home Depot CFO Richard McPhail said on the earnings call. "Shrink has been a consistent pressure over the last several quarters and even the last few years. It's something we're tackling every day."
Retailers 'not crying wolf'
According to the National Retail Federation's (NRF) National Retail Security Survey, retail shrink was a nearly $100 billion problem for the industry as of 2021, the last year data was collected. That cost more than doubled from $45.2 billion in 2015.
"I can tell you that never before have I seen what I'm seeing today," David Johnston, NRF vice president of asset protection and retail operations, told Yahoo Finance. "The retailers are not crying wolf. They are highlighting a major issue out there."
It's not just shoplifting — organized retail crime and employee theft have become growing concerns, according to the NRF.
Violence is a bigger issue too: According to Cornell, Target stores saw a 120% increase in theft incidents involving violence or threats of violence in the first five months of 2023.
"The threat really starts from the point that it leaves the warehouse all the way till it gets to the retail store," Marty Andrews, VF Corporation (VFC) vice president of loss prevention, told Yahoo Finance.
And "successful outcomes for the thieves" are only making matters worse, Marq Claxton, director of political affairs and public relations at the Black Law Enforcement Alliance and a former NYPD officer, told Yahoo Finance. Claxton warned that thieves are "becoming more violent, more aggressive, more frequent with more people."
The issue gained more attention last weekend after thieves got away with roughly $300,000 in merchandise after a "flash rob" at a Nordstrom (JWN) in California.
"They're in a position now where these types of flash robberies, these smash-and-grabs — or they've been called 'mobberies' — are very lucrative and very successful for them," Claxton said. "So until there are things put in place to mitigate damage or to resist this current surge, there's going to be an increase in these types of activities."
Locked-up merchandise 'a fine line'
The problem is a double-edged sword for retailers and consumers alike.
More retailers have locked up higher-ticket items behind plexiglass and installed cameras and other security systems, but these measures come with trade-offs.
Walmart CEO Doug McMillon said the company prefers to "never lock anything up" as it's bad for business and interferes with customer engagement.
"That impacts that consumer interaction," Andrews said. "That's why people are going to retail stores, they want to be around the merchandise, they want to touch it, they want to have those interactions, so it's a fine line of how do you get that great consumer experience, but how do you protect your product?"
Some feel the extra precautions are necessary, however.
While locked-up merchandise may be inconvenient, "think of the opposite when the mother of a newborn tries to go get formula and the merchandise isn't there because it was just shelf-swept," NRF's Johnston said.
Walmart's McMillon said that some jurisdictions need to take more action on retail-related crime as companies focus on the aspects of shrink they can control.
For instance, the rising use of self-checkout has gained attention as a source of inventory loss. Some studies and reports have documented customers not paying for items in self-checkout transactions or swapping price tags for lower-priced goods when scanning higher-ticket items.
But the extent of self-checkout theft is not widely understood. In a call with investors in May, Costco (COST) CEO Richard Galanti said inventory shrink "fluctuated ... 3 basis points up, really before COVID, as we rolled out self-checkout, and since then, it's come back down a little bit."
At its annual meeting in June, McMillon said lower inventory helps since shrink is correlated with higher inventory levels. The retailer brought inventory growth down by 5.54% year over year.
But ultimately, it's all hands on deck to curb theft.
"What we're seeing today requires the government, the community, the retailer, everyone, ... including the consumer, to take action," Johnston said.
Per the Retail Industry Leaders Association (RILA), more than a dozen state attorneys general have launched organized retail crime task forces to coordinate investigations between retailers and prosecutors.
Back in June 2023, Congress also passed a law that tasks the FTC with implementing new baseline requirements for online marketplaces to collect, verify, and disclose some information about high-volume third-party sellers — those with 200 or "more separate sales or transactions of new or unused consumer products and $5,000 or more in gross revenues" in any continuous 12-month period during the past 24 months.
The platforms on watch range from small platforms to big-name online marketplaces like Amazon (AMZN) and Walmart, where stolen goods can be resold.
Carl Settlemyer, an attorney in the FTC’s Bureau of Consumer Protection, said "it's sort of a running obligation ... for the high-volume sellers." He added that it falls on these platforms and consumers to report suspicious activity and flag "bad actors who get through the net."
"If you can take a designer handbag and resell it for 30% off online ... the consumer has to be a little concerned about that," Johnston said.
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