Thieves Steal Macy’s, Old Navy Clothing as Analysts See ‘Turning Point’ for Retail Shrink
Reports of an organized retail crime (ORC) wave may have executives concerned for their bottom lines, but at least one analyst believes we have reached “the peak of the shrink cycle.”
A team from the multinational investment bank UBS, led by equity research analyst Michael Lasser, published a research note Tuesday arguing that recent data suggest “shrink will reach a turning point and become a favorable profit driver” “soon.”
More from Sourcing Journal
No One Can 'Solve' $95 Billion Retail Crime Epidemic on Their Own
Chamber of Commerce Reacts to California Bill's New Shoplifting Policy
This “turning point” couldn’t come soon enough as Tennessee police recently reported three women stealing $1,400 of Old Navy apparel as a separate trio shoplifted $1,000 worth of children’s clothing from a Memphis-area Macy’s store.
“As we see it, the impact of shrink will turn from a headwind to a tailwind later this year and into next year,” Lasser wrote. “This should create a profitability benefit for several hardline, broadline and food retailers…. The bottom-line is that, over time, shrink should be a positive driver for the stocks of several retailers including [Target, Dollar General, Dollar Tree, The Home Depot, Ulta Beauty, Walmart and Kroger].”
Lasser and his team examined the number of mentions of “shrink” and shrink-related keywords during retailers’ conference calls. They found these mentions rose and fell in waves with peaks lasting two to five quarters, including from Q2 2013 to Q3 2014, Q4 2015 to Q3 2016, Q2 2018 to Q4 2018 and Q1 2021 to Q4 2021. With these mentions spiking “significantly” over the last few quarters, Lasser expects shrink will subside “through the rest of 2023 and into 2024” as retailers act against it.
According to the National Retail Federation, shrink cost retailers $94.5 billion in 2021, the most recent year for which it has data. This amounted to 1.4 percent of retail sales, in line with past years and even slightly below the 1.6 percent NRF calculated for 2019 and 2020.
At the same time, however, 52.9 percent of retailers surveyed in May and June of last year said they experienced an increase in ORC in the prior 12 months. Another 27.5 percent said it stayed the same, while 19.6 percent said they were not sure. On average, respondents said ORC incidents increased by 26.5 percent.
Retailers in the NRF survey attributed the greatest portion of shrink, 37 percent, to external theft, including ORC. Internal theft ranked second, accounting for 29 percent of theft, followed by process or control failures at 26 percent. A clear majority of respondents, 70.7 percent, said ORC had become more of a priority compared with five years ago, including 32.8 percent that said it was “much more” of a priority. Slightly more, 74.1 percent, said external theft excluding ORC had become a greater priority. Customer-on-associate violence, however, ranked first, with 77.6 percent saying it had grown as a priority.
Beyond the apparent rise in ORC, Lasser highlighted several other factors he believes are driving increased shrink, including “sizable” growth in inventory last year. On average, inventory growth outpaced sales growth by 6 percent, he said.
“As more inventory moved through the system, it was harder to track, manage and maintain,” Lasser wrote. “In fact, some of the retailers that experienced the greatest growth in inventory are now contending with the most significant issues with shrink. This includes Target, Walmart and Home Depot.”
Lasser also pointed to pandemic era supply chain issues as another culprit. Congestion, specifically, forced cargo to sit and be at higher risk of theft, he said. The increase in services like curbside pickup and buy online pick-up in store introduced further room for leakage, he added. Staffing shortages and increased employee attrition likely contributed to shrink too, he said.
Increased investment in labor should help reduce shrink, as higher staffing levels lessen opportunities for external shrink, Lasser noted. The analyst also called out increased investment in anti-shrink technology, specifically in artificial intelligence.
“Our shrink expert explains that the issue isn’t a lack of technology or products to use, but that many retailers have previously forgone working with third-party providers at the expense of building out their own tech solutions in-house,” Lasser wrote. “Shrink will decline as retailers play catch up on these kinds of investments.”
The UBS analyst also called out the recently passed Integrity, Notification and Fairness in Online Retail Marketplaces for Consumers Act (INFORM Consumers Act), which will take effect Tuesday. The legislation will require online marketplaces collect and verify financial and identifying information from high-volume third-party sellers.
Retailers, marketplace commit to ORC agreement in California
The same day UBS published Lasser’s note, California Attorney General Rob Bonta unveiled a “first-of-its-kind agreement” designed to better combat ORC. The agreement includes commitments from retailers and marketplaces alike, including Amazon, eBay, Etsy, Target, The Home Depot and Walgreens.
The agreement commits retailers to filing detailed police reports for all ORC-related incidents, maintaining policies related to retaining video from ORC-related incidents, ensuring loss prevention personnel are properly trained, maintaining records of ORC-related thefts in a case management system and helping provide training to law enforcement on how to partner on ORC investigations. It also requires the retailers to communicate with fellow retailers “to establish connections between ORC incidents and threat patterns across the retail ecosystem” and “stay updated on trends in ORC.”
On the other side, it commits marketplaces to maintaining staff for addressing reports of ORC on their platforms; maintaining a dedicated webpage or point of contact to ensure timely replies to law enforcement requests; maintaining internal written policies, systems and staff to monitor listings to “affirmatively” prevent and detect ORC, maintaining external policies defining marketplace rules and the consequences of violations; maintaining internal written policies that guide collaboration and information-sharing with retailers and other marketplaces; and maintaining internal policies related to referring identified ORC to the authorities.
The agreement also includes commitments from both retailers and marketplaces to communicate with each other regarding the latest trends in ORC. This information should be shared through the establishment of regular industry meetings facilitated by Regional Organized Retail Crime Associations, prosecutors and law enforcement or independently, the document notes.
“Organized Retail Crime is a prevalent issue for all retailers, online and physical, and there is no one-size-fits-all solution,” Anthony Williams, director of California public policy, Amazon, said in a statement. “For us, customer trust is central to everything we do. To that end, we strongly support legislative efforts and collaborative partnerships, like Attorney General Bonta’s Statement of Principles, to stop bad actors from harming consumers.”
