Risk Management

Retail theft: it's complicated

To understand the situation, some say you have to understand shrink rates.
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Francis Scialabba

· 5 min read

Turn on the news or tune in to an earnings call and you’ll probably hear the same two-word culprit tottered out for falling profits and sales dips. Starts with R, ends with…well, it’s retail theft.

It’s reached such a fever pitch, however, that some retail executives are backtracking. At the start of this year, Walgreens CFO James Kehoe said the pharmacy chain had “cried too much” about retail theft in 2022, and overdid it with private security guards in stores.

“We’ve started seeing [retail theft] being used as an excuse: an excuse for falling profits, an excuse for closing stores,” Neil Saunders, retail analyst and managing director of retail research agency GlobalData, told CFO Brew. “Now, it may be a legitimate excuse, but nevertheless it’s being used as a talking point around why certain things are happening to retailers.”

That timing makes sense, Saunders continued. “We’re seeing a lot more pressure on retailers,” he said, citing sluggish sales and an erosion of profitability. “The problem is that when performance comes under pressure, people do start rolling out more excuses.”

But that’s also what makes the current moment so nebulous, because retail theft isn’t just a catch-all scapegoat. In recent years, there has been a notable uptick of retailers reporting lost inventory. Retailer’s average shrink rate, or their percentage of lost inventory, jumped to 1.6% in the 2022 fiscal year, up from 1.4% the year before, according to the National Retail Federation’s 2023 retail security survey. That amounted to $112.1 billion in losses last year, up from $93.9 billion in 2021.

The CFO POV. In this environment—where shrink is both a clear, concrete problem and an ever-present, misunderstood scapegoat—CFOs need to be level headed in their approach.

For many, Saunders said, it’ll be a cost-benefit analysis: “Are there technologies…you want to invest in that could reduce theft? Can you increase security at stores, and what impact will that actually have on theft?”

Some anti-theft measures might not be worth the trade-off. For instance, locking up $2 cough drops behind plexiglass is “not the solution,” Mary Breslin, a certified fraud examiner and former chief audit executive who started her career at Price Club (now Costco), told CFO Brew. “That’s going to drive people to Amazon…You might not lose anything to shrink, but you’re not going to sell anything either.”

She also suggests looking “beyond the numbers” to analyze which store layouts have been effective for companies. And because some retail theft can also be internal, executives would also be wise to invest in employee training that makes workers know they’re valued while preparing for potential incidents.

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“Your greatest line of defense is your people,” she said.

A proxy for theft. In the retail industry, shrink is essentially synonymous with lost inventory, but that can include a lot more than theft, making it a “misleading measure,” Saunders said.

“There’s a lot of things that go into the shrink number,” he explained, from products that got lost somewhere in the supply chain or goods that were accidentally damaged by staff members. “That’s the problem sometimes with the shrink numbers,” he continued. “It’s a proxy for theft, but it isn’t just about theft.”

“The calculation of inventory shrinkage has historically been the primary indicator of loss,” David Johnston, VP of asset protection and retail operations at the National Retail Federation, told CFO Brew. “But one of the challenges we have to…recognize is that shrink is no longer the indicator; it’s just an indicator.”

Breslin is confident companies can accurately track detailed loss inventories.

“Based on my experience working in retail and consulting for folks in retail, they do know the full scope, if they’re following their policies,” she told CFO Brew. “Simply take your cycle counts, your physical inventories, [and ask] ‘What’s missing?’ You can tell by the numbers.”

The larger issue is that it can be “difficult to attribute how the loss arose,” in Saunders’ telling, and Breslin concedes that distinguishing internal and external theft is usually not feasible.

What now? Retailers should be thinking about solutions, Saunders said, because it’s likely the next chapter of the retail theft narrative. In recent years, retailers were able to believably claim that retail theft caught them off guard. That excuse won’t sit so well with investors heading into the new year, Saunders explained.

“For the whole of 2023, you've been banging on about theft,” he said of retailers. “When it comes into 2024…if you’re falling below your profit forecast, [and] you’re saying, ‘Well, it’s because of theft,’ I think investors will say, ‘Well, yeah, but this has been on the radar for a long time. You should have accounted for this.’”

“You can only use it as an excuse for so long before people start saying, ‘Well, fine, but what are you doing about it to prevent it?’” he added.

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CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.