The Lex Newsletter: shoplifting, shrinkage and a $95bn problem for US retailers

Dear reader,

Walk into any big chain pharmacy in New York City and the first thing you’ll notice is the number of goods that sit behind security cabinets. Putting expensive electronics under lock and key is not new. But these days, the selection includes laundry detergents, shampoos and even deodorants. At my local CVS store in Brooklyn, the simple act of buying toothpaste has become a multi-step affair. After pressing a button marked “Call for assistance” next to the display case, I need to wait for a staff member to unlock the plastic prison and retrieve my $8.79 tube of Sensodyne.

One of the workers I spoke to at CVS, Angie, told me the set-up was a pain for both customers and floor workers. But the store has no choice. While petty theft has always been around, she said shoplifting had become more frequent and brazen since the pandemic began. At least once a week someone would come into the store, grab stuff off the shelves and walk out. She has theories about where the stolen merchandise ends up. Some thieves sell it to nearby bodegas (corner shops) to feed drug habits. Others work in more organised groups and offload it online.

So-called shrinkage, an industry term that measures inventory losses related to such factors as theft, fraud or damage, represented about 1.4 per cent of US retail revenue, or roughly $94.5bn, in 2021, according to the National Retail Federation (NRF), an industry trade group. That number may have increased in 2022.

The opioid epidemic, homelessness, organised retail crime (ORC) groups, changes to policing and criminal sentencing as well as the growth of ecommerce have all been blamed for the retail crime wave. Some of America’s biggest retailers have warned that the increase is hitting bottom lines.

Target says it has seen “a significant increase” in theft and ORC across its business. Shrinkage reduced the company’s gross profit margin by more than $400mn in the first three quarters of its fiscal 2022 year. The number is expected to rise to $600mn for the full year.

At Rite Aid, shrinkage for the third quarter was $9mn worse than the previous year. The pharmacy chain said that the “organised crime-driven” rise would be “a continued headwind” in the fourth quarter.

Beauty retailer Ulta said in its last earnings call that gains in its third quarter gross margin would have been higher had it not been for inventory shrink. “When times get tough, shrink goes up,” said the company’s chief financial officer.

Walmart chief executive Doug McMillon warned in an interview with CNBC last month that if the problem is not corrected then “prices will be higher and/or stores will close”.

A string of US viral videos showing people openly shoplifting has helped put the problem in the public spotlight. But just as retailers are quick to blame extreme weather for poor sales, the issue of retail theft can be a handy scapegoat for poor operational decisions.

There are reasons to be sceptical about how big a financial hit US companies are taking as a result of theft, compared with weaker consumer spending or excess inventory. For starters, the term “shrinkage” refers to inventory that was bought but cannot be sold. This can be the result of theft but it can also be because of product damage, theft by employees, vendor fraud and other reasons. Losses from shrinkage jumped from $61.7bn in 2019 to almost $95bn in 2021. But that is largely because of inflation, which has driven up the overall value of goods. Expressed as the percentage of total retail sales, shrinkage actually fell from 1.6 per cent to 1.4 per cent during the period.

NRF’s survey showed that in 2021 about 37 per cent of shrinkage was from external theft, 28.5 per cent from employee/internal theft and 25.7 per cent from process/control failures. Dollar General, another retailer that reported increased shrink during the third quarter, attributed the rise to “the inflationary environment, coupled with higher inventory levels”.

More recently, Walgreens said its shrinkage fell from 3.5 per cent to 2.5 per cent during its fiscal first quarter. “Maybe we cried too much last year,” said James Kehoe, the company’s chief financial officer, during an earnings call with investors last week.

More retailers should provide investors with calculations on the impact that theft has on shrinkage. I for one am looking forward to the day when my toothpaste is no longer locked up in a plastic cage.

Have a good rest of the week.

Pan Kwan Yuk
Lex writer

Further reading

The Financial Times dissects Nelson Peltz’s record as the billionaire activist investor looks to take on Disney.

An eye-opening New York Times story on one Arizona community’s water problems.

Surely the strangest US political story of 2022: George Santos and the lies that keep coming.