Print Issue: September 2019
“Progress is being made, but loss prevention teams continue to face setbacks and challenges with new and expanding areas of threat,” according to the authors of a recently released report from the National Retail Federation (NRF) and the University of Florida, the 2019 National Retail Security Survey. “Loss prevention teams are pulled in many directions, combating the various types of shrink.”
In the report’s survey section, the majority of respondents said that five risks—organized retail crime, cyber incidents, internal theft, e-commerce crime, and return fraud—are now more of a priority than they were in the last five years.
Another recent study, the 31st Annual Retail Theft Survey conducted by Jack L. Hayes International, also finds that theft continues to be a major problem for retailers, especially because individual case loss values rose sharply. In this survey, the 20 large retailers who participated (and who own 13,674 stores that together generated more than $330 billion in sales) reported that in 2018 they apprehended more than 279,000 shoplifters and dishonest employees.
The retailers recovered $114 million from those apprehensions—around 8 percent of total retail theft losses. On a per case basis, employee theft values soared: the average theft amount per incident increased by 30 percent in 2018 to $1,361, and the average shoplifting case value increased by nearly 12 percent to $301.97, the Retail Theft Survey found.
“Retail theft overall continues to be a serious problem for retailers negatively impacting their bottom line, which results in higher process to consumers,” Mark R. Doyle, president of Jack L. Hayes International, writes in the Retail Theft Survey.
THE RELATIVITY OF SHRINK
Every year, the NRF survey measures total retail shrink—theft, fraud, and other types of retail losses. In 2018, shrink totaled $50.6 billion, which comes out to about 1.4 percent of total sales. This is an increase from $46.8 billion in 2017. The estimate is based in part on a survey conducted earlier this year of 63 loss prevention and asset protection executives from a range of retail sectors.
The $50 billion number may seem high, but some experts caution that “shrink is relative,” says Alan Greggo, CPP, an asset protection specialist at Microsoft and a member of the ASIS Retail Asset Protection Council. “What I mean is, 1.4 percent of $1 million in sales is $14,000 off the bottom line. That looks pretty good, right?” he explains. “But 1.4 percent of $5 billion in revenue is $70 million—yikes, astronomical waste and loss of profits.”
As a percentage of overall retail sales, shrink in 2018 reached a similar level as it did in 2017—1.38 percent in 2018 compared with 1.33 percent in 2017. In fact, in the past few years, shrink as a percentage of total sales has held steady at around 1.4 percent, according to the NRF's Retail Security Survey.
What keeps the recent shrink percentage relatively stable? One contributing factor, according to Greggo, is that some loss prevention and asset protection practitioners are moving away from “silos of secrecy,” becoming more willing to collaborate with each other. Another is that organized retail crime associations in some states and cities have effectively brought together law enforcement, prosecutors, and retail security leaders to deter and apprehend crime groups.
But the fact is that the shrink percentage’s recent stabilization is not necessarily a victory for loss prevention. “Any thriving business wants to set goals and improve sales and loss reduction, so asset protection/loss prevention practitioners should always be striving to reduce the loss,” Greggo says. “I don’t know of any business that wants to just maintain the loss, or not see it reduced.”
Loss prevention consultant Chris E. McGoey, CPP, a longtime ASIS member, has a similar view. He says that a stabilized shrink percentage “gives some companies a pass.” Retailers accept the 1.4 percent as a benchmark they can live with, and they budget for it. They can cut expenses on the security side if budgets become tight, as long as they try to keep the shrink percentage low by focusing on increasing sales. “It’s basic math,” McGoey says. However, that’s easier to do in a strong overall economy. When the economy hits a downturn, sales often go down too, and the shrink percentage suddenly goes higher, causing alarm among management, he adds.
ORGANIZED RETAIL CRIME
Organized retail crime (ORC), non-ORC shoplifting, and employee theft typically account for about two-thirds of shrink each year, according to NRF. Most of the remainder comes from paperwork errors or vendor mistakes.
By many accounts, ORC continues to be the most devastating source of theft, with reported losses of more than $30 billion annually, NRF estimates. Nearly all of the companies in the Retail Theft Survey reported that they were a victim of ORC activity in the past 12 months. And most of the firms reported more ORC activity in 2018 than in 2017.
“These thieves work diligently to commit their theft of popular items such as over-the-counter medicines, razors, batteries, tools, cell phones, and designer clothing,” the Retail Theft Survey found. “It is common for them to work in teams, employ distraction techniques, and use booster-bags to circumvent anti-shoplifting systems.”
One reason that ORC organizations pose so much of a threat to businesses is that they do not discriminate against any type of retailers, Greggo says. “Sure, being in a shopping mall makes it more convenient to hit many stores in one place and move on down the highway to the next shopping center. But ORC gangs also victimize grocery stores, drug stores, specialty stores, and big box stores,” he explains.
“They have matured in their attacks, just as retailers have matured in their tactics to combat the crimes,” Greggo continues. “ORC gangs map out their targets, maintain lists of desired merchandise, and have ‘go-to’ fencing operations. They are high-stakes businesses, with goals to steal more and increase their cash intake.”
ORC is not a new phenomenon; decades ago, criminal groups were stealing sizable quantities of goods and fencing them somewhere, McGoey explains. But now, with the rise of e-commerce websites like eBay, fencing stolen goods has become much easier. “It has always been happening, but it’s much easier to fence the goods these days,” he says. “There are so many online sites.”
“Many thieves have found that selling their stolen items through various online auction sites…results in quicker sales and much higher prices than the traditional selling of items on the street or at a local flea market,” the Retail Theft Survey authors write.
However, it can be difficult to give exact estimates on how much of shoplifting is being committed by ORC groups, and how much by individual thieves acting on their own, experts say. Moreover, some store trends unconnected to ORC, such as the recent sharp increase in self-scanning, have resulted in higher losses for some stores.
Originally, self-checkout supporters argued that the inevitable loss that would result from the practice would be offset by the savings made from staff reductions, since stores would need fewer cashiers. But some are questioning this tradeoff. “Local store employees shake their heads universally and say, ‘What are we thinking about here?’” McGoey says. It now seems that many self-scanning advocates did not realize just how much theft would ensue.
“People get clever about how to do a fake scan,” McGoey adds.
Like ORC, employee theft continues to be a serious risk for many retailers.
The problem is sometimes shrouded in myth. For example, some companies consider employee theft to be occasional isolated incidents that do not have a significant impact on the firm’s bottom line. Moreover, some of these companies assume that when the incidents do occur, they are typically petty thefts of small everyday items like pens and paper clips.
But these assumptions are largely false, according to the Retail Theft Survey authors. “Hayes International has witnessed a steady and significant rise in this serious problem. Each year thousands of employees are caught stealing from their employers and co-workers,” they write. “Furthermore, our studies reflect that this group of thieves are being caught stealing far more than a few insignificant supplies.”
Studying data from more than 1.1 million employees, the Retail Theft Survey found that one out of every 40 employees was apprehended for theft in 2018. The money recovered from these employee apprehensions came in at more than $38 million in 2018, an increase of 13 percent from 2017.
Overall, Retail Theft Survey participants apprehended 28,145 employees for theft incidents in 2018. Although this number was down nearly 13 percent from 2017, the long-term trend has been up, with employee theft apprehensions increasing year-over-year for eight of the past 11 years.
The Retail Security Survey offers more evidence of the costliness of employee theft. Although it found that the largest losses per incident came from robberies—at an average of $2,885 (down from $4,237 in 2017)—robberies are relatively rare. Employee theft is much more common. It increased to $1,264.10 per incident in 2018, up from $1,203.16 in 2017.
When asked about this increase, some Retail Security Survey respondents said that the “difficult hiring market makes it more difficult to screen out potential internal thieves.” Another factor is the reduction of preemployment screening requirements, either because of legal restrictions or because the employer is trying to staff stores more rapidly.
Staff levels also prove problematic for retailers seeking to curb theft. According to the Retail Theft Survey, opportunities for dishonest associates to commit theft and abuse are increasing, while reductions in staff and supervisors lead to decreased detection.
Employees may sometimes cooperate with an ORC group and serve as the inside connection, McGoey says. For example, the employee might make sure that no one is at the loading dock when thieves come to steal cargo. Or, the supervisor in one wing of the store could agree to look away when shoplifting happens. “We have examples of video in which we see that,” he explains.
In some cases, a member of an ORC group joins a retail company as an employee. “It’s entirely possible for an ORC gang member to apply to a retailer, pass the interview opportunities and background checks, and then help their ORC gang members usher carts full of merchandise out the door,” Greggo says. Still, for the most part ORC and employee theft are separate problems, he explains: “They are both threats to the business, yet they have different root causes behind them.”
And getting at those root causes of employee theft can be an effective way of addressing the problem, he adds.
“Why do people steal from their employer? Because they feel overworked, under rewarded, treated poorly, and they can rationalize why it’s OK to take merchandise or money,” he says. “So, many companies are improving the employee experience, including pay structure, family leave, benefits, and work–life balance. And leadership training of retail store leaders improves how people are managed.”
Although retail security specialists clearly have their hands full fighting theft, the future is not all gloom and doom.
Greggo does notice improvements in employee management, which could go a long way in reducing staff theft.
“Overall, I think retailers are doing more to keep their employees happy, so their employees keep their customers happy,” he says. “In today’s retail environment, it’s all about experiences. Motivated employees provide good experiences for their customers.”
He also cites technological improvement and the Internet of Things, which should allow for the advancement of merchandise security tools like radio-frequency identification (RFID) tags, video integration, and analytical assessments. “We should see an impact on shoplifting, ORC, and operational errors,” he explains.
McGoey advocates for more comprehensive training in retail security, such as the development of a loss prevention university through which people could earn degrees in loss prevention and inventory control.
Such a highly trained specialist could then be the lead on-site professional for a retailer’s loss prevention team, with all staffers participating and reinforcing security, he explains. This would take training for all, but it would be worth it. “Our efforts are better served focusing on employee issues,” he says.
As for the authors of the Retail Security Survey, they concede that although today’s loss prevention professional has more challenges than ever, one bright spot is retailers’ willingness to increase their investment in loss prevention resources. “Departments are looking for additional talent with the need for more sophisticated skills,” they write.
Mark Tarallo is senior content manager at Security Management. Contact him at [email protected] or connect with him on LinkedIn.