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Are Retailers' Lower Profits Truly Due to Rising Organized Theft? Unraveling the Blame Game

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Understanding the Impact of Organized Retail Crime on Businesses

This is the first installment in a comprehensive three-part series that delves into the issue of organized retail crime and its effect on the retail industry. The series will critically examine the assertions made by retailers about the impact of theft on their businesses, as well as the measures being taken by corporations and policymakers in response to this growing problem. Be sure to stay tuned for parts two and three of this series, which will be released later this week.

The Rising Concern of Organized Retail Theft

Retailers across the board, including big names like Target, Dollar General, Foot Locker, and Ulta, have identified organized retail theft as a significant concern. The issue has gained such prominence that many companies are attributing their declining profits to this form of crime. However, quantifying the exact impact of stolen goods on a company's bottom line is a challenging task, and verifying these claims is even more difficult.

Organized Theft: An Industrywide Problem

When releasing their earnings reports in May and June, numerous retailers cited 'shrink,' a term used in the retail industry to denote inventory loss, as a major reason for their reduced profit outlook or lower margins. This issue is expected to resurface as a flurry of retail companies prepare to report their financial results in the coming week.

The Challenge of Verifying Retail Theft Claims

While organized theft is a genuine concern, verifying the claims retailers make about it is nearly impossible. Companies are not obliged to disclose their losses from stolen goods, making it a difficult metric to accurately count. This lack of transparency leaves the industry, investors, and policymakers with limited options but to rely on the word of the companies.

Shrink: A Complex Issue in Retail

Shrink, a term that refers to lost inventory in the retail industry, can result from various factors. These include shoplifting and vendor fraud, which are hard to control, as well as employee theft, administrative error, and inventory damage, which retailers have more power to curb. However, retailers rarely break down how much of their inventory loss is due to crime and how much is due to other causes, making it impossible to verify whether the issue has worsened over time.

Understanding the Financial Impact of Shrink

Retailers often withhold information that may appear unflattering on earnings calls and press releases. However, companies are not required to disclose losses from shrink unless they're considered "exceptionally large" and material to investors. Losses from shrink are usually buried in the "cost of goods sold" and only show up in a retailer's gross margin.

The Role of Organized Theft in Rising Shrink

When industry executives claim that organized theft is on the rise, they often base their assertions on a study released by the National Retail Federation. According to this study, losses from shrink increased to $94.5 billion in 2021 from $90.8 billion in 2020. However, the data used in this study is anonymized, gathered on the honor system, and largely based on estimates, making it less reliable than it appears.

The Real Impact of Shrink on Retailers

Retailers have always had to deal with shrink, but they have long relied on estimates and educated guesses to determine how an item was lost. They use sales patterns, inventory trends, historical data, and, when available, evidence such as surveillance footage to estimate how merchandise is lost. However, the actual amount that American retailers lost to shrink in 2021, and how that number has changed over time, remains unknown.

Organized Retail Crime: A Growing Concern for Retailers

Retailers like Target have made headlines by revealing the significant losses they've incurred from unaccounted inventory. For instance, Target reported in May that it was on track to lose more than $1 billion from shrink this year, up from $763 million the previous fiscal year. However, the company acknowledged that it's challenging to calculate theft and shrink overall, raising questions about the accuracy of its estimates.

Tracking and Measuring Shrink: A Complex Task

Shrink is a complex issue to track and measure because it can originate from many sources at all points in the supply chain, from the factory to the store. Not many retailers have the sophistication to track it at all these different points. Those that have the right systems and technology in place have a better grasp of where their shrink is coming from, but overall, the industry lags behind in these investments.

Implications of Organized Retail Crime for New Businesses

The rise of organized retail theft presents a significant challenge for new businesses entering the retail industry. As this series has highlighted, the issue is complex and multifaceted, with a lack of transparency and difficulty in accurately quantifying losses making it a particularly tough problem to tackle.

Financial Challenges for New Retailers

New businesses, already grappling with the challenges of establishing themselves in a competitive market, may find their bottom lines severely impacted by shrink. The financial losses resulting from theft, coupled with the costs associated with implementing measures to combat it, can strain the resources of a fledgling company.

Need for Accurate Tracking and Measurement

The issue underscores the importance of accurate tracking and measurement systems for inventory management. New businesses must invest in sophisticated systems and technology to have a better grasp of where their shrink is coming from.

In conclusion, while organized retail theft is a daunting issue, it's one that new businesses cannot afford to ignore. As they navigate their way in the retail industry, understanding and addressing this problem should be a top priority. This will not only help safeguard their profits but also contribute to the broader industry efforts to combat this pervasive problem.

Article First Published at: https://www.cnbc.com/2023/08/09/claims-about-organized-retail-theft-are-nearly-impossible-to-verify.html
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