Brick-and-mortar retail’s indisputable edge over e-commerce is that consumers can get what they want immediately, and can touch and feel the product before buying it. Rising theft—and stores’ measures to prevent it—could dull that edge.
The National Retail Federation estimates that shrink—an industry term for loss in inventory—amounted to roughly 1.4% of retail revenue in 2021, or roughly $94.5 billion. Most of that shrink is caused by theft. In a CNBC interview earlier this month, Walmart Chief Executive Doug McMillon said that if the retail theft issue is not addressed over time, “prices will be higher and/or stores will have to close.”
Although shrink is a perennial problem in retail, it really took off when the pandemic hit. In the five years leading up to 2019, retail shrink grew at a compound annual growth rate of roughly 7%, according to data from the NRF. In 2020, it jumped 47%, and rose another 4% on top of that huge jump in 2021. Some retailers, including Ulta Beauty and Target, have said that shrink has gotten worse again this year. “When times get tough, shrink goes up,” Ulta Beauty Chief Financial Officer Scott Settersten said on the company’s earnings call on Dec. 1. We’ve seen that in retail over a long period of time.”
Retailers surveyed by the NRF said Covid-19 has worsened the risk of crime, partly because labor shortages have made it difficult to fully staff stores. Moreover, supply-chain shortages made certain products more susceptible to theft because they fetched high value in secondary markets, according to Mark Mathews, vice president of research development and industry analysis at NRF. Supply-chain delays during the pandemic also meant more cargo was sitting around, leaving it more vulnerable to theft.
Shrink can have a substantial impact on already thin retail margins. Target said that the rise in shrink, including theft, reduced its gross profit by more than $400 million in the first three quarters of its fiscal year, compared with a year prior. For the full fiscal year, it estimates that its gross profit will take a $600 million hit. Dollar Tree in its November earnings call said that shrink and inflationary cost pressures shaved 1 percentage point off its operating margin at its namesake stores in its most recent quarter and 1.7 percentage points at its Family Dollar stores, which tend to be located in more urban areas. That is substantial for a company whose consolidated operating margin was 5.5% in the quarter.