Any in-depth research into retail theft reveals a definite problem. Namely, that it’s unclear how much of a problem it is or how much it’s rising, if it’s worsening at all.
That hasn’t stopped the industry, along with a few retail chains, from emphasizing it in research reports, earnings calls and other forums. On Oct. 26, representatives from the National Retail Federation descended on Capitol Hill for what the group dubbed “Fight Retail Crime Day,” to “advocate for legislative solutions to address organized retail crime.”
Many point to high-profile reports of smash-and-grab store robberies or arrests of organized thieves as evidence of a problem. For statistics, reporters, lawmakers and other business groups rely on the NRF and the Retail Industry Leaders Association. Meanwhile, some analysts believe the retail industry could be overplaying the problem, at least to some extent.
“While theft is likely elevated, companies are also likely using the opportunity to draw attention away from margin headwinds in the form of higher promotions and weaker inventory management in recent quarters,” William Blair analysts led by Dylan Carden said in an Oct. 25 client note. “We also believe some more recent permanent store closures enacted under the cover of shrink relate to underperformance of these locations.”
This issue is clouded by uncertainties, not least because most discussion of it – in the media, in analysis and even in the industry itself – mixes up terminology and numbers.
What are we talking about?
Assessing how retail crime affects the industry is confused by several terms that are either ill-defined, used interchangeably or both.
Every year for the past several years, the NRF has released its “Retail Security Survey,” billed as “The state of national retail security and organized retail crime.” The research, a survey of dozens of retailers, depending on the year, digs into inventory loss, known as “shrink.”
The problem begins there. Shrink encompasses inventory losses caused by all kinds of reasons, including theft, operational or process mistakes, and systemic errors. Retail’s shrink rate rose to 1.6% of sales in 2022 from 1.4% in 2021, according to the NRF’s annual retail security survey.
The word “shrink” is often used — by the media, researchers and the industry — as a stand-in for “theft,” even though, according to the NRF, more than a third of shrink is due to administrative reasons and unrelated to theft of any kind.
The NRF itself has been imprecise about this. In its own press release announcing its latest survey, the NRF reported its full shrink number, in dollar terms, as a problem of "retail crime,” even though retail crime is a subset of that total shrink number.
Earlier this month, that error showed up in New York, where Gov. Kathy Hochul had vetoed a bipartisan bill that would have established an organized retail crime task force. In a published statement, the New York Retail Council criticized the move, noting that “Stores that invest in New York communities lose $4.4 billion to retail theft.” Council spokesperson Amanda Powers said by email that the statistic comes from a Capital One Shopping report on retail theft, which treats the NRF’s total shrink number as theft, then extrapolates the numbers by state.
However, using the NRF statistics as outlined in Capital One’s report, the dollar amount related to all types of retail theft in New York would be $2.86 billion. Powers declined to comment on that possibility, saying the group doesn’t have additional relevant statistics to evaluate it.
Retailers' level of inventory loss or "shrink" hasn't changed much
Shrink as a percentage of retail sales, 2015-2022
The level of shrink has held fairly steady for the last several years, since at least 2015. To calculate the financial impact of shrink, the group uses revised estimates for total retail sales from the U.S. Department of Commerce. In 2022, NRF estimates that shrink reached $112.1 billion in losses, up from $93.9 billion in 2021. The numbers are not adjusted for inflation.
“Shrink is such a broad term and it is very hard to unpack what is behind the numbers. And, of course, retailers mention it, but then don’t like to share too many details,” GlobalData Managing Director Neil Saunders said by email.
Retailers are preoccupied with theft because about two-thirds of shrink, (or unaccounted-for inventory), is estimated to have been stolen, either by employees or outside thieves, per the NRF’s surveys. In 2022, employees stealing from retailers accounted for 29% of shrink, while external theft – including shoplifting, cargo robbery and organized retail crime – accounted for 36%.
The biggest problem? Maybe, maybe not
Both the NRF and the Retail Industry Leaders Association are most vocal about one type of theft: “organized retail crime” or ORC. The NRF defines this as “theft/fraud activity conducted with the intent to convert illegally obtained merchandise, cash, cargo or cash equivalent into financial gain (no personal use), typically through their online or offline sales.”
This definition is neither legal nor precise, and that contributes to uneven reporting on the part of store workers, loss prevention staff and police, experts say. Like shrink, the term “organized retail crime” is often lumped in with other types of retail theft, including shoplifting, employee theft and cargo robbery. Due to differing approaches from local, state and federal jurisdictions as well as businesses themselves, such terms are defined inconsistently by law enforcement, prosecutors, lawmakers, criminologists and retail loss prevention officers.
Theft of all types, including by employees, is the largest cause of shrink. Errors are the second-largest.
The top reasons for shrink in 2022, according to the National Retail Federation
“It’s a well-known issue in the industry that the definition of organized retail crime is subject to different interpretations, even within the same organization, just by different staff interpreting the same data,” said Trevor Wagener, director of the research center and chief economist at the Computer & Communications Industry Association, who studies these issues.
Moreover, the scale of organized retail crime is less clear than it may once have been. Today, according to both the NRF and RILA, it is not known what percentage of shrink is due to organized retail crime. But the groups have attempted to measure it in the past.
In its 2020 report, the NRF said that “ORC costs retailers an average of $719,548 per $1 billion in sales,” which would equal 0.07% of sales. More recently, it has stopped breaking out its impact on the industry. Today, the NRF does still cite figures as it discusses organized retail crime, but it no longer releases financial costs specific to it.
That’s because retailers are reporting ORC losses that are lower than what the NRF expects them to be, Danielle Inman, NRF’s senior director of media relations, said by email.
The NRF believes “that the reported dollar value of ORC probably represents the tip of the iceberg and may greatly understate the problem,” she said.
Not all retailers investigate ORC, some because they’re not susceptible to it, but others may be missing the extent of a problem, according to Inman. The NRF said it also now refrains from pinpointing the dollar loss because the consequences of organized retail crime aren’t all financial, noting that more than two-thirds of survey respondents said that violence and aggression in 2022 was up compared to 2021.
However, some analysts believe the industry could be inflating the problem.
While S&P Global Ratings in September called retail theft one of “the top risks to the sector,” analysts there led by Diya Iyer also said they “believe some retail companies could be overstating the contribution of theft this year.” Similarly, in their recent research note, William Blair analysts speculated that some retailers may be employing theft as a cover for lackluster merchandising or ineffectively managed stores.
“Shrink is such a broad term and it is very hard to unpack what is behind the numbers."
Neil Saunders
GlobalData Managing Director
Above all, as a subset of a subset of retail theft, (which itself is a subset of shrink), ORC has been difficult for the industry to quantify, CCIA’s Wagener said. Available data suggests that, overall, organized retail crime is not driving shrink increases, he said.
“A deeper issue with ORC is simply that no one, not even the retailers, has a good sense for the actual size of the problem,” he said. “I don't doubt that there are a limited number of specific stores in specific cities where ORC patterns have increased, but those stores don't appear to be representative.”
The numbers are coming from inside the house
This shows how, along with the jumble of terms and dearth of specifics, the numbers on shrink and theft are often outdated, inadequate, misinterpreted or some combination. In turn, murky or inaccurate stats are widely picked up in press coverage and elsewhere.
To begin with, for its reports on theft, the industry has relied on surveys of a relatively small number of very large retail chains. The NRF’s Retail Security Survey and RILA’s 2021 statistics on stolen goods rely on non-representative samples that call their conclusions into question, experts say.
RILA’s 2021 report on retail crime estimated that as much as $68.9 billion worth of products were stolen from retailers in 2019, a number that extrapolated data from “five major interstate retail companies.”
Five is too few to make that leap, and the fact that those surveyed were large chains also probably skewed the result, according to CCIA’s Wagener. Jason Brewer, senior executive vice president of communications and marketing at RILA, said the group is no longer pursuing this line of research.
The NRF’s annual shrink report includes data from more than five retailers, but it too depends on a relatively small pool. The organization based its most recent calculations on survey answers from 177 retail brands. That’s nearly triple last year’s 63 respondents, but still a tiny fraction of its membership, which includes about 16,000 retailers.
Together, NRF’s respondents see $1.6 trillion of annual retail sales and run more than 97,000 retail locations in the U.S. As with RILA’s estimate, the retail theft experienced by such major players may not be all that representative of what’s going on in the industry as a whole, Wagener said.
The lack of response from the vast bulk of its membership may also be a problem, according to Trent Buskirk, a professor of data science at Bowling Green State University and an expert in survey data.
“Those who didn't respond could maybe have a very different experience with theft, and they just didn't think it was worthwhile to report,” he said by phone. “A non-response bias might tilt these statistics upward. When you see things like ‘70% of the retailers,’ that's a pretty high number for everybody to be in agreement. That situation is indicative of a potential for non-response bias.”
The NRF didn’t directly address questions about such criticisms, except to add that about 35 of those answering the survey were retailers with fewer than 200 stores.
Strength, and weakness, in numbers
The numbers that flow from these surveys deteriorate further when they are improperly labeled, or plugged into equations where they don’t hold up mathematically.
For example, RILA’s finding two years ago that $68.9 billion of goods is stolen from retailers each year has had particular staying power. Often cited as “nearly $70 billion,” it is circulating even now in press releases, media reports and white papers on retail crime. The statistic comes from a survey published in 2021 of five large retailers, which gained steam right away and is often used to describe the extent of organized retail crime.
However, the finding refers to all theft, not just organized retail crime, RILA’s Brewer said by email.
“A deeper issue with ORC is simply that no one, not even the retailers, has a good sense for the actual size of the problem."
Trevor Wagener
Chief Economist, Computer & Communications Industry Association
In fact, RILA itself doesn't "generally use that number any more in our communications, given that it’s now a few years old,” Brewer said. Still, RILA remains comfortable with the number because the report is from 2021 and its information is from 2019.
“I always add the caveat now that more recent studies suggest that the number is now significantly higher, which tracks the benchmarking surveys we’ve done with our [asset protection] community,” Brewer said.
As Wagener previously noted, including in June testimony to the U.S. Congress, the size and nature of RILA’s sample size throws the number into question. Yet, other trusted sources have embraced it, often referring to it as solely a measure of organized retail crime rather than all types of theft.
In 2021, the California Retailers Association used RILA’s finding to come up with its own claim that organized retail crime in the state accounted for $3.6 billion in annual retail losses. The Los Angeles Times noted that would be equal to 25% of the annual retail sales in the state – unlikely if not impossible — especially given the NRF’s estimate that year that losses from organized retail theft averaged 0.07% of retail sales, “an amount roughly 330 times lower than the CRA’s estimate.”
Despite its questionable utility, this statistic continues to be quoted with authority. The U.S. Immigration and Customs Enforcement Agency picked it up last year, and the Department of Homeland Security uses that in its online information about its efforts combating organized retail crime. The U.S. Chamber of Commerce employs the RILA report in its calculations of retail theft by state. Reuters included RILA’s number in a June explainer on retail crime this year.
"We recognize the challenges the retail industry and law enforcement have with gathering and analyzing an accurate and agreed-upon set of data to measure the number of incidents in communities across the country.”
Mary McGinty
VP of Communications and Public Affairs, National Retail Federation
In an email to Retail Dive, Brendan Dugan, president of the National Coalition of Law Enforcement and Retail, known as CLEAR, pointed to RILA’s number as the most up-to-date reflection of “the current retail losses to ORC,” despite RILA’s description of it as referring to all theft. Sen. Chuck Grassley (R-Iowa) is the most recent to cite it publicly, in a press release touting his meetings with the NRF in late October.
Wagener finds NRF’s data imperfect, but more credible than RILA’s. Still, in one case, the NRF unknowingly quoted a source that referred incorrectly to an old NRF shrink number as an estimate of ORC.
In a report this year dedicated to organized retail crime, conducted with risk, compliance, investigations and monitoring firm K2 Integrity, the NRF said that shrink was $94.5 billion in 2021, “nearly half of which was attributable to ORC, according to NRF survey data and research by the National Coalition of Law Enforcement.”
This came from testimony from CLEAR’s Dugan, who in 2021 told the Senate Judiciary Committee that the group estimated that organized retail crime led to $45 billion in annual losses for retailers. In an email to Retail Dive, Dugan confirmed that he was citing NRF’s 2016 report on total retail shrink as CLEAR’s ORC estimate.
That means that, for a crime report published this year, NRF used shrink totals from two different years, citing one as total shrink and the other as the ORC subset of that shrink. In fact, each number reflects inventory loss due to all reasons, unadjusted for inflation, five years apart.
In an email, Mary McGinty, NRF VP of communications and public affairs, said the NRF was “not aware that Ben Dugan was citing any National Retail Federation report, study or data in his 2021 Senate testimony,” and that it “will review with K2 and, if necessary, correct and update the report.”
“Daily incidents of theft” and “recoveries of stolen retail goods into the millions of dollars” should nevertheless be the focus of the group’s attention, she said.
“We stand behind the widely understood fact that organized retail crime is a serious problem impacting retailers of all sizes and communities across our nation,” she also said. “At the same time, we recognize the challenges the retail industry and law enforcement have with gathering and analyzing an accurate and agreed-upon set of data to measure the number of incidents in communities across the country.”
In reality, using NRF’s own numbers and methodology in its earlier reports on shrink, the inventory loss attributable to organized retail crime was not nearly 50%, as the NRF/K2 report indicates, but closer to 5%, Wagener found. All this means that the group is lobbying Congress on this issue without standardized terminology or reliable numbers in hand, he warned.
“There are varying narratives on how bad these crimes are and aren’t, with statistics being manipulated for political and budgetary reasons."
Reggie Byron Jones-Sawyer
Member of the California Assembly and Chair of the Assembly’s Committee on Public Safety
“Before there’s any sort of legislative solution, we really do need to improve the data collection, because it’s very difficult to say whether or not ORC is going up or down,” Wagener said. “With the data that we have, it looks very, very flat. But that data is of course known to be very noisy, with respect to the actual amount of activity going on.”
Policymakers in California are delving into these issues in order to parse claims that a 2014 referendum that reclassified some property offenses, including shoplifting, is leading to more or less crime. The weakness of the data around retail theft led dozens of California Assembly members in June to request an investigation by the Little Hoover Commission, an independent state oversight agency.
At its first hearing on Nov. 16, the commission heard from retail groups and shop keepers, who offered testimony around theft incidents that offered little insight into the scale of the problem or whether organized retail crime was the most pressing issue. Assemblymember Reggie Byron Jones-Sawyer, who chairs the Assembly Committee on Public Safety and has authored legislation to combat organized retail theft, told the commission that even natural allies like sheriffs departments and the California Retailers Association have conflicting ideas of what must be done.
“There are varying narratives on how bad these crimes are and aren’t, with statistics being manipulated for political and budgetary reasons,” he said. “We want the actual irrefutable data to tell us where we really are at. This helps the legislature develop better policy to deal with specific crimes.”
via https://www.aiupnow.com
Daphne Howland, Khareem Sudlow
