What is retail shrinking and organized retail crime?

For several years, the terms shrink, retail crime and organized retail theft have resonated from the mouths of politicians, police officers, industry groups and the country’s most prominent retail leaders.

Politicians and police departments have sounded the alarm about rising retail theft, calling for tougher enforcement and prosecution to combat it.

Trade groups and retailers have feared the shrinking’s effect on profits, warning it could lead to store closures, problems retaining staff, safety concerns and reduced returns on investment over time.

All of these parties have called for legislation that they say would better equip law enforcement agencies to crack down on the growing trend and catch those responsible.

What is shrink, by the way? And how does it differ from retail crime and organized retail theft?

Here’s everything you need to know about the subject. CNBC gathered this information using interviews with trade associations, retailers, law enforcement officials and publicly available records, including securities filings, survey data and transcripts of retail revenue phone calls.

When dealers use the term shrink, they are referring to the difference between the inventory they should have on their balance sheet and their actual inventory.

Shrink captures the loss of inventory from a variety of factors, including employee theft, shoplifting, administrative or cashier errors, damage or vendor fraud.

For example, a retailer may have $1 billion in inventory on its balance sheet, but a count may show only $900 million in merchandise, indicating that it lost $100 million in shrinkage.

But it is difficult to find out how the objects were lost. Shrink can refer to everything from expired food to a broken jar of pickles, from cosmetics that a cashier misdialed to a bottle of aspirin that was stolen and later resold online.

Shrink, including shoplifting and organized retail crime, cost retailers $94.5 billion in 2021, up from $90.8 billion in 2020, according to a 2021 study by the National Retail Federation that used data from 63 retailers. It is the most recent data available.

The companies surveyed for the survey estimated that retail theft accounted for 37% of these losses, employee or internal theft 28.5% and process and control failures 25.7%. Unknown losses and other sources accounted for the rest.

However, these numbers are largely estimates due to how difficult it is for retailers to determine whether an item was stolen, lost or missing for other reasons. It is not the case that thieves inform retailers about the goods they take.

Retailers with commercial property insurance may be covered for unforeseen losses such as theft, depending on the policy. It is unclear which dealers have such insurance, and if they do, how much it covers.

For the past couple of years, retailers have blamed less-than-expected profits on retail theft, shrink and organized retail theft. And the problem hasn’t gone away this earnings season.

In May, Target, Dollar Tree, Home Depot, TJ Maxx, Kohl’s and Foot Locker all cited shrinkage, retail theft or both as a reason for lower profits or hits to gross margins.

Target lost about $763 million from shrinking in the last fiscal year, and said the shrink is expected to shave more than $1 billion from profits in the current fiscal year.

Foot Locker said heavy discounting, and an increase in retail theft, shaved 4 percentage points off margins in the first quarter compared with a year earlier. The hit to merchandise margins was “driven by higher promotions,” the company said. It is not clear how much of an effect retail theft had on results, or whether promotions were the primary cause of the profit loss.

Home Depot said gross margins fell slightly due to “increased pressure from shrinkage.”

In the past, Walmart, Best Buy, Walgreens, Lowes and CVS have all cited shrink and retail theft as a problem.

In January, Walmart CEO Doug McMillon told CNBC theft is “higher” than it has been historically. “If it’s not corrected over time, prices will go up and/or stores will close,” he said.

Still, others have said the problem has stabilized.

Best Buy, which previously commented on retail theft, said shrinkage levels have stabilized to pre-pandemic levels. Because of the expensive electronic goods it sells, the stores were already fortified against thieves, the company said.

In January, Walgreens Chief Financial Officer James Kehoe said the company’s concerns may have been overstated after shrinking stabilized over the past year.

“Maybe we cried too much last year,” Kehoe said on an earnings call with investors.

Shrinkage was about 3.5% of sales last year, but as of January the number was closer to the “middle two,” Kehoe said. He also said the company would consider moving away from hiring private security guards.

Homeland Security Investigations, the primary federal agency dealing with organized retail theft, defines the activity as “the association of two or more persons engaged in unlawfully obtaining items of value from retail establishments, through theft and/or fraud, as part of a criminal enterprise.”

The NRF defines organized retail theft as “large-scale theft of retail goods with the intention of reselling the goods for financial gain.” The trade group says it usually involves a multi-level criminal enterprise.

At the bottom are boosters, the people who steal items from the shops. They then give the items to fencers, who pay the boosters for the products at a fraction of what they cost.

Fences then sells the items. They often sell the goods online, at informal street markets or even to other retailers. Sometimes the products are exported abroad.

The line between organized retail theft and shoplifting may be murky, but they are distinctly different.

Organized retail theft involves a larger criminal enterprise. Traditional shoplifting can often be need-based or done for other reasons that do not involve the elaborate resale of goods in collaboration with others.

An example of retail theft, or shoplifting, might be a teenager stealing a t-shirt or a poor person stealing food.

Shoplifting and coordinated theft are old crimes, but many experts say organized retail theft has grown along with the rise of online shopping, which has allowed groups to reach more customers.

In the past, fencers often loaded loot at informal locations such as flea markets or seedy small retail establishments. However, with the rise of online marketplaces, criminal groups now have access to large numbers of consumers.

After the Covid pandemic led to widespread store closings and shutdowns, e-commerce became the primary way consumers shopped, leading to an increase in organized retail theft, some experts said.

“With Covid, more and more consumers were buying online than in physical stores, and so the criminal actors saw even more profit from their illegal activity, and so that only exacerbated the problem,” said Lisa LaBruno, executive vice president of retail trade for the Retail Industry Leaders’ Association.

“It keeps coming back to the lack of accountability, and the massive profitability that criminal actors experience as a result of being able to hide behind their computer screens,” she said.

Organized retail theft has also increased because it can be low risk compared to other criminal enterprises, such as armed robbery or drug dealing.

For example, the crime of petty theft is charged in New York when a person steals goods worth less than $1,000. If the defendant is convicted, he faces up to one year in prison. But they can also receive probation, community penalties and fines, in addition to restitution.

Furthermore, people charged with petty theft in New York are almost always automatically released after their arrest due to recent criminal justice reforms to the state’s bail law.

Conversely, armed robbery is a felony in New York and comes with much harsher penalties.

Enforcement Specialist John Willis, who is part of an organized theft task force from Homeland Security Investigations’ Charlotte field office, said people he has arrested for the practice have cited the low-risk nature of the offense as the reason for committing it. .

“I arrested some individuals when I first got here to Charlotte, like before she committed [organized retail crime] violations, they were drug dealers and violent criminals who spent time in both state and federal prison for violent crimes and drug trafficking,” Willis told CNBC.

“And they simply said, ‘I’m making more money. And if I get caught, nothing really happens to me.’ So they get out of jail and they say, ‘We’ve learned our lesson, let’s not do drugs and hurt people, let’s just start stealing things,'” he said.

Furthermore, many retail security guards take a “hands off” approach when they witness theft, said Special Agent Willie Carswell, who is part of the same task force. Security guards are often told to only call the police when they see a theft in progress.

“If a booster knows he can go in and he can rip them off and he’s not going to face any kind of resistance when he does that, of course the risk versus reward for him increases. He knows that’s where he has to be He don’t have to steal this from somebody’s backyard where he can get shot. He knows he can walk into the store and he can rip them off,” Carswell said.

The items most often stolen by organized theft groups tend to be the most sought after by buyers.

When consumers shop online marketplaces such as Amazon and eBay, a few specific items have a high risk of coming from an organized theft group.

Over-the-counter medications are by far the largest class of items being stolen and resold online, and allergy medications are the largest subset, law enforcement sources told CNBC. The sources spoke on condition of anonymity because they were not authorized to comment on the matter.

In 2022, one retailer lost $2.9 million on allergy medications alone, the sources said.

When shopping online marketplaces, consumers should be cautious about purchasing Zyrtec, 60 or 90 count, Allegra, and Claritin. Other OTC drugs that may be counterfeit include Prilosec, Nexium, CQ10, Advil, Tylenol and Prevagen, the sources said.

Currently, face creams are also being targeted, and include items from drugstore brands such as Olay, Neutrogena, Roc and L’Oreal, the sources said.

— Additional reporting of CNBC’s Melissa Repko