Is blaming crime the whole story behind retail 'shrink'? Experts say maybe not

While an increasing number of major retailers, including Minneapolis-based Target, cite higher theft rates to explain tougher security measures or store closures, analysts question whether their losses are all due to crime.

Product losses, known as shrink in the industry, have almost become synonymous with theft, especially as they've increased in the U.S. in fiscal year 2022 to more than $112 billion, according to the National Retail Federation. But there are other factors the industry buzzword covers that are less about people stealing and more about how retailers need to better manage their inventory, experts said.

The opportunity for operational mistakes — like canceled orders not making it back to shelves — has grown since the pandemic spurred wider adoption of alternative shopping methods, like self checkout, drive-up and buy online, pick up in store. More ways to sell come with more ways to lose.

"People talk about shrink and it being this problem, and it's always linked to theft," said Neil Saunders, managing director of the retail division of consulting company GlobalData. "Theft is an issue. It's growing. It does erode profits, but ... a lot of shrink also comes down to operational issues. It comes down to internal things the retailer is doing."

Loss-prevention experts believe about 34% of shrink is from a combination of operational errors and other unknown causes, close to the same amount attributed to external theft. But many retailers don't talk publicly about what they can do to proactively and internally manage these nontheft losses.

Brand Elverston, an independent retail consultant who formerly helped lead asset protection at Walmart, said while retail theft has likely become more violent, the actual loss numbers are more murky than most retailers say.

"What am I more likely to say on an earnings call: Is it theft that is a problem, and it's putting pressure on our profitability, or we are really screwed up internally, and we ordered too much stuff, and we couldn't find it?" Elverston said.

Automated or contactless retail services installed during the pandemic were meant to make shopping safer and more convenient, but they can also make inventory more difficult to track, said former Target executive Chris Walton, co-founder of retail blog and podcast Omni Talk.

Self-checkout can lead to more opportunities for intentional or unintentional theft. Order pick-up and same-day delivery also increase the potential for human error.

"Inventory can get misplaced," Walton said. "The wrong inventory can go out in the wrong bags. That exacerbates the problem. The same thing happens with third-party pickers, the Instacarts, the Shipts, the DoorDashers of the world. They can make those same errors."

Many retailers like Target also use their stores as mini-distribution centers to fulfill and ship online orders. But that has consequences.

"I would unequivocally say that the workload being pushed into stores over the last three or four years is definitely a driver of the increased shrink," Walton said.

Returns lead to more shrink as well, said Brandon Pierre, vice president for customer success at Minneapolis-based supply-chain software company SPS Commerce. Some retailers still have different store and online item codes, leading to improper cataloguing for a purchase-return involving both channels.

"The inventory is coming back in, but where is it actually going, and how am I selling it, and is it getting back on the shelf?" Pierre said.

Every time a customer cancels or changes an order is another opportunity for misplacing, Pierre said. Retailers are also struggling to find workers, which makes improper store management and damaged items more likely, Saunders said.

"When the floor is messy or stock in the back of the stores is messy, it's much easier to just lose things," he said.

Retailers can address these losses in many ways, like eliminating some points of sale. Walmart has started removing some self-checkout lanes in New Mexico. Another option is to charge customers fees to offset some costs. This year, Amazon raised the order minimum for free Amazon Fresh grocery delivery for Prime members.

Technological innovation is another avenue, like installing a new inventory management system or using radio frequency identification tags. Retailers could also alter the way employees work or their store designs.

Northern Tool and Equipment is one of the retailers harnessing technology to better manage inventory. CEO Suresh Krishna said the shift was primarily to improve customer service, but with an added bonus of safeguarding against shrink.

The Burnsville company — which has more than 100,000 tools on its shelves — is in the middle of a massive update of its internal point-of-sale and inventory-management systems.

"Now with enhanced technology, it allows our people to take care of inventory processes in a much simpler way," Krishna said during a tour of the Burnsville store near the company's headquarters. "An example is, it used to take 25 keystrokes to receive a truck into the system. Now it takes five. ... It has significantly reduced even our own errors so it can include that shrink."

During the pandemic, Northern Tool — which also offers same-day delivery — added curbside pickup. Northern Tool's online sales now generate about a third of its business. That puts extra pressure on managers to have accurate views of their store inventory.

"It adds another layer of possible shrink," said Jeff McGill, Midwest regional sales manager for Northern Tool.

The new system provides real-time inventory status when an employee scans a product, as opposed to relying on sometimes day-old item counts. The system also updates the available inventory shown online, which is helpful for customers when there might be more out-of-stock items like generators during a tropical storm.

Northern Tool is also able to access customers' purchasing history over an extended period with its customer databases merged so store and online purchases are in one system.

All of Northern Tool's more than 120 stores should have the new system by Thanksgiving, in time for the busy holiday shopping season. The company has made investments in its predictive analytics capabilities.

"We're providing a lot more flexibility for the customer to shop whichever way they want," Krishna said. "The pandemic forced us to think about that in a much faster way. ... All of those options provided us with what I would call opportunities for customer friction, where execution issues may have caused customers' [orders] to not be fulfilled the way [they] should have been.

"So the entire focus for us has been, how do we enhance the customer experience with better technology?"