Inflation and opportunity drive soaring rates of retail theft. Ulta Beauty, Target, and even Dollar Tree address the disturbing new trend of retail theft and its effect on quarterly earnings. Beyond the financial impact, the uptick in organized retail crime (ORC) impacts the consumer experience in-store, brings concern for the safety of store associates, and in some cases, results in store closures.
The National Retail Federation (NRF) reported that annual merchandise shortage (shrink) amounted to $94.5 billion in 2021, up from $90.8 billion in 2020, with nearly half attributed to organized retail crime (ORC). The NRF showed that, on average, retailers experienced a 26.5% increase in ORC.
“The year is off to a positive start, as the Ulta Beauty team delivered revenue, operating margin, and diluted EPS consistent with our internal expectations. Store traffic remained healthy, member growth showed continued strength, we delivered growth across key categories, and we strengthened engagement with the Ulta Beauty brand,” said Dave Kimbell, CEO of Ulta Beauty, during the earnings call.
Ulta Beauty reported net sales compared to the first quarter of fiscal 2022 increased 12.3% year over year to $2.6 billion, owed to increased comparable sales, strong new store performance, and growth in other revenue.
While results were positive, Kimbell focused on product theft and inventory shrink during the earnings call. “The rise in violence and aggressive behavior during organized retail crime thefts is concerning. The company has experienced higher levels of theft and is challenged to address the issues collaboratively. Retailers in other sectors have similarly raised concerns about increased organized retail crime (ORC)—professional, large-scale theft conducted as a business with goods resold on the black market for financial gain."
Dollar Tree cited shrink as one reason for the chain's lower-than-expected profit, with the Wall Street Journal reporting the issue hit the company’s earnings by roughly 14 cents a share last quarter compared with the same period in 2022. "This is not unlike what you're seeing in many other retailers across the industry," CFO Jeffrey Davis told analysts. "Some of this is societal, some of it is economic, some of it, of course, is particular to us. And we're taking all the appropriate steps that we can to control and mitigate this where we can."
At Target, the company's first-quarter operating income was 5.2% higher than expected, mainly attributed to gross margin upside from lower freight and transportation costs and efficiency efforts that offset a higher-than-expected impact from shrink, which reduced the company’s gross margin rate by a full percentage point in the first quarter compared to a year ago.
“The unfortunate fact is, violent incidents are increasing at our stores and across the entire retail industry,” Target CEO Brian Cornell said during an earnings call. "When products are stolen, simply put, they’re no longer available for guests who depend on them. And left unchecked, theft and organized retail crime degrade the communities we call home.”
Target’s inventory loss totaled roughly $763 million last fiscal year, based on the company’s financial filing. This year, shrink is anticipated to surpass $1 billion, reducing the company’s profitability by more than $500 million.
The Rise of Organized Retail Crime
Historically, shoplifting rises during economic hardship, driving some people to steal basic necessities. While this is at play, the larger concern is the losses attributed to the work of organized criminal gangs. For those who have turned shoplifting into a trade, stolen goods were once liquidated through flea markets or pawn shops, but the rise of online shopping has made it easier than ever to turn pilfered products into cash.
The 35th Annual Retail Theft Survey from Jack L. Hayes International reported 81% of the retailers reported an increase in shrink in 2022, resulting in over 340,000 incidents of apprehension, representing a 45.6% increase, and the recovery of over $288 million in stolen merchandise, representing a 70.5% uptick in 2022.
Organized retail crime is driven solely by financial motives, with criminal groups engaging in ORC because it can be highly profitable. Large and small retailers are dealing with an escalation in store theft. from petty shoplifting to well-organized shelf-clearing crimes. In New York City, nearly a third of all shoplifting arrests were committed by 327 people who were arrested and rearrested more than 6,000 times, according to the The New York Times.
Scott M. Settersten, CFO of Ulta Beauty, said, “ORC theft put a pretty meaningful drag on our financial performance and will remain a challenge the rest of the year.”
Relatively low risk compared to other criminal activities, ORC has the potential for high financial rewards combined with a perception of lenient legal consequences and minimal jail time, making it an appealing venture for criminals. The rise of online marketplaces and e-commerce platforms has provided new avenues for organized criminals to sell stolen merchandise. These platforms offer anonymity, ease of listing products, and a large customer base, making it convenient for criminals to distribute stolen goods.
Organized retail crime is carried out by sophisticated criminal networks that operate across multiple locations and jurisdictions. These networks often have well-established hierarchies, communication channels, and specialized roles within the criminal enterprise, making it more challenging for law enforcement agencies to disrupt their activities.
Retailers are pressing lawmakers to take shoplifting more seriously through legislation requiring online marketplaces to collect and verify third-party sellers' identities and financial details, and forcing high-volume sellers to disclose contact information to consumers.
“While we’re doing all we can to address the problem, it’s an industry and community issue that can’t be solved by a single retailer,” Cornell said.
"Target is collaborating with legislators, law enforcement and retail industry partners to advocate for public policy solutions to combat organized retail crime, and the company is working to keep its stores open in markets where the problems are happening."
Managing the Surge in Shrinkage
Organized criminals exploit vulnerabilities in retail operations, such as understaffed or poorly trained security personnel, inadequate surveillance systems, and weak inventory management practices.
Retailers are taking defensive merchandising measures, shifting the placement of high-risk merchandise and installing locked cabinets that require the assistance of a store associate. While these actions may impede theft, they also impact the shopping experience for consumers and, ultimately, sales.
Kecia Steelman, Chief Operating Officer for Ulta Beauty, said they are employing a full-court press, increasing and educating staff as best they can, and investing in security guards and armed security guards in some locations. By the end of the year, 70% of the chain will merchandise fragrance in locked cabinets.
Retailers say security devices have become a necessity in some cases. “Different products can experience different theft rates, depending on store location and other factors, affecting which products and how—they are protected from theft at each store. Our goal is to keep products available and accessible for customers to purchase and we utilize a variety of different measures to deter or prevent theft. Locking a product is a measure of last resort,” a spokesperson for CVS said in a statement emailed to BeautyMatter.
Off-the-record discussions with retailers illustrate the frustration they feel. “I was under pressure to lock up nail polish but the numbers I made offset the theft,” says one former drugstore buyer. “What’s funny is that the exact same colors are stolen no matter what store, so I know they are reselling them to salons.” She estimates she would lose 20% of nail polish sales if people needed to find someone to unlock the products. Another buyer recalls being at a salon when a guy came in trying to peddle nail polish. “I told the nail technician please don’t buy those; they are from my store across the street.”
“This is a real balancing act for retailers right now,” Mark Doyle, President of Jack L. Hayes International, said. “We know customer service is the best deterrent to shoplifting, as many shoplifters want and need privacy to commit their thefts. However, many retailers aren’t in a position to increase their payroll right now with sales being stagnant."
Doyle said, “There are some very positive anti-theft actions taking place, such as the INFORM Consumers Act, RFID technology combined with machine learning, artificial intelligence, facial and feature recognition, power tool activation technology, and self-service locking cases, among others. Reducing theft and loss will take a team effort going forward between retailers, law enforcement, and legislators.”
The Macro Problem Requiring a Macro Answer
Addressing organized retail crime requires collaboration between retailers, law enforcement agencies, and policymakers. It involves implementing robust security measures, increasing awareness and training for retail staff, improving information sharing among stakeholders, and advocating for stricter penalties for those involved in organized criminal activities within the retail sector.
“Large-scale theft impacts our associates and our guests, and despite our investment, it is getting worse, not better,” shared Kimbell. The company has increased its employee training and education, plans to use locking fixtures for fragrance, and continues investing in staffing and security personnel. “ORC is a macro problem and needs a macro answer. I am personally involved in this issue,” said Kimbell.
