The battle against shrinkage, when a store has fewer items in stock than its recorded inventory, is an ongoing struggle in the retail sector, and its complexities are evolving alongside the industry itself.

To better understand the challenges retailers face in combating theft and shrinkage, GLG’s Sidharth Satpathy sat down with seasoned industry expert, Steve Haas, who has over 25 years of experience in merchant and finance roles at both Nordstrom and Macy’s.

Could you paint a picture of the true scale of shrinkage and theft in the U.S. retail sector today? What are the different categories contributing to it?

It’s a combination of consumer theft, which is a very real part of it, and internal theft, which can take place anywhere from a warehouse to a selling floor or at any other step in the process. Then about 20% of all theft is generally attributed to paperwork and bookkeeping errors, where there are accounting irregularities that inflate inventory levels, so when retailers actually take a physical count, they’re short. So, it breaks up into those three buckets at about 40% each for internal theft and external theft and just under 20% for paperwork, bookkeeping, and financial errors.

What are the primary types of shrinkage and theft that retailers are facing today?

The problem is, Sidharth, that it’s everything. It’s across the board. It’s everything from what we typically think of, of somebody taking one item and sticking it in their bag or trying something on in the fitting room and walking out with it, up to what we’ve seen more and more of, which are these sort of mass grab-and-runs, where 50 people will descend on a department store and take everything off of a designer handbag floor, which simply overruns any kind of loss prevention staff in a store. So unfortunately, it’s not just one thing, which is what makes this increasingly challenging to target how to address it.

What is escalating this? Has the pandemic played a role here?

Yeah, unfortunately the pandemic plays a role in everything and probably will for years to come. In this case, I would say the pandemic did a couple of things. The first most tactical one is that stores have reduced their staffing levels in an effort to control costs, and as we’ve discussed many times before, there are increased gross margin and profitability pressures. One of the places retailers can potentially save money is labor. They have fewer people on the floor, and the single greatest deterrent to theft is a physical presence of salespeople. If someone engages with you when you walk in and you have the belief that there are people walking around, data shows that you’re much less likely to have people steal from you. Conversely, in today’s environment where staffing in many cases has been reduced to somebody standing behind the register, that deterrent just doesn’t exist. Unfortunately, it’s a “pick your poison.”

The other thing that we have seen, and I think this trend was coming, and a desire to reduce labor expense accelerated it: We’ve seen a very large uptick in the United States toward self-checkout, when 10 years ago that didn’t exist anywhere. It is now possible. I walked into a grocery store the other night at, I don’t know, 10 p.m., to grab something. The only option to check out now was self-checkout.

So that’s an extreme, but I would argue that 40 to 50% of all transactions are handled through self-checkout now, which data shows has significantly higher shrink rates, sometimes by people making a mistake and genuinely mis-scanning something. If I choose to scan one thing and put two in my cart, the technology today just doesn’t exist yet to capture that. So, the pandemic, as with everything, either created a new problem or took something that was already bad and made it even worse. And I think in this case it’s both.

How do retailers respond to this? Can you tell us some impactful strategies that they can implement to address shrinkage without hurting sales performance?

Yeah, it’s the second part of that sentence that’s very challenging, “without hurting sales performance.” Stopping shrinkage is easy. Every retailer could get shrinkage to a fraction of what it is, if you were willing to take it to extremes. If you’re willing to lock everything up, if you were willing to put an armed guard at the front door, if you were willing to frisk every salesperson when they clocked out of their shift. Those aren’t realistic. So unfortunately, shrinkage always has trade-offs and retailers have to decide which way they want to lean. And typically, they err on the side of realizing that the worst thing they can do is materially impact top-line performance in their efforts to reduce shrinkage. But you definitely see people trying to find that sweet spot, where the consumer is willing to accept something as a best practice and it reduces shrinkage.

So, what I mean by that is, if you’re going to buy a $1,000 Gucci handbag, the average customer understands that that is going to be locked up. It would not be reasonable for someone to think that they can simply walk up and buy it. But the other examples that we’re starting to see pop up are where it feels very excessive and, quite honestly, consumer unfriendly, and that’s the sweet spot that retailers are trying to find. And it depends on the retailer, and it depends on how severe the issue is.

I think to some degree there is a hope that this current moment of increased shrinkage is somewhat cyclical and that they need to find the right balance of keeping market share while continuing to improve shrinkage. You can envision a world where technology can help us here, and that’s coming. It’s not here yet. So, they have to be careful that they don’t create an environment where consumers either don’t feel welcome or safe or are not comfortable shopping.

Speaking of solutions, tech solutions like AI and video analytics are gaining traction. What do you think of their potential in mitigating shrinkage and any trade-offs that you think we should consider?

Where I think technology may ultimately be able to help is if you think about what Amazon has started to develop. I’m referring to their Amazon Fresh and Amazon Go, and I have seen it somewhere else; I think it is UNIQLO now who has it, where essentially, the Amazon example is spectacular in practice as small-format grocery stores. You walk in, you scan your Amazon app on the way in the door, so it knows who you are, and it tracks every single thing you pick up and put in your cart, and it charges you for it. There really is no way in that ecosystem to steal from Amazon.

UNIQLO has a new thing at self-checkout where you simply put everything in the bag; you don’t scan it, but it scans everything you put in your bag. Unlike my grocery store example where I said I scanned one, put two in the bag, UNIQLO knows. If I put two in the bag, it charges me for it. I think there is some evolution of things like that, along with RFID, which is the individual tracking of items — not like a sensor, but each item literally has a unique identifier — two shirts, two of the same shirts sitting next to each other on a fixture, each have a unique identifier. I believe there will be some convergence of automatically charging you for it and tracking individual devices that will make it increasingly harder to steal.

Are there any emerging tech or trends that you see having an impact on the future of retail shrinkage prevention?

The tech that used to do it doesn’t anymore. The two principal things tactically that big retailers would have is they would put sensors on their high-priced items, or they would do what’s called cabling them. So, if it’s a leather jacket, they put a metal cable through the sleeve of all of them, and they lock the fixture up. There’s also a sensor that has a dye tag on it that blows up and ruins the garment if you try to pry it open at home. But it is possible in the black market to buy a sensor remover. Those exist. People buy them all the time. If I steal something and I bring it home, and I have a sensor remover; well the sensor is no longer valid. That begs the question, what happens when you walk out the door and the alarm goes off?

Unfortunately, today, nobody even looks at it. The salespeople will look, shrug their shoulder, and say, oh, there must be something wrong with the alarm. Very, very, rarely will someone stop and say, “we must’ve forgotten to take the sensor off,” is how they always answer it. Which is, “hey, it’s not your fault. It’s our fault. Can I see your receipt? We’ll be happy to take the sensor off.” Well, if it is an innocent person who did it, they probably stop at the sensor when the alarm goes off, because they go back to the register because they don’t want to get home and have a sensor on their item. If it’s someone stealing, they just keep walking because they know they’re going to take the sensor off at home, and no one wants to confront them. So that’s no longer effective either.

I think the idea of facial recognition is a long, long, long way off. I think we don’t have it right, even from a loss prevention perspective. And I think to get to where retailers and anybody can effectively implement that and be ready to confront someone and say, “Hey, you’re not welcome in our store,” I don’t think it’s that. I think it’s going to have to come back down to how do we secure items effectively without alienating the customer? And then in the world of self-checkout, which I don’t think there’s any question is here to stay, how do we ensure that everything that walks through that turnstile gets rung up? And I do believe that technology is much closer.

It’s expensive to implement, but when you start talking about delivering a meaningful reduction in shrink, it becomes easy fairly quickly to justify a significant capital expense, if over time, I can reduce my shrinkage. So, I think that is the biggest thing that’s coming, to continue to move to self-checkout, and to find foolproof ways to capture everything that goes through.

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About Steve Haas

Steve Haas is an independent retail consultant at Tailored Solutions Consulting, LLC. Prior to entering the consulting sector, Steve held senior-level roles at both Nordstrom and Macy’s. He was most recently with Nordstrom for eight years between 2012 and 2020, where he held a variety of Omni-Channel Vice President positions and was directly responsible for inventory management, brand and assortment planning, and full P&L results. Previously, Steve held the position of Director of Business Development at Wireless Advocates between 2010 and 2012, where he negotiated and rolled out businesses inside large national retailers. Before this, he was Vice President of Planning at Macy’s between 2006 and 2008.

This article is adapted from the GLG Teleconference “Combating Retail Shrinkage and Theft” hosted on February 14, 2024. If you would like access to this event or would like to speak with Steve Haas, or any of our industry experts, please contact us below.