Retail theft has become a scapegoat

• Retail companies have reported billions of dollars in losses from theft by citing shrink numbers.
• But shrink isn't just theft. It's a bit more complicated.

If you listen to major retailers talk about theft, one word comes up again and again: shrink.

Retailers include losses due to theft as a part of "shrink," an industry term for the difference between the inventory a store has on hand and the amount of inventory it's supposed to have according to its balance sheet. Shrink includes customer theft, but it also accounts lost or destroyed inventory and employee theft, to name a couple of other examples.

But companies such as Target and Walgreens have cumulatively reported billions of dollars in losses from theft by citing shrink numbers. Often, company executives use "shrink" and "theft" interchangeably, while providing no breakdown of how much of their shrink is attributable to theft.

Target, for example, previously told Insider that missing inventory at its stores had doubled since 2019. But the big-box chain hasn't broken down the exact causes of that increase. Still, the company mentioned shrink in the run-up to the company's decision in September to close nine Target stores across the US.

Target did not immediately respond to Insider's request for comment for this story.

When Rite Aid closed stores, its chief financial officer, Matthew Schroeder, said it targeted "stores in high-shrink areas."

In August, a Home Depot executive responded to an analyst's question about shrink on an earnings call by referencing "organized retail crime" and calling for congressional action on a bill that would curb the sale of stolen goods online.

Talking about shrink like that overstates the impact of theft on retailers — and hides other problems that the companies might be less willing to discuss with investors.

"Theft as a reason for shrinkage is a tale as old as time," said Melodie van der Baan, the CEO and a cofounder of Max Retail, a company that sources excess inventory from retailers and resells it. "It will always be a thing, but it's everything else that you have to manage in your business to offset it."

Retailers measure theft as part of shrink, but that's just one of the factors that can influence their bottom lines

Theft is merely one cause of shrink, which added up to $112.1 billion, or 1.6% of all retail sales, in 2022, a report the National Retail Federation released in September found.

External theft accounted for 36% of shrink in 2022, the report said. That figure includes the impact of organized retail crime.

That means other factors make up the majority of the problem.

Employee theft accounted for 29% of shrink, the report said. Another 27% came from "process, control failures and errors," it added — in other words, a retailer's shortcomings in tracking inventory.

During the pandemic, many stores saw shrink go down, William Blair analysts wrote in a research note in October. Fewer people were shopping in person, which likely led to fewer thefts. Many turned to delivery services such as Instacart to get food and other essentials.

But as society opened up again, multiple sources of shrink started returning to their pre-pandemic norms.

Retailers also had to order enough goods to meet fluctuating demand from shoppers. After a run on toilet paper and other goods left store shelves bare in 2020, retailers including Walmart put in larger orders than usual with suppliers to ensure they could meet demand.

That backfired in 2022 as shoppers returned to pre-pandemic buying habits. All that extra inventory ended up cluttering the back rooms of these stores.

Many retailers reduced the glut by offering discounts or liquidating what they couldn't sell — a decision that drove up shrink, van der Baan said. And while the pandemic and its aftershocks provided a striking example, retailers often struggled to get inventory ordering right, even in "normal" years.

"When you're short on supply, you can't hit your numbers," van der Baan told Insider. "But if you overbuy, and things don't work out for macroeconomic reasons, you're also not hitting your numbers, and now your balance sheet is upside down."

Retailers could be pointing to theft to prompt government action or distract from operational issues

If so many elements contribute to shrink, then why are some retailers pointing to theft only?

One reason, analysts at William Blair said, could be: Laying out problems managing inventory or running stores could draw ire from investors and others on Wall Street.

But Target, for example, "could be using shrink to mask other issues, including poor inventory management, which came to a head in 2022 following supply-chain disruption, and is now exiting underperforming stores to boost overall margins," the analysts wrote in a research note this October.

Several of the nine stores that Target is closing are small-format stores that the company has been experimenting with, the analysts wrote.

Shrink isn't the only problem that retailers say they face as a result of theft. Target's store-closure announcement said theft was "threatening the safety of our team and guests" at the stores it decided to close. Crime data from those locations, such as one in Manhattan, New York, suggested that closing Targets didn't suffer a higher amount of crime than others that are remaining open

Retailers could be calling attention to both theft and related violence as part of a push for government action.

"Some retailers we speak with suggest that one of the easiest actions local governments could take would be to lower the dollar threshold for theft to be considered a felony (and therefore add more deterrents)," the William Blair analysts wrote.

Whether that kind of change would be effective in reducing theft is unclear, the analysts wrote.

Do you work at a major retail store such as Walmart and have a story idea to share? Reach out to this reporter at abitter@insider.com.