For the second consecutive year, loss prevention executives report that retail shrink levels remain at historically low levels. According to the 2016 National Retail Security Survey, conducted by the University of Florida in partnership with the National Retail Federation, while losses from shrink increased from $44 billion in 2014 to $45.2 billion last year, inventory shrink as a percentage of retail sales actually remained the same as the year before. At 1.38 percent, they are the two lowest shrink percentages recorded in the survey’s 25-year history.
Dr. Richard Hollinger, criminology professor at the University of Florida and lead author of the NRSS, says that despite the proliferation of organized retail crime gangs and the persistent threat that retailers face from dishonest employees, the survey’s shrinkage rates have actually been dropping for a number of years. In fact, Hollinger initially thought that last year’s findings were an anomaly due perhaps to the sample selection or industry consolidation, but that doesn’t appear to be the case now.
“Given what we have been finding out about organized retail crime, I thought the shrinkage rate would bottom out at 1.38 like it did last year and then start to slowly climb back up — mainly because of organized retail crime and the growth of that phenomenon,” says Hollinger.
Hollinger says there could be several different explanations for the low shrink rates. One could be that retailers have gotten a good enough handle on theft to the point where it has been stabilized, or perhaps stores that had high rates of shrink have gone out of business. Admittedly, Hollinger says many companies that experience high shrink rates are still reluctant to report it, even in an anonymous survey, and those numbers therefore may not be reflected in the study.
Interestingly, the study found that retailers reporting the highest levels of shrink — 2 percent or greater — increased from just over 17 percent in 2014 to nearly 19 percent in 2015. However, the number of retailers reporting shrink levels of less 1 percent also grew from about 34 percent to more than 40 percent.
“There are a number of different hypotheses here, but I really thought something in the 1.3s was about as low as it would get,” says Hollinger. “To see it happen again was a pleasant surprise. To me, either the exact same people filled out the exact same questionnaire like they did the year before, or there is stabilization. I think it is probably the latter.”
That’s not to say, however, that every retailer is experiencing a decline in theft. On the contrary, nearly half of the retailers surveyed said they experienced increases in overall inventory shrink in 2015.
For the second year in a row, shoplifting/external theft (including ORC) accounted for a greater percentage of inventory shrink (39 percent) than did employee/internal theft (36 percent). Last year marked the first time in the survey’s history that retailers incurred more losses due to shoplifting than internal theft. Retailers lost an average of $377 per shoplifting incident last year — an increase of nearly $60 over 2014.
Loss prevention executives reported a decrease in the average loss from a dishonest employee cases, from more than $1,500 in 2014 down to barely more than $1,200 last year. And while the number of employee apprehensions increased, prosecutions, terminations and civil demands for these types of internal incidents dropped.
Retailers experienced a big jump in the average amount lost due to robbery, which jumped from just under $2,500 in 2014 to more than $8,000 in 2015. This was due primarily to an increase in jewelry stores reporting extremely high average losses, according to the study.
While the drop in the average amount lost due to employee theft may signal that retailers are getting a better handle on internal theft and catching these incidents quicker, Hollinger says the results of a single survey are not enough to draw any significant conclusions in that regard.
“The average dollar value is obviously affected by inflation to some extent, but most loss prevention people tell me that if they are going to catch a dishonest employee, it is probably going to be in the first six months to a year. Initially, they think security is pretty good — then they begin to realize security isn’t that good, they get cocky and then they get caught,” Hollinger explains. “All that tends to happen in six months.”
Although the retail industry has been among the early adopters of next-generation video surveillance and other security devices, the survey found that some advanced technologies, such as facial recognition, have failed to gain much traction. Even tried-and-true technologies like RFID merchandise tags have experienced waning support. The number of retailers who reported using RFID tags in 2015 dropped from more than 16 percent in 2014 to less than 8 percent in 2015.
“I remember the first time RFID was introduced, it was like we had just cured cancer,” Hollinger says. “The thinking was it will make a fundamental difference and I think it could have; however, the price breakpoint of those tags — particularly the throwaways — just really never got where it needed to be.”
With regards to facial recognition in particular, Hollinger believes the controversial nature of the technology has made many retailers weary to implement it in stores. “After 9/11, I think the industry missed a real opportunity to roll out [facial recognition] software because they already had the bandwidth, they were retrofitting all of their stores with digital cameras, so they had much better pictures and the computer systems were bigger and could hold more pictures,” says Hollinger. “My thinking was like the gambling industry where it had a major effect on card counters, I thought the retail industry would roll it out. But the idea of everybody’s picture being taken while they’re checking out was a little bit more than the retail industry wanted to try and explain to the shopping public.”
Despite the fact that the overall shrink rate is trending in the right direction, Hollinger says everyone should remain concerned about the increasing sophistication of ORC gangs and the potential they could have on shrink in the years to come. “They are not just domestic shoplifters anymore,” he says. “The merchandise is ending up in foreign countries, the money is ending up in foreign countries and is being used not just to fund criminal activity but terrorist activity.”
The survey of 80 senior retail loss prevention executives from various sectors was conducted March 22 to April 22, 2016. Click here for more information about the survey.
