Wal-Mart Is Getting Hit Hard by Thieves (BusinessWeek)

The problem of shrinkage

Wal-Mart has a shrinkage problem, and it's not the Seinfeld variety. It's the kind that, in retail industry jargon, refers to stealing and losing stock to damage or poor inventory management.

In explaining a fairly dismal quarterly result on Tuesday morning, the massive retailer called out shrinkage again and again. In the press release, it was mentioned three times. In the conference call, it came up 13 times. That's a lot of shrinkage. Walmart sales, in fact, were pretty decent, but expenses weighed on the company’s profit. Part of those expenses entailed writedowns for inventory that just disappeared. Store employees say they have seen everything from customers stealing meat in their pants to thieves bursting out a back door with a shopping cart full of electronics to be loaded into a waiting car.

What’s more, Walmart's chief financial officer, Charles Holley, said he expects the problem to persist. Walmart is restarting a program to teach employees how to spot thieves, be they coworkers or would-be consumers. Meanwhile, it is auditing its entire supply chain to "close gaps" while it adds staff to parts of stores in which items tend to vanish. Many stores now station an employee at the exit to check customers' receipts. 

Walmart is also dealing with waste from poor management of stock rooms and inventory, said Holley. When backrooms get clogged with merchandise, it can be difficult to know what items need to be marked down and moved to the sales floor. And too much food is getting damaged or going bad before it can be sold.

How big of a problem is shrinkage? For the typical vendor, it amounts to about 1.4 percent of sales, according to a 2014 survey by the National Retail Federation. About 38 percent of that is caused by shoplifting, an additional 35 percent via theft by employees, and the rest reflects damaged goods, cashier errors, and other administrative slip-ups. Walmart hasn’t said how much stuff is being nicked, but at that rate, it would be losing roughly $7 billion a year to thieves. In short, the return on any kind of shrinkage-prevention program is probably pretty good. 

The thing about shrinkage, however, is that chief executive officers don’t like to talk about it, which makes today’s statements from Walmart particularly telling. Of all earnings conference calls by Standard & Poor’s 500-stock index companies in the past year, shrinkage was mentioned on only 21 occasions. It’s been a bit of a problem at Whole Foods and the “Dollar” stores, but executives typically cite stealing only when they are cracking down on thieves.

Lowe’s, for example, has been bragging about “best-in-class inventory shrink performance.” Home Depot said its theft-prevention added .07 percent to its gross margin in the fourth quarter.

Walmart's theft problem swelled in a period when it was hiring employees, paying them more, and bulking up staffing across the board. Meanwhile, the company has a second shrinkage problem to contend with this morning: its stock price.