What are retail shrink and organized retail crime?

For several years, the terms shrink, retail crime and organized retail theft have echoed from the mouths of politicians, police officers, trade groups and the country’s most prominent retail executives.

Politicians and police departments have sounded the alarm about rising retail theft, and are calling for stricter enforcement and prosecution to fight it. 

Trade groups and retailers have griped about shrink’s effect on profits, and warned it could lead to store closures, employee-retention issues, safety concerns and reduced investment returns over time. 

All of these parties have urged passage of legislation they say would better equip law enforcement officials to crack down on the growing trend and catch those responsible. 

What is shrink, anyway? And how does it differ from retail crime and organized retail theft?

Here’s everything you need to know about the topic. CNBC gathered this information using interviews with trade associations, retailers, law enforcement officials and publicly available records, including securities filings, survey data and transcripts from retail earnings’ calls.

When retailers use the term shrink, they’re referring to the difference between inventory they’re supposed to have on their balance sheets and their actual inventory. 

Shrink captures the loss of inventory from a variety of factors, including employee theft, shoplifting, administrative or cashier error, damage or vendor fraud. 

For example, a retailer could have $1 billion in inventory on its balance sheet, but a count could show only $900 million in merchandise, indicating it lost $100 million in shrink. 

But it is difficult to figure out how the items were lost. Shrink could refer to anything from expired food to a broken jar of pickles, from cosmetics that a cashier rang up incorrectly to a bottle of aspirin that was stolen and later resold online. 

Shrink, including shoplifting and organized retail crime, cost retailers $94.5 billion in 2021, up from $90.8 billion in 2020, according to a 2021 study conducted by the National Retail Federation that used data from 63 retailers. That is the most recent data available. 

The companies polled for the survey estimated that retail theft accounted for 37% of those losses, employee or internal theft 28.5% and process and control failures 25.7%. Unknown loss and other sources accounted for the rest. 

However, those figures are largely estimates because of how difficult it is for retailers to figure out whether an item was stolen, lost or missing for other reasons. It’s not like thieves inform retailers about the merchandise they’re taking with them. 

Retailers with commercial property insurance can be covered for unforeseen losses such as theft, depending on the policy. It’s unclear which retailers have such insurance and if they do, how much it covers.

For the last couple of years, retailers have blamed smaller than expected profits on retail theft, shrink and organized retail theft. And the problem hasn’t gone away this earnings season. 

In May, Target, Dollar Tree, Home Depot, T.J. Maxx, Kohl’s and Foot Locker all cited shrink, retail theft or both as a reason for lower profits or hits to gross margins. 

Target lost about $763 million from shrink in its last fiscal year, and said shrink is expected to shave more than $1 billion off its profits in its current fiscal year.

Foot Locker said heavy discounting, and an uptick in retail theft, shaved 4 percentage points off its margins in the first quarter compared to the prior-year period. The hit to merchandise margins was “driven by higher promotions,” the company said. It’s not clear how big of an effect retail theft had on the results, or if promotions were the primary reason for the profit loss.

Home Depot said its gross margins fell slightly due to “increased pressure from shrink.”

In the past, Walmart, Best Buy, Walgreens, Lowes and CVS have all cited shrink and retail theft as an issue.

In January, Walmart’s CEO Doug McMillon told CNBC theft is “higher” than it has been historically.  “If that’s not corrected over time, prices will be higher, and/or stores will close,” he said. 

Still, others have said the problem has stabilized.

Best Buy, which previously spoke out about retail theft, said shrink levels have stabilized to pre-pandemic levels. Because of the pricey electronic goods it sells, its stores were already fortified against thieves, the company said.

In January, Walgreens’ Chief Financial Officer James Kehoe said the company’s concerns may have been overblown after shrinkage stabilized over the past year. 

“Maybe we cried too much last year,” Kehoe said on an earnings call with investors.

Shrinkage was about 3.5% of sales last year, but as of January, the number was closer to the “mid-twos,” said Kehoe. He also said the company would consider moving away from hiring private security guards.

Homeland Security Investigations, the primary federal agency that tackles organized retail theft, defines the activity as “the association of two or more persons engaged in illegally obtaining items of value from retail establishments, through theft and/or fraud, as part of a criminal enterprise.”

The NRF defines organized retail theft as the “large-scale theft of retail merchandise with the intent to resell the items for financial gain.” The trade group says it typically involves a criminal enterprise with multiple levels. 

At the bottom are boosters, the people who steal items from the stores. They then turn the items over to fencers, who pay the boosters for the products for a fraction of what they cost. 

Fencers then resell the items. They often sell the goods online, in informal street markets or even to other retailers. Sometimes, the products are exported to foreign countries. 

The line between organized retail theft and shoplifting can be murky, but they are distinctly different. 

Organized retail theft involves a larger criminal enterprise. Traditional shoplifting can often be need based or done for other reasons that don’t involve the elaborate reselling of goods in concert with others. 

An example of retail theft, or shoplifting, could be a teenager who steals a T-shirt or an impoverished person who steals food.

Shoplifting and coordinated theft are old crimes, but many experts say organized retail theft has grown alongside the rise of online shopping, which has allowed groups to reach more customers. 

In the past, fencers often offloaded stolen goods in informal places like flea markets or disreputable small retail businesses. But with the rise of online marketplaces, criminal groups now have access to broad swaths of consumers.

After the Covid pandemic led to widespread store closures and lockdowns, e-commerce became the primary way consumers shopped, which caused organized retail theft to increase, some experts said.

“With Covid, there were more and more consumers buying online than in brick-and-mortar stores, and so the criminal actors were seeing even more profit from their illicit activity, and so it only exacerbated the problem,” said Lisa LaBruno, the senior executive vice president of retail operations for the Retail Industry Leaders Association.

“It keeps going back to the lack of accountability, and the massive profitability that criminal actors are experiencing as a result of the fact that they can hide behind their computer screens,” she said. 

Organized retail theft has also increased because it can be low risk relative to other criminal ventures, such as armed robbery or drug dealing. 

For example, the crime of petit larceny is charged in New York when an individual steals less than $1,000 worth of goods. If convicted, the defendant faces up to a year in jail. But they can also receive probation, community service and fines, in addition to restitution. 

Further, individuals charged with petit larceny in New York are almost always automatically released after their arrest because of recent criminal justice reforms to the state’s bail law. 

Conversely, armed robbery is a felony in New York and comes with much stiffer penalties. 

Supervisory Special Agent John Willis, who is part of an organized retail theft task force out of the Homeland Security Investigations Charlotte field office, said individuals he has arrested for the practice have cited the low-risk nature of the offense as the reason for committing it.

“I arrested some individuals when I first got here to Charlotte, who, prior to committing [organized retail crime] violations, they were drug dealers and violent criminals who spent time in both state and federal penitentiary for violent crimes and drug dealings,” Willis told CNBC. 

“And they simply said, ‘I make more money. And if I get caught, nothing really happens to me.’ So they get out of jail and they go, ‘we learned our lesson, let’s not do drugs and hurt people, let’s just start stealing stuff,'” he said.

Further, many retail security guards have a “hands off” approach when they witness theft, added Special Agent Willie Carswell, who is part of the same task force. Security guards are often instructed to just call law enforcement when they see a theft in progress. 

“If a booster knows that he can go in and he can rip them off and he’s not going to encounter any type of resistance when he does it, of course the risk versus reward goes up for him. He knows that’s where he needs to be. He’s not having to steal this out of somebody’s backyard where he might get shot. He knows he can go into the store and he can rip them off,” said Carswell.

The items most frequently stolen by organized theft groups tend to be the ones most in demand by shoppers.

When consumers shop on online marketplaces such as Amazon and eBay, a few specific items have a high risk of coming from an organized theft group. 

Over-the-counter drugs are by far the largest class of items that are stolen and resold online, and allergy medicines are the largest subgroup, law enforcement sources told CNBC. The sources spoke on the condition of anonymity because they weren’t authorized to speak on the matter.

In 2022, one retailer lost $2.9 million worth of allergy medicines alone, the sources said. 

When shopping on online marketplaces, consumers should be wary of buying Zyrtec, 60 or 90 count, Allegra and Claritin. Other OTC drugs that could be stolen goods include Prilosec, Nexium, CQ10, Advil, Tylenol and Prevagen, the sources said. 

Currently, facial creams also are being targeted, and include items from drug store brands like Olay, Neutrogena, Roc and L’Oreal, the sources said. 

— Additional reporting by CNBC’s Melissa Repko