Investors keeping tabs on retail stocks might be overlooking a crucial factor eating into profits: the escalating issue of retail shrinkage, which includes losses from shoplifting and more organized retail crime. An expert in the field recently expressed to Business Insider that Wall Street might be underestimating the impact of this growing concern.
The term ‘retail shrinkage’ encompasses various forms of inventory loss, ranging from casual shoplifting to intricate multimillion-dollar retail crime operations. While investors are more attuned to conventional financial metrics, they might not fully grasp the magnitude of shrinkage in the retail sector. In 2022 alone, retailers lost a staggering $112 billion due to shrinkage, with about $41 billion attributed to shoplifting, as reported by the National Retail Federation.
Retail giants like Target have sounded alarms, predicting an exacerbation of these losses. Target, for instance, foresees an increase in shrinkage costs, projecting losses of approximately $1.3 billion in 2023. Neil Saunders, the managing director of GlobalData’s retail consulting unit, emphasizes the seriousness of this issue, noting its significant impact on retailers’ profitability and, consequently, investor concerns.
However, obtaining concrete data on shrinkage and its precise financial toll is challenging. Retail companies often remain reticent about the exact figures lost to theft and rarely provide explicit guidance on how shrinkage might affect their earnings. This lack of quantification leaves investors somewhat in the dark, reliant on indirect indicators like profit margins and operational costs to gauge the impact of shrinkage on businesses.
When assessing which retailers might be less vulnerable to theft, investors can consider factors like store layout and security measures. Retailers with substantial floor presence and robust security, such as Best Buy and Costco, are typically better positioned to mitigate losses from theft.
As the holiday season approaches, the problem of theft is expected to intensify. With stores stocking up on inventory and attracting large crowds, the opportunity for shoplifting increases, making it more challenging for retailers to control shrinkage.
This rise in shoplifting adds to the myriad challenges facing retailers as the year draws to a close, including concerns over consumer spending amidst higher borrowing costs and dwindling pandemic-era savings. Saunders warns that there are no signs of shrinkage abating, framing it as part of a broader array of difficulties confronting the retail sector.
Investors, therefore, might need to recalibrate their focus, paying closer attention to how retail shrinkage, particularly shoplifting, is silently but significantly impacting the bottom line of retail companies. Ignoring this trend could mean overlooking a key factor in assessing the health and profitability of retail investments.