Shoplifters are stealing headlines this summer. A flurry of US retailers have claimed that increased theft – described by the industry as ‘shrink’ – is hitting profits, with organised crime proving particularly troublesome. UK retailers are keeping mum, but they are also being hit badly by a crime wave.
DIY retailer Home Depot (US:HD) said that its gross margin dipped by 8 basis points in the second quarter of 2023 “primarily driven by pressure from shrink”, while Dick’s Sporting Goods (US: DKS), America's largest sports retailer, saw shares drop by almost a quarter after it cut its guidance and warned that “organised retail crime and theft in general [is] an increasingly serious issue”.
Kohl's (US:KSS), Foot Locker (US:FL), Walmart (WMT:US) and Target (US:TGT) have also been quizzed by analysts about shoplifting, with Target reporting “more than 1 percentage point of cumulative profit pressure from higher shrink since 2019”.
Across the Atlantic, however, listed companies have been largely silent on the subject. “It’s not something that anyone is really commenting on,” said Bernstein analyst William Woods. This does not necessarily mean that there's no problem.
Businesses that are not traded on the public market are speaking up, with the Co-op lamenting its “highest ever levels of retail crime, shoplifting and anti-social behaviour”. It recorded 175,000 incidents in the first six months of 2023 – almost 1,000 incidents every day and 35 per cent more than last year. Meanwhile, Waitrose and John Lewis are offering on-duty police officers free hot drinks in a bid to deter thieves.
The Co-op's warnings of lootings and "brazen and violent theft" coincided with research by the British Retail Consortium, which found that theft has increased by 27 per cent across 10 of the UK’s largest cities. “The nature of these crimes has changed, with perpetrators becoming bolder, and many retailers reporting increasing links to organised-crime activity,” the trade association said, and added that some cities had seen incidents of theft rise by over two-thirds.
The UK grocery sector specifically has suffered a 33 per cent rise in shrink – also known as 'unknown loss', in industry jargon – since 2018, according to ECR Retail Loss, a working group that surveyed 10 of the UK's biggest retail chains.
“Retailers agreed that a lot of the increase could be explained by external theft, with all retailers agreeing that more people are stealing from them,” the report concluded.
Lack of data
It is difficult for investors to assess how individual stocks are being affected, however. “There’s always been a reluctance to share the shrink or unknown loss number,” said Adrian Beck, academic adviser to ECR Retail Loss.
Diving into company accounts is not particularly illuminating. While shrink covers theft, it also includes stock that is damaged or simply unaccounted for, so the numbers aren’t completely clean. More pressing, however, is the fact that few UK retailers even refer to shrink in their annual reports, let alone provide detailed information about it.
One way to approach the problem is to look out for ‘inventory losses and provisions’. Supermarket giants J Sainsbury (SBRY) and Tesco (TSCO) both disclose this figure, and both saw inventory losses and provisions tick up in 2023, in absolute terms and as a percentage of total sales.
It is possible, however, that this is simply a case of post-Covid normalisation. At Tesco, inventory losses and provisions are still lower than 2019 levels. Sainsbury's did not provide the data before 2020.
The world of clothing is even trickier to evaluate, given that such provisions account not just for theft or wasted goods, but old stock that may go out of fashion.
“There is significant estimation involved in the calculation of inventory provisions to ensure that inventory is held at the lower of cost and net realisable value,” Frasers Group (FRAS) explained in 2020. “This involves consideration of expected future losses on sale of inventory including assessing the likely impacts of Covid-19, inventory obsolescence and the additional costs to sell.”
Amid the uncertainty, however, some analysts are voicing concerns. “UK retailers haven't been as vocal about shoplifting in their external communications as some of the retailers in the US, but they are certainly thinking about it and taking action, even if they’re not broadcasting it,” said Goodbody analyst Fintan Ryan.
“I think it’s one of the reasons why companies are still being a bit cautious when it comes to profits in the foreseeable future. It could be a reason why a company wouldn’t upgrade its guidance.”
There are plenty of other factors affecting forecasts, of course – not least consumer spending power. And in recent weeks, news from the UK has been fairly chipper, with the likes of Marks and Spencer (MKS), Next (NXT) and Card Factory (CARD) upping their guidance.
However, as shopkeepers complain of an “unprecedented” crime spate, and price hikes become harder to justify against a backdrop of easing consumer price index inflation, any potential hit to the gross profit margins of UK retailers is worth keeping a close eye on.
