The Surprising Plague Killing Retailer Profits

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Editor's note: A previous version of this article incorrectly attributed Checkpoint Systems' RF security tag to another company. The Fool regrets the error.

Retailers face lots of challenges, such as already-low profit margins pressured by competitors, consumers cutting back during economic downturns, and even shoplifting. There's a big challenge that few recognize, though: employee theft. In some cases, these losses exceed total profits earned.

In the 2009 textbook Financial Accounting, Jerry Weygandt offers this startling information: "The average employee caught stealing costs his or her company $1,341, while the average loss from a shoplifting incident is only $207." Overall, the average inventory loss in supermarkets because of theft is 2.28%. If that doesn't sound like much, check out the following grocers' net profit margins:


Net Margin (Trailing 12 Months)

Great Atlantic & Pacific Tea (NYSE: GAP  ) (11.93%)
Kroger 0.02%
Winn-Dixie (Nasdaq: WINN  ) (0.55%)

Data: Yahoo! Finance.

Clearly, the grocery business is a tough one, with companies really struggling lately. If you're thinking that Whole Foods Market (Nasdaq: WFMI  ) , with its fancier fare and heftier prices, would have a heftier margin, you're right: 2.73%. That sure beats the companies above, but it's still low compared with other large, successful companies. And given that the average employee theft rate tops 2%, even Whole Foods is losing a huge chunk of its profits to the scourge.

At a Cincinnati Kroger store, for example, a policeman working security charged the grocer nearly $3,000 for hours he never worked. In New Jersey, an A&P employee bilked the company out of $1,620 by taking cash for phony merchandise returns.

Supermarkets are not the only victims, though. Employees can steal through fraud and embezzlement from all kinds of businesses. The Association of Certified Fraud Examiners has estimated that American businesses lose 7% of their revenue to employee fraud. That amounts to hundreds of billions of dollars.

Interestingly, not all employee theft is intentional. When a software package called StopLift that analyzes check-out activity was used at one store, it found that most losses were because of cashier error. After reassigning or retraining the employees in question, losses dropped by 86%.

Signs of hope
In a recent report, the National Retail Federation (NRF) found that employee theft outweighed shoplifting, representing 43% of losses versus 35%. Losses for the overall industry totaled a whopping $33.5 billion. Clearly, this is a big problem.

There's reason to be hopeful, though: The NRF data showed retail merchandise losses overall averaging 1.44%, down from 1.51% in 2008 and 1.61% in 2006.

If such companies could cut these loss rates in half, they could increase their profitability enormously, and in some cases would start posting profits instead of losses. The fact that they're making headway is good news for investors.

Interested investors might want to take a look at companies involved in reducing merchandise losses because it's clearly a critical activity for retailers. Checkpoint Systems (NYSE: CKP  ) , for example, offers tools such as radio frequency (RF) security tags, which are used at companies such as Walgreen (NYSE: WAG  ) and Rite Aid (NYSE: RAD  ) .

As a Walgreen vice president noted, "To gain a competitive advantage, we have to stay on top of all the tools that are available to us, whether we are looking at our businesses from the point of view of loss prevention, distribution, merchandising or marketing." Rite Aid has roughly cut its front-end merchandise losses in half with Check Point technology.

Shrinkage is an often-overlooked aspect of retailing, but it's a critical one, and especially so in these tough economic times when many people are feeling especially desperate. Strong and promising companies will work on reducing their theft and other merchandise losses, in order to boost profitability.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Selena Maranjian doesn't own shares of the companies mentioned. Check Point Software is a Motley Fool Rule Breakers selection. Whole Foods Market is a Motley Fool Stock Advisor recommendation. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 24, 2010, at 1:40 PM, easydoesit0123 wrote:

    The problem with these studies that break down theft by percentages is that only the unsuccessful thief participates in the survey. The professional shop-lifter that never gets caught continues stealing with no one the wiser.

  • Report this Comment On November 24, 2010, at 2:54 PM, AmTheft wrote:

    Please be aware that it is Checkpoint Systems (CKP on NYSE) which makes anti shoplifting products like radio frequency security tags. Check Point Software Technologies (CHKP on Nasdaq) is an unrelated company focused on information technology security.

    A recent study showed that in North America, about 47% of shrink is from employee theft, and 35% caused by shoplifting.

    But one really has to look much deeper. For example, there are many more incidents of shoplifting than employee theft. But the value per incident tends to be lower.

    Also, many times you see employees working with outside thieves. Is this employee or outsider theft?

    Finally, because the cost of theft goes right to the bottom line, small improvements in loss prevention often lead to significantly higher profits.

  • Report this Comment On November 27, 2010, at 11:59 AM, ocean56 wrote:

    I worked retail security for 30 plus years both shoplifting apprehension and employee theft. These figures have always plagued me because they are not really accurate.

    "In the 2009 textbook Financial Accounting, Jerry Weygandt offers this startling information: "The average employee caught stealing costs his or her company $1,341, while the average loss from a shoplifting incident is only $207."

    The dirty little secret is that the $1,341.00 is most likely what the average employee admitted to stealing while working for the company....not each and every time they stole.

    The average shoplift amount varies depending on type of, electronic, etc stores its possible its 207. per incident. Grocery and Drug, no way its 207. per incident. Most like 30. to 40. per incident at the most.

    Potentially without good internal controls employee theft could be higher but often shoplifting is overall the greater loss IMO.

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