Walmart (WMT 1.32%) and Target (TGT -0.70%) have a theft problem. In recent months, the big box retailers have been complaining about an increase in "shrinkage," a retail industry term for when in-store stock is lower than what's accounted for in the books. In other words, people walking out of the store with unpaid inventory is on the rise. Even commerce software company Shopify (SHOP -2.37%) has a frequently visited webpage explaining "shrinkage," how it's on the rise, and how small retailers can combat the problem. Shopify estimates it was a $61 billion-a-year loss for the retail space a few years ago, but that figure has reportedly increased in 2022. Inflationary pressure on consumers is an oft-cited reason for this rise in theft.
Enter Nvidia (NVDA -3.33%), which believes it has solutions to help with retail shrinkage. Here's what investors need to know.
Shrinkage a top cause of shrinking profit margins
During their third-quarter 2022 earnings calls and post-earnings interviews, Walmart, Target, and other retail executives explained how big a problem shrinkage has become. Target specifically said theft had an estimated $400 million impact on gross profit margin of merchandise sold through the first nine months of 2022.
Target is huge and sells tens of billions of dollars in merchandise every year, but retailer profit margins are thin already -- low- to mid-single-digit operating profit margins are about the average. $400 million is a big deal when it's a full 2% of total gross profit year to date. For the full year of 2022, Target expects total shrinkage to rise to an estimated $600 million.
What's especially notable in this figure is that e-commerce accounts for upwards of 20% of Target's sales these days, where shrinkage likely isn't as big a problem. Of course, e-commerce (whether it's shipped to consumers' homes or ordered online for in-store pickup) has its own challenges affecting profit margins, but it nonetheless makes the in-store theft problem that much more dramatic. On the Q3 2022 earnings call, Target CEO Brian Cornell said the company is "making significant investments in training and technology that can deter theft and keep our guests and store team members safe."
Walmart similarly said it thinks it's losing about 2% to 3% of its merchandise value to theft this past year, up from an estimated 0.7% to 1% annual loss before the pandemic. Walmart has said it's putting in measures like locking up more products behind glass, and might raise prices to counter losses.
But locking up merchandise is inconvenient, and increasing prices to counteract theft is unfair to those shoppers who aren't committing the crime. Some industry pundits also want online marketplaces like Amazon (AMZN -1.64%) and Meta's (META -0.52%) Facebook Marketplace to do more to crack down on the sale of stolen goods on their sites. But in a recent presentation on the future of AI, Nvidia thinks it has better ideas.
The rise of artificially intelligent crime fighters
In Nvidia's 2023 AI Predictions blog post (a really interesting must-read primer on what AI is actually doing), vice president of Nvidia's AI for Retail segment Azita Martin mentioned shrinkage (as well as supply chain challenges, but that's a different topic entirely). Martin specifically mentioned new challenges arising from contactless checkout options at brick-and-mortar stores. As the ease of walking out with unpaid products increases, Nvidia has solutions like computer vision-enabled cameras that can spot theft, paired with analytics that can recognize if an item being rung up at self-checkout is indeed the correct item purchased.
Nvidia has other retail solutions that help further automate the checkout experience so retailers can allocate employees to other tasks, like restocking and store monitoring. Such technology could help stores like Walmart and Target fight theft and improve their profit margins. Of course, purchasing and implementing new technology costs money. But given the size of the shrinkage problem Walmart and Target have been reporting this year, making an up-front investment could lead to a dramatic improvement in the bottom line in subsequent years if they can keep better track of their inventory. Target's CEO commentary mentioned above seems to indicate they agree.
All of this speaks to how powerful a business Nvidia has become. Its AI platform now has specific use cases that span every sector of the economy, not just video games where it got its start. In fact, Nvidia is planning on providing further details on its largest revenue segment, "data centers," starting with the Q4 fiscal 2023 update (for the three-month period that will end in January 2023). Data center end-markets hauled in over $3.8 billion in sales last quarter (nearly two-thirds of total revenue) and includes AI software used by industries of all types -- including retail.
Nvidia's technology could indeed help companies like Walmart and Target solve some of the most critical problems like theft they face today. And that could be a really great thing for both retail shareholders and Nvidia alike.
