Published June 13, 2007
NEW YORK – Shoppers at Wal-Mart stores across America are loading carts with merchandise — maybe a flat-screen TV, a few DVDs and a six pack of beer — and strolling out without paying. Employees also are helping themselves to goods they haven't paid for.
The world's largest retailer is saying little about these kinds of thefts, but its recent public disclosures that it is experiencing an increase in so-called shrinkage at its U.S. stores suggests that inventory losses due to shoplifting, employee theft, paperwork errors and supplier fraud could be worsening.
The hit is likely to rise to more than $3 billion this year for Wal-Mart Stores Inc.(WMT), which generated sales of $348.6 billion last year, according to retail consultant Burt Flickinger III.
About 47 percent of the dollars lost came from employee theft, while shoplifting accounted for about 32 percent, according to the National Retail Federation report. Administrative errors account for 14 percent, while supplier fraud accounts for 4 percent. The remaining 3 percent is unaccounted for.
Flickinger and other analysts say the increase in theft may be tied to Wal-Mart's highly publicized decision last year to no longer prosecute minor cases of shoplifting in order to focus on organized shoplifting rings. Former employees also say staffing levels, including security personnel, have been reduced, making it easier for theft to occur. And a union-backed group critical of the retailer's personnel policies contends general worker discontent is playing a role.
Wal-Mart declined to offer any explanations for the rise in losses, but denied it has cut security staff and said employee morale is rising rather than falling.
Although Wal-Mart declined to reveal its shrinkage rate, analysts suspect Wal-Mart — which for years had a theft loss rate that was half that of its peers — is getting closer to the industrywide average. Theft is a big problem for all retailers, costing them $41.6 billion last year, according to a joint study released Tuesday by the National Retail Federation and the University of Florida.The study found that the shrinkage rate as a percentage of sales ticked upward slightly to 1.61 percent of sales in 2006 from 1.60 percent in 2005.
Whatever the cause, such theft — which late founder Sam Walton once called one of retailers' top profit killers — adds one more challenge when Wal-Mart is already struggling with sluggish sales at its established stores due to an overall economic slowdown as well as its own stumbles in its home and apparel merchandising strategies.
Eduardo Castro-Wright, president and CEO of Wal-Mart's U.S. store division, briefly acknowledged the theft problem in a mid-May conference call with analysts. He cited shrinkage as well as increased markdowns and higher inventory for dragging down first-quarter profit margins.
"We are concerned about shrinkage and are investigating the cause and are taking steps to correct it," Castro-Wright said. Company officials won't comment on those countermeasures.
The company also said in a June 1 filing with federal securities regulators that the gross profit margin for its Wal-Mart Stores segment fell by 0.1 percentage points in the first quarter due in part to "higher inventory shrinkage."
John Simley, a Wal-Mart spokesman, declined to elaborate. He would say only that the company's theft losses as a percentage of sales is "better than our industry peer groups."
Analysts say it's significant that the company has publicly disclosed that theft is becoming a problem. "It is getting to the point of being material," said Richard Hastings, vice president and senior retail sector analyst at Bernard Sands. Securities regulations require companies to alert shareholders to significant corporate developments that could affect the value of their holdings.
The industry's shrinkage rate has been generally declining since the mid-1990s as retailers have been investing in new technology such as closed circuit TVs, according to Richard Hollinger, professor of criminology at the University of Florida.
In one of the more brazen employee thefts, a man wearing dark clothing and a ski mask entered a Port Clinton, Ohio, Wal-Mart store last January at midnight unnoticed by employees and stole $45,000 from the store safe. The store's night manager, Dana Walker, 30, was later arrested for the crime. He became a suspect because he knew the combination to the safe, police said.
The company's vociferous critic WakeUpWalMart.com, funded by the United Food and Commercial Workers which have been for years tried to organize the retailer's workers, publicized the company's decision last year to relax its zero-tolerance policy on shoplifting. The new policy seeks prosecutions of first-time offenders only if they are between ages 18 to 65 and steal at least $25 worth of merchandise.
That change may have emboldened some folks to shoplift, said Mark Doyle, president of Jack L. Hayes International, a retail consultancy on loss prevention.
WakeUpWalMart.com and some former employees said Wal-Mart may also have been trying to appease complaints by some police departments that its stores tied up police with too many shoplifting calls. Wal-Mart has denied that.
Wal-Mart also may have been spooked by worries about lawsuits from wrongful death, unlawful imprisonment and other legal issues related to aggressively chasing down shoplifters. In March, Wal-Mart agreed to pay $750,000 to the family of a suspected shoplifter who suffocated to death as loss prevention workers held him down in a parking lot outside a store in Atascocita, Texas. The shoplifter died in August 2005 in a parking lot, according to published reports.
The change in policy came at the same time the company began using more part-time workers — in part because of a new scheduling system that matches staffing more closely to peak shopping hours — and shifting security personnel, analysts and critics say. That has left the discount chain without an experienced and loyal staff to monitor what's strolling out its back and front doors, analysts and some former employees supplied by WakeUpWalMart.com said.
"The business is being run by bean counters. I am shocked at the Spartan level of staffing," said Flickinger, managing director of Strategic Resources Group. He added, "There are also morale issues. Workers feel that the company is taking care of itself."
While Wal-Mart denies that it has cut anti-theft jobs overall, it said it has adjusted staffing to put more personnel in stores in high-crime areas and fewer in stores with less trouble.
However, Dan Meyer, a former district loss prevention supervisor for several Wal-Mart stores in New Jersey disputes that. Meyer, who said he accepted a buyout last fall after almost 12 years with the company, said Wal-Mart reduced the number of loss prevention staff in each store last year and redesigned their jobs in a way that was less active and more administrative.
"That's why shrinkage is up," he said.
Meyer said he averaged 13 apprehensions a month during most of his time at Wal-Mart. That number dropped to three to four a month in the months before he left last October. Meyer said his totals dropped because there were fewer security staff and less support from his managers for aggressively rooting out theft.
WakeUpWalMart.com has linked rising theft to its claims that the company offers skimpy pay and benefits. Wal-Mart also faces a class-action lawsuit alleging female workers were passed over for men in pay and promotions.
"I am not the type to steal, but because we are so mistreated, when I saw things I just didn't do anything," said Gina Tuley, a former Wal-Mart bakery worker, who quit her job at the Seagoville, Texas, store in March. A big complaint was that her hours had been cut, reducing her take-home pay.
Wal-Mart defends its pay as competitive and its health care coverage as better than most retailers, and has denied gender discrimination.
Simley said an April survey of employees that showed rising job satisfaction suggests Tuley's attitude does not represent most Wal-Mart associates.
Even so, several former associates said in interviews that their bonuses have declined because of the rise in inventory losses. Wal-Mart's Simley disputes these claims, saying shrinkage was dropped from the bonus formula about a dozen years ago. It was Walton's idea to tie associates' bonuses to their store's theft levels to give them a vested interest in keeping theft in check.
Tuley said her bonus last year was $300, down from $800 the previous year.
Still, she said, "People would walk out with bags of merchandise ... I heard the alarms go off and people wouldn't even look," she added.