Stolen goods get sold to law-abiding Americans by third-party vendors on big ecommerce sites that profit from it. Legislation to control it struggles.
By Wolf Richter for WOLF STREET.
It’s a big profitable business across the US because the cost of the merchandise is zero: Organize a bunch of people via the social media, raid a store and and run out, arms-full of merchandise, and then sell this stuff into specialized distribution channels from where it gets sold by third-party vendors on some of the best-known ecommerce platforms in the US, such as eBay and Amazon and many others.
Shares of Best Buy [BBY] plunged 12.4% today after the company’s earnings call, during which it discussed a laundry list of headwinds and pressures on its gross profit margins, which, for US sales, fell 60 basis points to 23.4%, “primarily driven,” as CFO Matt Bilunas put it, by product damages and returns compared to last year, lower margins of services, and the infamous “inventory shrink.”
Inventory shrinkage or inventory shrink are the retail industry’s long-established terms for the phenomenon of inventory vanishing from the company due to vendor fraud, employee theft, and retail theft, including organized retail crime.
The total amount of shrink across the US from vendor fraud, employee theft, and retail theft in 2020 was roughly $62 billion, about the same as in 2019 despite many stores being closed for part of 2020, according to the National Retail Federation’s “2021 Retail Security Survey: The state of national retail security and organized retail crime.”
Average shrink from vendor fraud, employee theft, and retail theft amounted to 1.6% of sales in 2020 (at retail prices), according to the NRF’s survey.
It has been going on for a long time, and many retailers have reported the shrink in their financial statements for a long time as one of the costs and margin pressues. But the connection with ecommerce has given it a new business model.
“We are definitely seeing more and more, particularly organized retail crime and incidence of shrink in our locations,” said Best Buy CEO Corie Barry during the conference call (transcript via Seeking Alpha). “And I think you’ve heard other retailers talk about it, and we certainly have seen it as well.”
In the prepared remarks, Barry said that Best Buy will launch a “new capability,” namely using the QR codes for products that are locked up. “Instead of waiting for an associate to unlock the product, the customer can scan the QR code and then proceed to check out to pay and pick up the product,” she said.
“We are doing a number of things to protect our people and our customers. As we talked about in the prepared remarks, we are finding ways where we can lock up product but still make that a good customer experience. In some instances, we’re hiring security. We’re working with our vendors on creative ways we can stage the product. We’re working with trade organizations,” she said.
But all this costs money and if the hoops are high enough for customers to jump through, it costs revenues.
“You can see that pressure in our financials,” she said. “And more importantly, frankly, you can see that pressure our associates. This is traumatizing for our associates and is unacceptable. We are doing everything we can to try to create as safe as possible environments.”
Organized retail crime has been around for about as long as retail itself. But the perpetrators had trouble selling large quantities of merchandise. Selling detergent and consumer electronics and handbags on the sidewalk was hard work and cumbersome.
But now there’s the internet with perfectly legal and huge retail platforms such as Amazon and eBay and many others, where perfectly law-abiding retail customers, who have no idea where the products came from, end up buying this contraband from third-party vendors, thus enabling the sophisticated fencing operations that make organized retail theft possible.
Retailers, including in recent years ecommerce retailers, have long been sitting ducks for criminals, in part because retailers want to create a smooth and hassle-free shopping experience. And they’ve been getting hit by theft from all sides – and organized retail crime is just one of them:
- Ecommerce crime
- Organized retail crime
- Cyber-related incidents
- Internal theft (by employees)
- Return fraud (online and brick & mortar)
- Gift card fraud
The costs of these crimes have always been part of the costs of doing business for retailers. And they have rolled those costs into retail prices. Customers are paying for these crimes.
Measures to prevent retail theft can be costly, and risky. If the prevention methods become inconvenient for customers – such as locking up merchandise or making customers jump through hoops for returns – they will hit revenues because Americans don’t like to jump through hoops to buy stuff or return stuff.
In 2012 already, the connection between legal ecommerce platforms and organized retail crime was pointed out by the Congressional Research Service, in a report for Members of Congress:
“Organized groups of professional shoplifters, or ‘boosters,’ steal or fraudulently obtain merchandise that is then sold, or ‘fenced,’ to individuals and retailers through a variety of venues. In an increasingly globalized society, more and more transactions take place online rather than face-to-face. As such, in addition to relying on physical resale markets, organized retail thieves have turned to online marketplaces as means to fence their ill-gotten goods.”
The 2012 report cited figures from 2010, of total shrink of $35 billion that year, with:
- $8.5 billion from vendor fraud, error, and unknown sources
- $15.9 billion from employee theft
- $10.9 billion from retail theft, including “organized retail crime.”
That was over 10 years ago. Inflation and the ease of selling this stuff on the internet have ballooned the total shrink to $62 billion in 2020.
State legislatures around the US and members of the US Congress have proposed various laws that would require online retailers, such as Amazon, to obtain proof from vendors that they purchased the merchandise legally.
The most recent effort in Congress “to combat the online sale of stolen, counterfeit, and dangerous consumer products” was proposed in October by Congresswoman Jan Schakowsky (D-IL) and Congressman Gus Bilirakis (R-FL). The Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act “directs online platforms that allow for third-party sellers of consumer products to verify the identity of high-volume third-party sellers, which will prevent organized retail crime,” according to the press release.
“The bill will also ensure that consumers can verify basic identification and contact information for high-volume third-party sellers of consumer products on online marketplaces,” it said.
“It will protect consumers and legitimate businesses, increase trust in the marketplace, and discourage criminals and fraudsters,” it said.
The big retail platforms that massively profit from stolen goods being sold by third-party vendors to unsuspecting Americans are not happy about this type of legislation, and efforts over the years to disincentivize organized retail crime by gutting its ecommerce-based business model have gone nowhere.
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