Retailers like Target, Best Buy and Foot Locker, along with major drugstore chains, have announced store closures due to problems with crime. They say that theft has become a significant problem for their bottom lines.
However, retail shrinkage doesn’t just occur from shoplifting. Inventory loss also occurs from breakage, spoilage and returns that are unusable. As CNBC reported last year, companies often blame organized theft for shrinkage, but the issue of employee theft is also a major concern.
Respondents to the National Retail Foundation’s 2023 Retail Security Survey (NRF Survey) attributed 36% of their total losses to external theft, while internal (employee) theft was the second highest cause of shrink loss at 29%. It’s no small matter; the average dollar loss reported for an internal theft was $2,180 per investigation.
Identifying Employee Theft
Internal theft may be more insidious than theft from outsiders because employees have access to merchandise in back rooms and warehouses, and they can steal items of higher dollar value in larger quantities. As one source told CNBC, it’s ‘relatively easy’ to take goods without anyone noticing, and the theft can go undetected because it’s not as noticeable as a shoplifter taking an item in public view. There’s also the issue of financial stress. Cash-strapped workers may see more value in stolen items than in remaining loyal to a low-paying job.
The NRF Survey found internal theft occurred in four major forms:
- Merchandise theft
- Refund fraud
- Cash/deposit theft
- Passing off merchandise to friends (also known informally as sweet hearting, sliding and free bagging).
In environments where employees have access to cash, pilfering and embezzling can occur. Any employee who can write checks or send money has the potential to engage in theft. In one case that MarathonHR is aware of, an employee was pocketing installment payments made in cash by customers. In another situation, an employee processed customer returns as chargebacks to their personal account instead of the company account. While the customer experienced a return, the company didn’t get any benefit from it.
Combatting Internal Theft
When it comes to deterring, detecting and investigating internal theft, the top five mitigation solutions mentioned by retailers in the NRF Survey included:
- Exception-based reporting software and programs
- CCTV systems and video surveillance
- Employee training and awareness
- Tip hotlines and tip rewards
- Point-of-sale transactions/system anomaly notifications and alerts
The value of employee training and awareness is significant. Speaking at the Goldman Sachs Global Retailing Conference last year, Lowe’s CEO Marvin Ellison cited investments in human capital and a well-compensated and trained workforce as factors that have helped the retailer combat the issue of theft.
In addition to loss prevention training, it’s good practice to remain vigilant for scams and to require periodic rescreening of employees to protect your business from unnecessary risks. If you have employees who touch sensitive personal or financial information on a routine basis, such as an HR function or accepting credit cards for payment, a background check policy that uncovers prior felonies and criminal activity is important. You need to be as confident as possible that employees will be performing their jobs in an ethical manner. Written disciplinary procedures in your employee handbook should articulate basic work rules and the consequences of engaging in company theft, including disciplinary action, termination or prosecution.