Dec 28, 2023
Major U.S. retailers collectively lost a whopping $112 billion due to shrink last year, according to a recent report from the National Retail Federation (NRF). Shrink refers to inventory lost due to things such as damage, theft or administrative errors.
But Costco (NYSE:COST) apparently isn’t losing as much as its peers.
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“Thankfully, it's not a big issue for us,” chief financial officer Richard Galanti told investors during a company’s earnings call in September, according to the Daily Mail.
Here’s how one of the largest retailers in the country is circumventing one of the industry’s biggest threats to its collective bottom line
Spike in retail theft
A spike in reports of shoplifting have been seen across the country in recent months. Retail corporations have said that merchandise losses related to theft, including organized retail crime, have ticked up recently.
The issue has pushed some retailers to shutter stores. Target (NYSE:TRGT), for example, recently said it would shutter nine locations across the U.S. because of rising theft and crime.
Altogether, theft accounts for 65% of retail shrink — 36% due to external theft and 29% due to internal (employee) theft — according to the NRF’s research.
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Costco's robust defenses
Costco has managed to keep a lid on its level of shrink.
Galanti told the Daily Mail after the earnings call that the company’s shrinkage rate was between “0.1% and 0.2%,” according to its data at the time. That’s significantly lower than the nationwide average of 1.6%, as reported by the NRF.
Among the reasons Galanti cited for Costco’s relatively low shrinkage is the layout of its stores. Because Costco stores are structured like warehouses, with only a single point of entry or exit, they’re less vulnerable to thieves.
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But Costco’s membership-based business model is, perhaps, its strongest defense, according to Galanti.
“You have to show your picture ID when you come into our warehouse,” he told the Daily Mail. “So the fact that it's member-only is a positive.”
Costco items are also relatively more difficult to steal. The chain sells bulk and larger items that are inconvenient for shoplifters.
However, the chain isn’t immune to theft. Galanti admitted during the call that shrink ticked up after the company rolled out self-service checkouts at some locations during the pandemic. But he told the Daily Mail the problem hasn’t worsened enough to stop the company from continuing to offer the feature.
Correction, Dec. 28, 2023: An earlier version of this story incorrectly stated that the NRF reported “crime” was costing the retail industry $112 billion. In fact, it reported “shrink” was costing the industry $112 billion. Shrink refers to loss of inventory and can include, but is not limited to, criminal activity such as theft. The story also stated the average shrink rate nationwide was 1.44%. The NRF’s latest figure is 1.6%, with the previous year’s average being 1.4%. Finally, Costco CFO Richard Galanti’s post-earnings call quotes are now properly attributed to the Daily Mail.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
