Saturday, 06/16/07

Wal-Mart has tough time as thefts increase
Store's losses closer to industry average

By ANNE D'INNOCENZIO and MARCUS KABEL
Associated Press


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 because of 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., which generated sales of $348.6 billion last year, according to retail consultant Burt Flickinger III.

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.

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.

Theft common in retail

Although Wal-Mart declined to reveal any details, 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.

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 because of 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, 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 caused in part to "higher inventory shrinkage."

Revelation is significant

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.

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.

The company's vociferous critic WakeUpWalMart.com, funded by the United Food and Commercial Workers, which has been for years trying 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.

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.

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.

I am hardly a fan of Wal-Mart-but this is a shame.