Black Market Billions: How Organized Retail Crime Funds Global Terrorists (Gal Zentner's Library) (29 page)

DigitalPersona, a biometrics company that provides retailers with biological loss prevention solutions, explains in a white paper the missing element that prevents traditional approaches to loss prevention from working: a lack of enforcing accountability for each specific transaction. “When people understand that their access to systems and resources automatically reveals who they are, their incentive to behave inappropriately is significantly reduced.”
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A Bottom-Line Breakdown of Costs

To compensate for the decrease in profit due to an increase in ORC, shrinkage, and cargo theft combined, many retailers turned to alternative means of cutting back on the bottom line. The cost inevitably got passed on to the consumer in unbelievable ways. In a report done by the Congressional Research Service on Organized Retail Crime, shrinkage cost retailers $36.3 billion in 2008.
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(The National Retail Security Survey (NRSS), a survey of trends in retail loss prevention measures, defined shrinkage as the reduction of physical inventory caused by shoplifting, employee and vendor theft, and administrative error.)
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Of that amount, theft cost retailers $28.4 billion, or 78.3% of the overall number. This figure included internal and external employee theft as well as shoplifting. And of those shoplifting cases, 27.5% were executed by members of an organized crime group.

This can translate into higher price per product for the customer, or having products locked up or kept behind the register, making
them more difficult for the customer to access. With an increase in store theft on both a small and large scale, there is a direct correlation between declining store traffic as well, which has fallen by 65%.

Per-Employee Theft Case Versus the Average Shoplifter

The NRSS conducted in 2008 points out that the average dollar loss per employee theft case was $1,762 compared to $265.40 for the average shoplifting incident.
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Total shoplifter and dishonest employee apprehensions increased for the fourth consecutive year, up almost 15% from the previous year, according to analysis done by Jack L. Hayes. And with the rise of ORC during the “Great Recession,” more in-store employees were colluding with or running their own rings. They believed they had a right to steal the product and felt as if the store owed them something.

“Given that the surveyed portion of the retail economy annually transacts $1.845 trillion, this percentage of loss is worth more than $32 billion,” Richard Hollinger said in the NRSS. “This means that the single largest category of larceny in the United States is the crime that occurs in retail stores. This figure is larger than motor vehicle theft, bank robbery, and household burglary combined.”

Labor Costs

ORC and loss prevention involve an endless cycle of costs for retailers, with labor costs taking up most of the expense. An increase in ORC has to do with the following factors:

• Making product more difficult for the consumer to access, such as by putting it behind glass or in a plastic case

• Embarrassing or awkward antitheft deterrents, such as locks that squirt ink or make it impossible to try on a piece of clothing

• Understaffing at stores

The third reason was the biggest problem retailers experienced during the “Great Recession.” When consumers started spending less because they were cutting back on discretionary and nondiscretionary purchases, retailers scurried to try to figure out how to increase their sinking bottom lines and profit margins in the wake of stagnant spending. Staff was the first expense to go—but in most cases that didn’t translate into an increase in profit.

In an interview with Retailwire, Derek Rodner, vice president of product strategy at Agilence Inc., a loss prevention firm in New Jersey, says the economic downturn of 2009 created a “perfect storm for retail theft.” He said, “Retailers significantly scaled back expenditures and capital projects in all areas—most significantly, loss prevention. In addition, many retailers cut their loss prevention staff up to 50%. At the same time, more people were losing jobs, and otherwise-honest folks were forced to resort to theft just to get by. These two factors combined to create a dramatic increase in shrink. Retailers are doubling their efforts [all over again] to combat this trend and are being forced into updating their legacy technologies and procedures to adapt to the changing dynamics.”

The NRF estimated that the average retailer spent approximately $215,000 on labor costs for loss prevention compared to $75,000 to $100,000 in 2006 and 2007, prior to the recession. But the rapid staff increases cost money not only in terms of salary, but also in terms of labor hours spent trying to find the right people after several initial misses. In terms of upper management, larger stores and big-box retailers often spend as much as $1 million to hire loss prevention executives.
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Estimated cost of labor to staff during heavy traffic times for a department store contributes to their operating margins in a negative way. (Costco, for example, saw an increase in its 2.77% in operating margin costs.)
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However, these costs tend to be more when there are fewer staff members or more turnover. In addition to internal staffing, retailers had to add labor expenses for setting up technology to monitor potential ORC activity to their bottom-line
costs. After spending hundreds of thousands of dollars on upgrades (to establish databases, for example), partnering with wireless providers (the Arden Fair/Verizon Wireless partnership costs $1,272 a year), and investing in training their employees, labor costs were hundreds of thousands of additional dollars spent just to combat ORC.

Decrease in State Tax Revenues

When goods are stolen instead of purchased, theft, ORC, shoplifting, and cargo theft can have an adverse effect on state tax revenues. The National Retail Association estimates that nationally, shoplifting is responsible for more than $1 billion in lost sales tax revenue each year. In California alone, it is estimated that the state’s losses in retail theft equal $5 billion, and $375 million is lost in annual sales tax revenue.
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Florida loses $106 million, Texas $153 million, Illinois $77 million, and New York $74 million.
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Sales tax collections in the January–March 2009 quarter were down 8.3% from the same quarter in 2008, according to a report done by the Nelson A. Rockefeller Institute. This decline is far worse than the worst sales tax revenue decline in the previous recession. Using the GDP price index to adjust for inflation, Census Bureau data shows that state and local sales tax revenue declined by 9.5% in the January–March quarter of 2009—far more than in any quarter since 1963. The last time we saw such drastic declines in state and local sales tax was in the third quarter of 1991, at 6.9%.

Sales tax declines were reported in all regions of the U.S. The Western states (including California and Nevada) had the largest decline, at 14.2%, followed by the Rocky Mountain region (Colorado, Utah) at 9.7%. Forty of 45 states with broad-based sales taxes saw declines, and 11 states had double-digit declines. Georgia led the states with the largest decline at 16.3%, followed by Nevada at 16.0%.
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In Texas, more than $1.2 billion in merchandise was stolen by ORC gangs, resulting in a loss of more than $76.8 million in sales tax revenue.
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This data isn’t surprising. States with higher instances of retail theft also had declining state sales tax revenue. As shown in a Retail Industry Leaders Association (RILA) Crime Trends Survey, as economic pressures persisted into 2009 and 2010, amateur or opportunistic shoplifting events, financial fraud, robberies, burglaries, and large increases in ORC continued to climb across all retail segments.
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In 2010, the RILA Crime Trends Survey reported that out of the retailers surveyed, 78% saw an increase in amateur and opportunistic shoplifting events, and 65% reported seeing an increase in ORC.
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Los Angeles, New York, Houston, Miami, and Baltimore were some of the heaviest-hit cities.

The responsibility ultimately falls on the stores. In 2008, the NRSS reported that retailers spent only .34% of annual sales on loss prevention tools such as contract services, security equipment, and loss prevention personnel.
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Although some experts blame the decrease in loss prevention budgets on inventory shrinkage over the years (retailers on the flip side have seen a 59% increase in ORC activity—again, a matter of how these crimes are defined), a more realistic explanation is the scaling back of budgets because of the recent economic downturn. Loss prevention measures, including loss prevention personnel, are the first to go when a store wants to cut back on costs.
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This inevitably leads to more goods being stolen from stores.

To further put the escalating cost in perspective, according to a study done in 2006, Walmart announced plans to open 1,500 new U.S. Walmart stores over the next five years. Based on a growth rate of 300 new stores per year, and assuming that the average number of 269 reported police incidents per Walmart store remains constant, the study projected that the cost to taxpayers will rise substantially over the next five years, consistent with Walmart’s growth. Extrapolating cost estimates on a national basis, the study further estimated that local police departments would respond to 6,398,165 police incidents at Walmart stores over the next five years. It also estimated that in 2010 police would respond to 1,441,033 calls at more than 5,357
U.S. Walmart stores. The estimated total cost to local taxpayers for policing U.S. Walmart stores over the next five years (2006–2010) was $495,857,788—nearly half a billion dollars.
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Because loss in state sales tax revenue is never about one-off petty theft or minor shoplifting cases, some states, such as Pennsylvania and Wisconsin, have introduced ORC bills that set harsher punishments if an individual is caught stealing items that are lower in value. Virginia State Representative Bobby Scott introduced the Organized Retail Theft Investigation and Prosecution Act of 2010 (H.R. 5932), passed in 2010 by the U.S. House. It establishes a new division at the Department of Justice to investigate and prosecute ORC. According to Joe LaRocca of the NRF, this bill “will work in close consultation with retailers and will be one of the keys to protecting both retailers and consumers against the massive economic costs and very real public health and safety risks posed by organized retail crime.”
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The bill (which currently is still subject to Senate approval) would also require the Attorney General to make recommendations on how merchants and law enforcement agencies can work together to combat ORC. Most importantly, it would authorize $5 million of funds per year through 2015 to support the program. As powerful as this law might be, the problem is in how people are prosecuted. Without more stringent federal, state, and local laws, ORC crews will just wander around the country, looking for the most lenient state to steal from.

Health Costs

The consumer doesn’t just suffer financially when retailers are hit by ORC, shrinkage, and theft. Products that are stolen are often repackaged and sold within days, compromising the product’s safety. The most common examples are items that fall into the “CRAVED” categories. (This acronym, coined by researcher Ronald V. Clarke, means goods that are concealable, removable, available, valuable, enjoyable, and disposable.) These include infant formula, ephedrine-based cold
medications, smoking cessation products, steaks, coffee, OTC medications, test kits, face creams, and premium razor blades.
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When an item is stolen and then repackaged, manufacturers cannot be certain whether their product has been contaminated, mishandled, or spoiled due to less-than-optimal storage conditions, or because expiration dates have been tampered with. FDA regulations that ensure that a product is safe for consumption become compromised the minute the product is mishandled or repackaged, putting the consumer at risk—all to save a couple dollars.

“Some of these guys have machines in their homes that cost tens of thousands of dollars, just to replicate the packaging of the merchandise they are stealing,” said Detective Kent Oda in a speech given at the LEAPS conference in Los Angeles. “You would not believe the lengths these ORC rings go to just to ensure they are re-creating the exact merchandise. When it comes to turning a profit, they don’t care if they are potentially putting your child, grandmother, or friend at risk. They are mostly concerned with how they are going to resell the product for what is it going for in retail.”

One mother whose child was affected by contaminated formula explained the aftereffects in graphic detail: “Every two hours my child would shit right through her diaper. But not the usual six-month-old expulsion. Her crap was runny and green. It was coming out from her underneath the gatherings of her diaper, to give you an idea of how much volume there was. The minute I would change her diaper, it would start up again. Her stomach was hurting, and this went on for six days. I would have to give her water and Pedialyte to make sure she didn’t dehydrate. My baby is five months old and solid, but I can’t imagine if this was a three-month-old, who are much more fragile. The whole experience was frightening and devastating.”
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Janice Ayala, Deputy Assistant Director, Office of Investigations, United States Immigration and Customs Enforcement (ICE), testified before the Subcommittee on Crime, Terrorism, and Homeland Security. She described how an ORC ring based in San Francisco
was busted in 2007 for selling products stolen from larger retailers to Rosemont Wholesale, a warehouse based in Oakland, California. The warehouse sold the medicines, razor blades, and baby formula to smaller grocery stores and on Internet sites. When the Oakland Police Department and USDA uncovered the stolen merchandise in the warehouse, they seized more than 20 tractor-trailers full of products stolen from stores such as Safeway, Target, Walgreens, and Walmart. The haul included vitamins, cold medicine, and hygiene products. When law enforcement officers went through the trash bins outside the warehouse, they found thousands of security tags and bar code labels from the retailers that were discarded.
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