Retailers may be using organized theft to cover up internal flaws

This is part two of a three-part series on organized retail crime. The stories will examine the claims retailers make about how theft is impacting their business and the actions companies and policymakers are taking in response to the issue. Read the first story here and stay tuned for part three.

Retailers who blame organized theft for lower profits could be overstating crime’s impact to cover up internal flaws or self-inflicted problems, CNBC has learned.

During recent earnings calls, major companies have blamed disappointing bottom lines or shrinking margins in part on roving bands of organized gangs that ransack their shelves. The issue could come up again as a string of major retailers start to report second-quarter results next week.

But behind closed doors, retailers are facing other issues they can better control, including theft by their own employees, that are contributing to losses, according to two sources who advise major retailers. They spoke on the condition of anonymity because they’re not authorized to speak publicly about clients. 

Many retailers have invested in technology to better understand what leads to shrink, or the gap between the inventory a company has and what it sells. Some companies have since identified theft from employees as a major contributor to losses, even as they blame external theft in public, said one of the sources.

Losses from self-checkout theft have also become a major issue, the people said.

While some retailers may be seeing higher rates of shrink because of poor hiring practices and self-checkout machines, others such as Target and Foot Locker could be using retail crime as a crutch to obscure internal challenges, experts told CNBC.

“Shrink has been going up but sometimes it’s very difficult to unpack how much is down to theft and how much is down to internal retailer issues and stumbles,” Neil Saunders, a retail analyst and the managing director of GlobalData, told CNBC.

“It is a problem, we know that, it does take money off margins, we know that, but there’s too much opacity in the way in which it’s reported and it is being partly used as an excuse for generally bad performance,” Saunders said.