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Did Internal Theft Get Better, Or Did Everything Else Get Worse?

As organized retail crime and external theft steal headlines, internal theft has creeped out of LP conversations. Is this a mistake?

To say there’s a lot on LP professionals’ minds in 2023 would be an understatement. Organized retail crime (ORC), civil unrest, labor shortages, changing laws, and violence against employees have all become so pressing, you might find yourself daydreaming about when employees stealing cigarettes was your biggest problem.

But as these other, newer issues have taken center stage, old LP problems such as employee theft are still prevalent and may even be growing worse due to an increase in the general havoc of the modern retail store.

In the National Retail Federation’s (NRF) 2022 National Retail Security Survey, external theft including ORC was cited as the greatest source of shrink (37 percent), but employee and internal theft came in a close second (28.5 percent).

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And while threats of violence might demand more attention, 36.2 percent of retailers said they were “somewhat more” concerned about internal theft compared to five years ago, and 20.7 percent said they were “much more” concerned. In addition, 58.6 percent of retailers said there was an increase in employee theft due to the COVID-19 pandemic.

PwC’s 2022 Global Economic Crime and Fraud Survey backs this up, with 68 percent of companies saying they experienced new fraud and an increased risk of employee misconduct following COVID-19.

Cheryl Blake

“While retailers are entering a post-pandemic era, it unquestionably changed every aspect of employee behavior, and has lasting effects,” said Cheryl Blake, vice president of the loss prevention portfolio at Appriss Retail. “This has been caused by staffing shortages, retail employees leaving jobs more frequently, and an increased reliance on seasonal workers. What’s more, omnichannel retailers have more touchpoints where internal theft can take place—including the point-of-sale, return desk, receiving dock, warehouse, and distribution channels. As a result, retailers have seen an increased need to mitigate internal theft and protect profits.”

The NRF’s 2021 National Retail Security Survey provided more details on the cost of internal theft. On average, retailers reported 361.6 apprehensions and 527.3 terminations due to employee theft in 2020. Each dishonest employee case cost retailers $1,551.66 on average; with inflation, this cost is surely much higher in 2023.

Scott Pethuyne

“Internal theft remains a significant source of concern for retailers,” said Scott Pethuyne, LPC, senior analytics solution consultant for Zebra Technologies. “Even though external theft and ORC have taken center stage in the media, the fact still remains that associates interact with retailers’ inventory and points of sale every day and have the potential to cause serious issues that negatively impact profitability.”

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Lacking Labor

One of the biggest changes to the retail landscape in recent years is the persistent labor shortage, which has made it difficult to fully staff retail stores, leading to a ripple effect on internal theft.

Read Hayes
Read Hayes

“There’s a few dynamics going on,” said Dr. Read Hayes, director of the Loss Prevention Research Council (LPRC) and research scientist at the University of Florida. “There are typically fewer employees in stores than before, so some of the exposure has been reduced, but at the same time, employees have such unique access and knowledge, which equates to opportunity. They have access to cash, they can activate gift cards, they can generate refunds, and sometimes they’re alone in stores and have unique information about security protocols so they may feel they can evade them.”

This topic was the center of much discussion at LPM and the Loss Prevention Foundation’s Annual Town Hall Meeting at the end of March.

One attendee pointed out that the lack of available talent has also led to more leniency in hiring, meaning retail employees are not vetted as thoroughly as they once were. “Look at how much has changed in the last few years with prosecuting, background checks, and reference checks,” they said. “I had a conversation last week with someone who closed a case involving an employee who had stolen cash from three previous employers. All of those checks we used to have, we don’t anymore. [Thieves] are getting interviewed and processed, and then just going down the street to work at the next store.”

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Employees’ Discontent

This staffing shortage, along with other factors, can also lead to discontent in employees, making them more willing to steal.

“Environmental factors like lack of adequate staffing and increasing retail violence can lead to a sort of ‘I don’t get paid enough for this’ attitude that can result in an associate feeling they’re owed something additional from their employer,” Pethuyne said.

The shocking rise in retail violence is probably the most impactful change in the retail industry—and employees are fed up.

According to LPM’s 2023 Violence in Retail Survey, approximately 90 percent of retailers reported the threat of violence as a result of shoplifting or ORC has increased over the past five years, with 55 percent saying it has significantly increased.

“The aftermath of COVID-19 seems to have incited and emboldened individuals to use verbal threats, weapons display, and physical contact as intimidation in brazen shoplifting events,” said one survey respondent.

This threat of violence to retail employees is certainly leading to an increase in internal theft.

“Internal theft has increased since the start of the pandemic; however, the increase in ORC and retail violence has taken the attention from loss prevention teams away from internal theft,” Blake said. “As a result, the opportunity for internal theft has increased. What’s more, the role of retail employees is more stressful as they must respond to ORC and violence in stores. In addition to current economic hardships, the dissatisfaction can increase the desire to turn to theft.”

Economic factors and a possible impending recession are also making employees more desperate, leading those who might not usually steal to do so.

“At the center of the internal theft is people, and people have been widely affected by changes in the world over the past few years,” Pethuyne said. “Financial issues like inflation and the higher cost of living can motivate otherwise reliable associates to resort to theft in the name of helping their families.”

Blake added that the current economic and retail climate have made the “desire” and “opportunity” aspects of the crime triangle a bigger problem.

Many at LPM’s town hall meeting noted that normalizing external theft has led to more internal theft. “When you look at ORC, if we don’t educate our associates on what we’re doing to address it, we become a target because they see how easy it is,” one attendee said.

This realization has led to other factors contributing to internal theft. “There’s a lot of collusion with internal theft and ORC suspects going on right now,” said another attendee.

Scott Thomas

Scott Thomas, national director for signature brands at Genetec, told LPM he agreed. “Our customers indicate that internal theft is a major concern,” Thomas said. “They’re seeing the biggest case increase in collusion at the checkout and external merchandise theft coordination. As employees notice the ORC walkouts not being approached and apprehended, they are telling their friends that the stores they work in are easy targets for theft. New ORC theft rings are sprouting up from this phenomenon.”

The popularity of buy online pickup in-store (BOPIS) has also led to more opportunities for internal theft.

“We had a meeting with a major retailer, and they dragged us to the side and said they’re now fulfilling orders out of stores, so that’s created new dynamics,” Hayes said. “Now you’ve got side or back doors that remain open all day, and areas that weren’t really designed for natural surveillance. So now you may have hidden areas in the store, you have more merchandise in those areas, and some employees take advantage of that.”

Hayes noted that third-party delivery services like Instacart also open the door for items disappearing before they reach the consumer.

“There’s so much focus on external theft right now. You’re not hearing quite as much out there on the street (about internal theft), but you do hear it from retailers,” Hayes added.

Can AI Save the Day?

Artificial intelligence (AI) has long been touted as the miracle solution to all LP woes. And while early solutions may have fallen short of expectations, the technology has evolved to produce margin-saving results.

“Certain kinds of transactions have a higher risk for loss, and we know these types of transactions can be higher risk, so we have software now—even algorithms and AI—being leveraged to determine theft,” Hayes said.

According to a March 2022 report from Fortune Business Insights, companies are funding advanced technologies, with businesses nationwide spending upward of $11 billion on technology to detect fraud in 2022.

“To identify and reduce internal theft, Appriss Retail’s Secure solution uses AI and machine learning to report on all transactions, piecing together discrete events that seem innocent, but when presented together, can identify hidden loss,” Blake explained. “By connecting multiple data sources, statistical models can uncover employee outlier behavior, allowing a retailer to act on what they don’t already know, improving profits through reduced shrink.”

Exception-based reporting solutions like Genetec’s can also be of use in detecting internal theft.

“For point-of-sale (POS), Genetec offers Transaction Finder, a full featured, exception-based reporting solution fully correlated with video that also provides live POS monitoring and alerts,” Thomas said. “For external merchandise collusion, Genetec is integrated with EAS systems for real-time notification with video.”

Zebra, too, promises to help retailers detect internal theft.

“Zebra gives retailers state-of-the-art visibility into their inventory and transactions,” Pethuyne said. “Whether that involves using RFID technology to know the moment products go missing, self-scan physical inventory counting to ensure accurate inventory levels, or advanced analytics to detect register theft and suspicious inventory movements, Zebra has several hardware and software offerings deployed in some of the world’s largest retailers to help them control their internal theft and shrink.”

With these options for internal theft detection and mitigation, integration will be key.

“As technology continues to evolve, our ability to detect things like internal theft certainly evolves with it, but we all know that dishonest associates’ methods also evolve just as quickly,” Pethuyne added. “I think the key will be efficiently merging all of the different technologies retailers have in play to address the issue, so that investigators and operators can quickly address any problems that pop up.”

Proper training of employees is also crucial in preventing internal theft. Thankfully, technology can help with that as well.

“What looks like internal theft can sometimes be unintentional and can be remedied with individualized training,” Blake said. “As a result, retailers can isolate these incidents from larger cases of ongoing theft. Technology monitoring how well employees conform to policies and procedures can help retailers identify gaps in their processes and improve upon them. Coaching cashiers can improve efficiencies at the POS, reduce front-end turnover, and decrease sale-reducing activities.”

Blake elaborated, “Even as retailers put more controls into place, there are still gaps that lead to opportunities for internal fraud. Retailers are often slashing coverage or reducing training. For retailers without the technology to address and mitigate internal theft, it will continue to become more of a concern. As the world becomes increasingly omnichannel and shoppers turn to online channels, retailers require an integration of data, systems, and people to create one source of the truth that allows them to reduce the thread of internal theft.”

Culture Makes All the Difference

Advanced technology will of course help mitigate internal theft, but every retailer’s first step should involve taking a good, hard look at their company culture.

Hayes said, “If you have a strong culture, employees know they have a code of conduct and understand very clearly that they will be punished if caught stealing.”

The LPRC has interviewed dishonest employees, and the results were proof that good corporate leaders are not enough to prevent theft in an organization.

“The main actionable findings were that employees tend to identify with their boss rather than the overall organization,” Hayes said. “So the organization may have a very strong culture of honesty and hard work, but if the local leadership doesn’t represent or buy into that—or takes advantage and is dishonest themselves—those are triggers. You’ve got to be very careful as a part of your audits out in the field to make sure the culture in every single location is strong. We also found that retailers who were regularly surveying store-level employees about culture seemed to have fewer problems with internal theft.”

While the technology and processes to detect internal theft continue to improve, Hayes hopes the recent deterioration in employee loyalty doesn’t decline further, as that will be the true determination of whether employee theft grows worse or better.

“Future generations might be changing jobs more and feel less compelled to be loyal to anything, including an employer,” Hayes said. “So that’s going to be a potential dynamic—less commitment. You might continually have fewer employees because fewer people want to work in retail, and those employees that are there might be less committed. So you might have less exposure from the quantity of employees, but the quality may be lesser.”

I guess we’ll just have to wait and see!

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