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ORC and Diverters

Organized retail crime (ORC) has been in the crosshairs of shrink reduction efforts for a long time now. But for many retailers, battling ORC has seemed less like a victory story and more like an arms race—for every stride made, the opposition adapts. ORC is a part of the retail marketplace, and it operates under the same basic principles as retailers. There is an opportunity to make a profit by supplying a demand, so various ORC players take it upon themselves to become the suppliers. But where exactly is that demand?

It turns out that a significant portion of the demand that ORC players are supplying comes from retailers themselves. Retailers are fueling the ORC system by buying product that may well have already been on their own store shelves, stolen, and completed a round-a-bout loop through the ORC underworld.

Tony Sheppard, LPC
Tony Sheppard, LPC

Tony Sheppard, LPC, national manager of the Organized Retail Crime Unit at CVS Health, has taken it upon himself to combat this self-defeating loop. “Companies are very often unintentionally purchasing stolen product,” he said. “And if they are, they’re the ones creating the demand to steal that product.”

He explained, “A retailer puts product on the shelf. A booster steals that product and sells it to a fence. That fence can turn around and sell the product right back to the consumer. That could be at a flea market, online, in mom-and-pop stores, and other places. But when it comes to health-and-beauty-aid (HBA) products and over-the-counter drugs (OTC), typically this stolen product goes from a mid-level fence to a wholesaler. And then the wholesaler packages it in bulk and turns around and resells it to retailers. Sometimes these are national retailers. Usually they are regional chains, but that’s not to say that large companies aren’t doing it as well. Lots of retailers don’t realize that they’re buying stolen or potentially counterfeit product.”

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The key to this convoluted scheme, the groups who “launder” stolen product back into legitimacy, are diverters. Diverters go by many names—wholesalers, salvage companies, alternate source suppliers—but they are the end medium through which retailers are buying stolen product and so fueling the demand that powers organized retail crime.

The Booster-Fence Ecosystem

The easiest way to understand exactly what diverters are and how they operate is to take a close look at the ORC ecosystem that they’re a part of. Boosters—the people who steal products intending to resell them—and fences—the buyers of stolen goods—vary enormously when it comes to the scale of their operations. As these actors deal with increasing volumes of stolen goods, the geographic area in which they operate tends to increase, as does the sophistication of their techniques. So for ease of discussion, they can be categorized into a hierarchy of three tiers.

The level 1 booster is someone who steals relatively small amounts, works alone, and operates locally. If they live in Phoenix, they might never leave Phoenix to steal. They might steal things from their neighborhood CVS and walk right across the street to Mom and Pop’s Market to sell them. It’s not uncommon for drug addicts to fall into this category, stealing just enough for them to get by for the day. “To me, anyone who steals something to resell I would classify as a booster,” said Sheppard. “If they come in and steal five packs of toothpaste and sell them across the street, I’d still consider that ORC, because they’re part of the ORC web.”

When a booster begins to travel to nearby cities to steal, when they increase their sophistication and volume, often teaming up with a partner or a group, they can be considered level 2 boosters—regional players. In comparison, the level 3 booster is a team of coordinated criminals who operate nationally and may sell their product directly to diverters.

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The level 1 fence is directly reselling product to consumers. They often appear to be legitimate businesses—they might be a local corner market, a swap shop, or a booth at a flea market. They sometimes recruit and train boosters, and they may buy product from level 1, 2, or 3 boosters. While most of the product a level 1 fence buys goes straight back to the consumer, they may move product daily or weekly to a level 2 fence. “If I bring ten boxes of Crest Whitestrips to him, he may not put that directly on the shelf,” explained Sheppard. “He may hold it and sell it to a higher level fence.”

The primary function of the level 2 fence is to repackage stolen product and sell it to the level 3 fence—the diverter. They don’t buy from the small-timers. They buy from level 2 and 3 boosters, or in some cases from level 1 fences. “For example, in one case we had a fence that drove around a van every day collecting product that seventeen level 1 fences had bought that day,” said Sheppard. “Then they repackage it all, and it goes straight to the wholesaler.”

Path of Stolen Retail Goods

Level 2 fences clean the product, removing stickers, security devices, or other markings that could identify which retailer the product had been stolen from. Then they repackage the product for distribution. They typically operate out of a residential house, a warehouse, or a storage unit. Storage units are appealing because they can be rented cheaply and easily, making it simple to evade detection by switching locations frequently. Some may rent several storage units and spread their product between them to minimize their losses if they do happen to be raided by law enforcement. The level 2 fence is the middleman between boosters and wholesalers. They typically don’t have a storefront, and though they may sell some of their product online, the bulk is sold to diverters.

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The level 3 fences (the diverters) complete the circle, selling stolen product back to retailers. They operate as a legitimate wholesaler or distributor, mixing legitimate product with stolen product and selling it back into the retail commerce stream. In many cases, they don’t know that the product they’re buying was stolen, though they probably begin to suspect so.

“A lot of these companies don’t realize that they’re inadvertently buying stolen or counterfeit product,” said Sheppard. “They see a good price, and it’s hard to fathom that someone stole four pallets of Mucinex, so they buy it. I think that the majority probably are suspicious, but they just don’t think about it that much. Over the course of time, maybe they notice irregularities, like a label that hasn’t been removed, or they get suspicious based on the prices. I think they probably get an idea that something’s wrong eventually, but they just look the other way.”

Why Do Diverters Exist?

So why do diverters exist in the first place? Why does the retail marketplace tolerate an avenue for stolen merchandise to be resold to them? “People may ask, ‘How could somebody possibly buy from these places? They must know these goods are stolen.’ But there are other reasons diverters are able to sell goods more cheaply than manufacturers,” said Sheppard.

Diverters exist because smaller retailers—local and regional chains—rely on them as suppliers. If you’re a local retail chain with ten stores, you can’t buy directly from the manufacturer because you can’t meet their minimum order requirements. So the diverter will buy from the manufacturer and then resell to you and a dozen similarly sized companies.

But diverters acquire legitimate products from other places too—anywhere they can get products cheaply enough to resell at a profit. They buy closeout goods. If a manufacturer is set to release a new season’s line of razor blades, they aren’t going to just throw away last season’s razors. Instead, they sell them to a diverter. Similarly, when a large national retailer buys product embedded inside a display, the retailers sells the inevitable excess to a diverter.

Retail overbuy is another source of legitimate product. Massive international retail companies get the absolute lowest prices from manufacturers because of the unrivaled scale of their purchase volumes. Because of their volume discount, they know that they can sell to diverters at a profit, so they may buy an extra million pieces beyond what is needed for their own purposes because reselling to the diverter can easily make small margin at very little risk or effort. This allows other retail chains to get legitimate product from a diverter more cheaply than from the manufacturer.

And that’s what it comes down to—buyers are incentivized to find the lowest prices for the products they decide to stock. For certain products, diverters will have the lowest prices. So retailers will continue to buy from them. “I think the bulk of retailers are clueless about diverters,” said Sheppard. “The buyers don’t work in LP, and I don’t think the thought that the product could be stolen crosses their minds. All retailers buy from diverters, though they don’t like to advertise the fact. Sometimes it’s for no other reason than the manufacturers being out of stock of a product.”

Reboxing and Counterfeit Goods

Diverters buy the cheapest goods they can find. With so many different avenues for legitimate goods to be resold, is it any wonder that stolen product gets mixed in? Even when diverters rebox product, they’re not trying to claim that it’s from the original manufacturer. Some companies, like CVS, won’t accept product unless it’s in a manufacturer spec case—a precaution against, among other things, counterfeiting—though most retailers don’t have that requirement. So how do retailers know that they’re not buying counterfeit goods when buying from a diverter?

Counterfeit goods do occasionally enter the US retail stream. But diverters want nothing to do with anything counterfeit. If retail buyers learn that they received counterfeit goods from a diverter, they’ll spread the word, and that diverter will be blacklisted.

“I’m only aware of a few instances of counterfeit. It only makes sense for specific items and price points,” said Sheppard. “The fact is, when you buy something from somewhere other than the manufacturer, you’re taking that risk. You’re not certain of where that product comes from. But the diverter is never going to knowingly buy counterfeit product. They’ll get cut off completely.” If counterfeit goods do show up, it’ll be the level 2 fence bringing them in from overseas. Some diverters have substantial programs in place to inspect incoming goods, specifically looking to make sure they’re not buying counterfeit.

And, of course, manufacturers are also very concerned with keeping counterfeit products off retail shelves. “Most manufacturers are very helpful with these cases,” said Sheppard. “They’re very concerned with brand integrity. During one of our investigations, we sold a fence tens of thousands of dollars of product, and 95 percent of that product was donated from the manufacturer. They have a vested interest in protecting their brand.”

shutterstock_236633497Online Marketplaces and Meeting Places

Counterfeit goods can be sold online, as can product stolen by ORC actors. While some amount of stolen product is posted for online sale by fences of all levels of sophistication, the bulk of it ends up back in the retail supply chain. “If that sheer amount of product is being stolen, where could it possibly be resold? The bulk of HBA and OTC online is stolen product. You’ll sell some there. But even though online is popular, you’re not going to compete with Walmart. So to sell that much Prevagen, Prilosec, Claritin, or Zyrtec, you’ll have to sell it to retail,” explained Sheppard.

The more important aspect of fences having an online presence is, just like with so many other groups, networking. Occasionally, people who have experience operating with ORC and the grey economy will train level 2 fences and will tell them who the diverters are. But usually diverters find fences online. “If a booster comes in and steals twenty boxes of Prilosec from ten stores, people think that ends up all being sold online,” said Sheppard. “But without question the bulk is sold offline. I do think some investigators spend inordinate amounts of time going after online fences who, from a volume standpoint, aren’t massive pieces. No, the online world is more of a meeting place between the booster and the fence or between the level 2 and level 3 fence. If I am getting started as a fence and list product on eBay, these diverters will buy that product from me. Then they’ll reach out to me privately and say, ‘Hey, any time you have forty-two-count Prilosec, I’ll buy as much of it as you have, no questions asked.’ Well, then I want more of that product, since it’s a guaranteed sale.”

What to Do?

To whatever extent retailers are bringing in stolen product from diverters at the loading dock, they are fueling external theft from their shelves in the front of the store. This cycling of product is an ORC engine that can be stopped—or slowed—at either end. But while most retailers have worked extensively to battle external theft, how much effort has been put toward battling the symmetric problem of unknowingly buying stolen products?

According to Sheppard, “I feel that’s the biggest opportunity—the point between the wholesaler and the retailer. I think that if we the retailers just scrutinize who we’re buying product from, then that’ll go a long way toward eliminating these issues. I’m not saying we shouldn’t buy from diverters, because everybody does, though some will tell you they don’t. I’m just saying we should take basic steps to make sure the people we’re doing business with are legit. There are companies who are literally buying 20 or 30 million dollars of product from people who they’ve met one time, and they don’t even know where their warehouse is.”

One issue is that it’s a tough topic to discuss. Naturally, retailers aren’t thrilled with the idea of sharing all the information of their suppliers with customers or competitors. If a customer goes to buy an OTC drug from the store, that customer assumes that they’re buying into an unbroken chain of custody—from the manufacturer to the store to their shopping basket. “Retailers just don’t like to talk about this,” said Sheppard. “They want you to continue to assume that everything you buy comes in pristine, straight from the manufacturer. One of the arguments that’s made against buying stuff Feature 4_Insideonline is you don’t know who you’re buying from—it could be counterfeit, it could be stolen—but that’s true of retailers too. It’s one of those topics that’s taboo. They don’t want to advertise it to the average consumer.”

And that’s when the retailer is aware of the issue. Remarkably, many retailers don’t even know that they are opening themselves up to this kind of exposure. Or if they do, that knowledge might be limited to certain individuals or teams within the organization. “A lot of companies don’t even know they’re buying from diverters,” said Sheppard. “When it comes to small chains, they don’t have much of a choice in who they’re buying from, and they don’t have a clue that they’re buying this stolen product. At most retail companies, not even LP is aware this is happening, or if they are, they don’t have a seat at the table. Some retailers have small dedicated teams that pursue diversion losses aggressively. But others don’t think that it’s as big of an issue as we here at CVS think it is. They focus on internal theft. External theft is seen as a cost of doing business.”

So what can a retailer do to ensure they’re not contributing to the demand for stolen products? “There are a number of steps they can take, like we’ve done here at CVS. I think the first step is they should scrutinize who they’re buying from,” Sheppard advised. “They should know where the wholesaler’s warehouses are, and they should inspect those warehouses. Is there a vetting process? Do they run background checks on the owners? Do they look to see if the company has ever been sued before? Do they check to make sure there aren’t seven different lots of Prilosec in the same box?

“Finally, I think the communication piece is a big part of the solution. That’s why CVS lets me talk about this. Any company reducing demand will benefit everyone. If we get more companies to scrutinize their diverters, it’s going to benefit CVS because it’s going to reduce theft. If people were more aware and more open about what’s happening and get together and look at this stuff together, without question there’d be a drop in this level of activity. When any one large retailer takes a look at their suppliers and finds an issue with one and stops buying from them, that translates into an instant reduction in demand for items targeted by ORC. It’s a simple chain of cause and effect—stop buying, less stealing.”

Like many issues in retail loss prevention, the issue of injecting demand that ORC feeds off of is an industry issue as well as an individual company issue, and one that can only be truly addressed industry-wide. A company doesn’t know if diverted goods originated on their shelves or their competitor’s. And to some degree, it doesn’t matter since in either case it’s incentivizing ORC actors to continue to operate. Closer collaboration with buyers within the company, as well as fellow LP professionals across the industry, can help to slow this ORC engine and reduce loss for everyone.


The cover story of LP Magazine’s inaugural issue fifteen years ago was titled “Organized Retail Theft—From Prison Training Grounds to a Store Near You.” In that article, King Rogers outlined the scope and mechanics of ORC—referred to at that time as ORT—calling for more intensive study, greater awareness, and better legislation to combat ORC.
•LP-PREMIER-1-final (Page 1)And in that decade and a half, a lot has changed. LP Magazine has changed. The LP industry has changed. Retail has changed. Laws have changed, consumers have changed, and criminals have changed. But the battle between retailers and ORC groups rages on. While the basic elements of ORC remain the same, its methods have evolved considerably in response to the technological, methodological, and educational deterrents implemented by retailers.

Rogers got his wishes. We have better information about ORC—universities, industry groups, law enforcement, and internal organizations have all studied the problem extensively. We have better awareness. ORC is one of the most talked about and targeted avenues of loss. And we have better legislation. Federal and state laws have been implemented that address ORC directly, as well as provide a legal framework for associated issues. There is more work to be done on these fronts, but progress has been made.

But it hasn’t been enough. ORC hasn’t gone away, and some might argue that, in fact, it has increased. If anything, it is now at least a known quantity. Maybe ORC is a permanent fixture in the retail arena. Or maybe the ever-accelerating technological revolution will one day render ORC a solved problem. In any case, successfully fighting ORC will depend on tackling both ends of the supply chain—boosters taking product out of the store as well as diverters shipping product in to the store. This conclusion is as true today as it was fifteen years ago, when Rogers ended his article with this: “There is an old saying that you can’t kill a snake unless you cut off its head. In the case of organized retail theft, until the illicit wholesalers are dismantled, the problem will continue.”

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