Lottery products are a common sight in various retail establishments, including convenience stores, grocery stores, pharmacies, and supermarkets. In 2022, annual lottery sales soared to a staggering $107 billion, fueled by the widespread appeal of instant scratcher tickets, which accounted for two-thirds of sales, and draw games such as Powerball and Mega Millions, responsible for the remaining one-third.
Lotteries provide substantial benefits to communities, generating tens of billions of dollars in annual proceeds for public education, parks, and other essential social programs, while also driving foot traffic to retail stores. However, along with these advantages comes a significant challenge for store owners: theft. Employee theft is a notable concern, as it is more prevalent and costly compared to theft committed by external actors. One of the reasons lottery products are such an attractive target for thieves is their high value-to-weight ratio. A stack of $1,000 tickets weighs just a few ounces and can be easily concealed. Scratch-off tickets heighten the allure, with 20-40 percent of tickets offering a cash reward, and the convenience of anonymous redemption at nearly any retail outlet offering lottery products.
The relatively low gross margin on lottery products, typically ranging from 5-7 percent, exacerbates their vulnerability to theft. Even minor instances of theft can swiftly wipe out profits from this category, resulting in losses as the revenue generated by stolen tickets far surpasses the modest margins.
How Does Lottery Theft Occur?
LottoShield, a company that utilizes technology to help retailers combat lottery theft, has compiled a list of ways by which theft takes place. The most financially damaging form is theft from the stock room, also known as the backstock, where scratcher packs are stored before being displayed for sale. Ideally, these packs should be secured in a safe, but typically, at least the manager and one other employee have access. To be played, scratcher packs need to be activated, so a thief will take a pack, activate it at the lottery terminal, and remove it from the store. This form of theft is the costliest because entire packs can be taken at a time. There are cases where theft from the backstock exceeds tens of thousands of dollars in just a few days. In such cases, rapid detection of theft and timely reporting to the state lottery can sometimes enable the state to void the stolen inventory, preventing the retailer from incurring charges. This highlights the importance of vigilance and effective communication between retailers and the state lottery to mitigate the financial impact of theft.
Theft can also arise when employees play lottery games during their work shifts, particularly during low-traffic periods when customer influx is minimal and employees have idle time. Initially, this activity may seem innocent, as employees often cover the cost of the tickets they play with their winnings. However, when they fail to win or cannot afford to pay for the tickets, they may resort to stealing. Conducting shift-level audits of the inventory will allow retailers to identify discrepancies and tie them to a specific employee.
Don’t Vending Machines Solve These Problems?
One might assume that lottery vending machines would solve these issues, but they do not. First, state lotteries do not provide vending machines to every retailer who requests one. Rules and restrictions vary from state to state; for example, some states permit vending machines only in supermarkets or in stores that also sell lottery at the counter, while other states don’t offer vending machines at all. In stores that have vending machines, theft can still occur as employees need to periodically restock the machine and remove cash. During these processes, tickets or cash may be stolen. Packs can also be taken from the backstock, like in other stores. In some instances, stores with vending machines may be even more vulnerable if they assume their inventory is secure and consequently adopt lax inventory tracking procedures. It is crucial for retailers with vending machines to maintain vigilant inventory management and recognize that these machines do not eliminate the risk of theft.
How Do Jackpots Impact Lottery Theft?
In recent years, jackpot sizes for draw games have grown due to increased popularity and changes in game rules. When jackpots surpass $1 billion, people flock to stores to purchase tickets, resulting in a spike in foot traffic and even larger jackpots. You might wonder how this affects lottery theft.
LottoShield conducted a recent study that looked at lottery shortages across 650 stores during the busiest lottery sales days of the year. The two days with the highest lottery sales in 2022 were July 29 and November 7, the days of the year’s largest jackpots. Notably, the drawing on November 7 was the largest jackpot in US history and the only one to exceed $2 billion. Lottery sales on these peak days soared to an impressive 13 times the daily average, to approximately $4,800 per store. So, how did this influx impact theft?
Interestingly, while overall losses increased per store, losses as a percentage of sales dropped by 56 percent. This means that on these high-volume days, selling lottery tickets was actually more profitable, and theft had a smaller impact on margins. One possible explanation for this is that the constant stream of customers left no idle time for employees to play.
How Can Retailers Prevent Lottery Theft?
Retailers can detect and deter lottery theft by adopting and adhering to strict inventory reconciliation and accounting practices. More specifically, to prevent lottery theft, retailers should:
- Count inventory every shift: By conducting shift-level inventory counts, retailers can create a narrow window for investigations, making it easier to identify discrepancies and potential theft.
- Cross-check backstock inventory with state delivery receipts: Regularly verifying that all packs delivered to the store are still present helps identify missing packs and potential theft.
- Maintain a clean price book and scan games using UPC during sales: Ensuring that all lottery games are accurately priced, updated in the system, and scanned by UPC during transactions helps maintain accurate inventory records and minimize the risk of theft.
- Implement clear cash handling processes for vending machine sites: Establish procedures for restocking the vending machine and ensure the cash removed matches the printout from the machine to prevent discrepancies.
- Investigate even small thefts immediately and communicate a zero-tolerance policy to employees: Promptly addressing minor theft incidents sends a clear message that theft is not tolerated. This is crucial because thieves often test stores with small thefts before attempting larger ones.
It is essential to understand that proper inventory management serves not only to catch thieves but also to eliminate doubts surrounding innocent employees. Establishing a fair and transparent system helps to maintain a positive work environment and build trust among staff members. While a software solution provides the advantages of automation and accuracy, stores can opt for manual handling to achieve similar results if they consistently apply effort and maintain vigilance.
Seb Kiureghian is the co-founder and CTO of LottoShield, a company that provides inventory management and loss prevention solutions to lottery retailers. He co-founded LottoShield with friends who owned a chain of convenience stores and had spent years struggling with lottery theft. Before LottoShield, Seb worked in product development at Amazon Web Services, where he was responsible for the launch of Amazon Forecast, a cloud service that utilizes machine learning to help companies generate accurate forecasts.
