Hidden Losses Employee Theft, Rather Than Shoplifting, Takes Heaviest Toll On Inventory Of U.S. Retail Industry

The retail industry euphemism is “inventory shrinkage.”

It refers to any loss of goods not accounted for in sales or damage.

Nationally, it’s a $26 billion-a-year problem for store owners and the people who work for them.

Inventory shrinkage can include shipping errors, botched paperwork and dishonest suppliers.

Far and away, however, the biggest source of shrinkage is theft.

And while much of the merchandise stolen is taken by shoplifters, even more is a result of employee theft.

Nearly every retailer faces the problem at one time or another. Seldom discussed, employee theft can be very costly.

“More small businesses fail from internal theft than from shoplifting, armed crime or any other crime committed against them,” said Sandy Richards, crime prevention expert with the Spokane Police Department.

The numbers support that theory.

A 1998 National Retail Federation survey done by the University of Florida showed that every shoplifting incident cost businesses an average of $212, while each incident of employee theft cost them $1,058.

That translated into $11.1 billion in goods stolen by employees vs. $8.9 billion taken by shoplifters.

Unlike shoplifting, which increases during the busy holiday shopping season, employee theft plagues retailers year-round.

While the NRF survey reveals the national scope of the problem, little is known about how widespread the largely unreported crime is in Spokane.

“It’s kind of like rape (statistics),” said Jack Pearson, a crime analysis officer with the Spokane Police. “How many of them are going on out there? No one knows.”

Employers often are reluctant to go to the trouble to prosecute employee theft, or are embarrassed to admit they were duped by a trusted employee.

“It just breaks the heart of the people that hired them,” said Richards. “It’s people you trust and work with and think have a stock in the business.”

It is often the employers who are unwilling to believe their employees are capable of theft who are most open to betrayal, experts say.

“The worse thing you can be is naive to the problem,” said Bruce Van Kleeck, a loss-prevention expert with the National Retail Federation who worked at Macy’s.

“You need to face the problem head on. You need to discuss the problem. Provide awareness training,” Van Kleeck said. “The people who keep it in the back room are the ones most likely to have a problem.”

Typical of the type of crime businesses deal with was an incident in Newport, Wash., this summer, when an employee of M&M NAPA Auto Parts was arrested for allegedly stealing more than $2,500 worth of car parts, batteries and car-care products.

According to store manager Fred Crane, Michael Hamilton worked alone on Saturdays.

“At the end of the day, he was taking it out the door with him,” Crane alleges.

Hamilton was arrested only after his wife informed police, who found piles of auto parts in the couple’s garage.

Hamilton’s attorney, Dennis Scott, said his client is innocent. Scott added that the items found in Hamilton’s garage cannot be proven stolen, alleging that the auto parts store had poor bookkeeping.

The case is scheduled for trial in January.

Hamilton’s arrest stunned most of the other employees, Crane said.

“He had very good people skills,” he said. “There were a lot of people really surprised.”

Since the arrest, the store has changed its policies, Crane said. It now looks into the backgrounds of new hires, requires workers to read and sign an employee handbook that outlines the store’s policies on theft and has changed its staffing hours.

“We no longer have a period when a person is alone in the store for a long time,” Crane said. “We have two people on the store on weekends.”

And while his trial date is pending, Hamilton is again working in retail, this time in the Spokane Valley.

Employee theft doesn’t just happen at small stores.

Department stores also suffer losses, and two years ago Nordstrom had such a problem with inventory shrinkage nationally that it attributed a fourth-quarter loss in revenue to the problem.

Because the stakes are high, chain stores often have techniques for combatting employee theft.

Burlington Coat Factory is careful who it hires, and is tough on offenders, said operations manager Bill Teter.

“We prosecute,” he said. “It’s a one-strike deal. We have 85 employees. If you let something slide, it goes rampant on you.”

The problem of employee theft is particularly acute among young people, said Van Kleeck of the NRF.

“In a tight labor market, some stores are hiring younger employees,” he said “Young workers don’t see the consequences and are unable to resist temptation. There’s this great merchandise and all your friends are wearing it…”

Leo Huntington was a manager at Kmart stores throughout the United States for 27 years.

Now retired and living in Spokane, he says it is essential for managers to stay on top of their inventory and their employees.

“It stems from a lack of supervision and a lack of reinforcement of policies,” Huntington said. “In handling money and handling merchandise, the methods have to be enforced or you’re providing the opportunity.”

Good morale among employees is also critical to preventing theft, he said.

At Kmart, problems were addressed at weekly training sessions, and employees were encouraged to talk openly and to feel they were a part of the success of the company, Huntington said.

“Employees are loyal, and you have to give them a reason to be loyal,” he said. “You’ll find less employee theft where employees have maintained their respect for management.”

But good morale alone won’t do it, said Richards, who recommends store owners take a number of protective measures.

Background checks should be mandatory, and store owners should require that all returned merchandise be accompanied by a receipt. Often, Richards said, employees will pass stolen good to an accomplice, who will try to return it for cash.

Other effective measures include posting cameras above the cash register and in stock rooms, and requiring vacationing employees to take a full week off at a time.

“That way, if anyone is fooling around with records, it’s going to come to light,” she said. “If (stores) are losing a certain amount every week, and suddenly they’re not (the employee) will get caught.”

One strategy stores now use is suing thieves - employees and shoplifters alike - for civil damages, said Van Kleeck.

“There’s laws in just about 50 states that allow retailers to sue for treble damages,” said Van Kleeck. “For a juvenile or adolescent who’s still with their family, if he stole $30 jeans and has to pay back $300, I like to think it’s going to deter somebody. Or at least their parents will discipline them more effectively.”

Richards said there is no better prevention than constant vigilance.

“The important thing is to realize that anyone can do it,” she said. It’s a temptation, and if people get away with it, they’ll keep on doing it.”

Graphic: Employee theft a bigger problem than shoplifting