A Must Read for All LP/AP Executives
One Secret to Costco’s Success: A Tight Rein on Shoplifting
Ahead of Costco’s earnings report later this week, it’s worth noting that one of
the secrets to the warehouse club’s financial success has been to keep
shoplifting to a bare minimum.
The company’s shrinkage, or shrink, the catchall industry term for merchandise
lost to shoplifting and employee theft, as well as damage or cashier errors, is
just 0.11% to 0.12% of sales, against a 1% to 2% average in the retail industry.
(COST) may have the lowest shrinkage of any major retailer—although few
provide specific figures. Costco’s performance is important because the company
has rock-bottom profit margins—a critical element in the value proposition for
its 53 million members.
Shrinkage comes up periodically as an issue for retailers as it did on last
week’s J.C. Penney (JCP)
earnings conference call. The struggling department-store retailer said it’s
making progress on combatting the problem.
“We have taken immediate action to improve shrink and are beginning to see
improved results on recent technology investments and staffing adjustments,”
said the company’s chief financial officer, Bill Wafford. He said that “security
tag implementations” have led to a “20% reduction in shrink dollars in their
Other retailers that have combatted shrinkage issues in recent years include
industry leader Walmart
At Costco, veteran chief financial officer Richard Galanti tells Barron’s there
likely are several reasons for Costco’s minimal shrinkage rate. There typically
is only one entrance and exit from Costco stores, a contrast with mall-based
retailers that often have multiple entrances. Another deterrent is that Costco
staff check customer receipts at the door. When retailers look to boost margins
by cutting staff, it can lead to higher levels of shoplifting because there are
fewer eyes to watch exits.
Galanti says he likes to think that Costco’s members, now numbering 53 million,
feel invested in the stores. They’re also relatively affluent. The basic Costco
membership runs $60 annually.
“We like to think we take good care of employees,” Galanti said. He noted that
Costco’s shrinkage rate is down from around 0.35% 35 years ago.
If Costco experienced anything like industry-standard shoplifting, it would
have no operating profit margin excluding membership fees and probably
would have to lift prices.
Editor's Note: The founder had taken great pride in their shrink
numbers over the years in a number of articles. From saying they lock up all the
expensive items like jewelry and closely monitor the entrances and exits with
their door greeters checking receipts. Leaving each store manager accountable
for their own business operation. But when you have every members' home address
and identification, what would you expect? Other than internal theft, reduced
external theft, and probably very little ORC. It's more about store design, bulk
merchandise, and environment. As they virtually eliminate electronics theft and
grab and runs.