Costco keeps tight reins on shoplifting
Issaquah, WA May 30 2019
Ahead of Costco Wholesale ’s earnings report on Thursday, 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, according to Costco Chief Financial Officer Richard Galanti. The retail industry average is in the 1%-2% range.
Costco (ticker: 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 combating 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 J.C. Penney CFO Bill Wafford. He added that “security tag implementations” have led to a “20% reduction in shrink dollars in their respective areas.”
Other retailers that have combated shrinkage issues in recent years include industry leader Walmart (WMT).
There likely are several reasons for Costco’s minimal shrinkage rate, CFO Galanti tells Barron’s. There typically is only one entrance and exit at Costco stores, in 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.
Employees are well paid by retailing standards—Costco now has a $15 minimum wage—and that has led to below-industry turnover. Target ’s (TGT) minimum wage is $13 an hour, and Walmart’s is $11. Amazon.com (AMZN) lifted its minimum wage to $15 an hour last year.
“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.
Another deterrent to shoplifting is that Costco sells many items in bulk sizes. It’s tough to walk out of the store hiding a pack of 18 boxes of Kleenex tissue.