The Hidden Threat: Understanding Internal Theft in Retail
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The Hidden Threat: Understanding Internal Theft in Retail

Date: Jul 11 2024
Read Time: 7 minutes

According to the National Retail Federation, shrinkage is “a measurement of inventory loss as a percentage of sales during a specific inventory period.” Many retailers use shrinkage as a blanket term for all theft, but knowing which type of theft you’re experiencing is key to finding solutions to fix it.

In this blog, you’ll learn the types of theft that make up retail shrink, uncover the surprising prevalence of internal theft, the retailers most vulnerable and how to limit it with access control measures.

Internal Theft vs. External Theft

Both internal and external theft contribute roughly 30% each to total retail shrinkage, but they differ significantly in terms of who commits the theft. Internal theft occurs when employees or insiders within a retail store steal merchandise, cash, or sensitive information for personal gain. By leveraging their familiarity with the store’s operations, they can assist other employees in stealing and more easily evade detection. On the flipside, external theft involves outsiders like shoplifters or organized retail crime groups who target goods or cause damage within stores. Both types of theft present substantial challenges for retailers, underscoring the need for heightened security measures and vigilant monitoring to safeguard their assets.

Exploring Vulnerabilities: Which Retailers Are Most at Risk for Internal Theft?

Completely preventing internal theft is a tall order. While all retailers experience some form or another of stealing, there are retailers that are more at risk of a dishonest employee and internal fraud.

1. Retailers with High Employee Turnover 

Industries characterized by high turnover rates, such as fast-food restaurants, convenience stores, and retail outlets, face an uphill battle against internal theft among retail employees. The constant influx and outflow of staff make it challenging to establish a stable, trustworthy workforce. Employees with short tenures may feel less invested in the company’s success or its ethical standards, potentially leading to higher incidents of theft that go undetected in the revolving door of personnel.

2. Retailers Selling High-Value Goods 

Retail stores that specialize in high-value items like electronics, jewelry, and luxury goods are prime targets for internal theft. The allure of expensive merchandise, easily concealed and with high resale value, can tempt employees into theft schemes. For retailers in this category, losses due to internal theft can be substantial, impacting both inventory management and financial stability.

3. Retailers with Cash Transactions Prone to Cash Theft 

Businesses that primarily handle cash transactions, such as small convenience stores, gas stations, and certain retail outlets, are inherently vulnerable to internal theft, including cash theft. Methods such as cash skimming, fraudulent voids, or falsifying records can go unnoticed in environments where stringent cash-handling protocols are lacking. Without robust controls and monitoring, the risk of monetary losses due to internal theft remains heightened.

4. Retailers with Limited Physical Security Measures 

Stores lacking adequate security measures, including surveillance systems, inventory controls, and comprehensive hiring practices, are more susceptible to internal theft, much like how neglecting physical security can lead to data theft in cybersecurity. Inadequate oversight can embolden dishonest employees to exploit vulnerabilities in operations, whether through theft of goods, manipulation of inventory records, or collusion with external parties. Effective security measures and strict adherence to protocols are critical to mitigating these risks.

5. Retailers with Inventory Shrinkage Issues 

Industries plagued by inventory shrinkage—losses due to theft, errors, or damage—such as supermarkets, pharmacies, and apparel stores, are often hotspots for internal theft. The complexity of managing large inventories and the potential for discrepancies can provide cover for unethical behaviors among employees. Addressing inventory shrinkage requires not only improved inventory management practices but also heightened vigilance and transparency in tracking and reporting discrepancies to prevent internal theft.

6. Retailers in Highly Competitive Markets 

In fiercely competitive markets where businesses vie for consumer attention and market share, internal theft can manifest as employees seek to meet ambitious sales targets or supplement their income through unauthorized means. Pressure to perform coupled with inadequate oversight or incentives can create an environment conducive to misconduct. Retailers operating in these environments must prioritize ethical practices and establish clear boundaries to deter internal theft, as employees steal to meet personal or financial needs.

Want to know more about the different types of employee theft? From time theft to fraudulent returns, when there’s a will there’s a way. Related Read: Preventing Employee Theft in Retail Stores

Statistical Insights: Quantifying the Impact

Statistics from recent studies shed light on the prevalence and financial implications of internal theft in various retail sectors:

  • Turnover Impact: Retailers experiencing turnover rates exceeding 100% annually report a significantly higher incidence of internal theft incidents. National Retail Federation estimates that internal theft accounts for a significant portion of retail shrinkage.
  • High-Value Goods: Stores specializing in electronics and luxury items report higher incidences of internal theft, with losses averaging 1.5% of annual revenue.
  • Cash Transactions: Businesses relying heavily on cash transactions face losses averaging 1.6% of sales due to internal theft activities, underscoring the vulnerabilities in cash-handling practices.
  • Security Measures: Retailers with comprehensive security systems and stringent hiring practices report up to 50% fewer internal theft incidents compared to those with lax security measures.
  • Competitive Markets: Industries operating in highly competitive markets experience internal theft rates nearly 30% higher than those in less competitive sectors, highlighting the correlation between market pressures and ethical lapses.

Mitigating the Risks: Strategies for Preventing Retail Employee Theft

To combat internal theft effectively, retailers should use a more proactive approach that includes:

  • Investing in Security Infrastructure: Installing surveillance cameras, hiring more security, and limited cash transactions can deter and detect internal theft. Engaging loss prevention professionals can further enhance these efforts by providing expertise in identifying and mitigating theft risks.
  • Enhancing Hiring and Training Practices: During the hiring process, thorough background checks, rigorous training on ethical standards and company policies, and fostering a positive work environment can cultivate a culture of integrity among employees.
  • Implementing Strict Inventory Controls: Adopting inventory management systems like a point of sale (POS) system that track stock levels, conducts periodic audits, and promptly reports inventory discrepancies can minimize opportunities for theft.
  • Promoting Transparency and Accountability: Encouraging open communication channels, whistleblower protections, and incentives for ethical behavior can deter internal theft and encourage reporting of suspicious activities. Happy employees are less likely to steal and can help influence positive employee behavior amongst new hires and other employees.
  • Invest in Asset Protection and Access Controls: Even with video cameras, there are blind spots. You can’t have eyes on everyone all the time. Loss prevention efforts should include asset protection in the form of reliable merchandise security devices. They don’t just prevent shoplifting but coupled with the right access control like InVue’s OneKEY, you can set parameters of who can access what and receive a full audit trail of product access.

Start Implementing Loss Prevention Techniques Against Disgruntled Employees

Internal theft in retail, also known as retail theft, is a tricky problem that needs careful handling and constant watchfulness. By knowing what puts your business at risk—like high turnover, valuable stuff, cash dealings, lax security, inventory issues, and competitive pressure—you can take steps to keep things safe. Investing in prevention not only saves you money but also keeps customers and stakeholders trusting your business.

To stay ahead in the retail game, it’s all about doing the right thing and having strong safeguards in place. That’s how you beat internal theft and keep growing strong over time.