Organized Crime Gangs Stifle Retail Profits

Sophisticated technologies and higher demand for bargains have led to an increase in organized crime against retailers, according to the National Retail Federations Organized Retail Crime survey.

Of the 129 retail companies surveyed, from restaurants and grocery stores to department and specialty retail stores, nearly all said they had been a victim of organized retail crime in the past 12 months, an increase of 6% from last year and one of the worst results in the surveys seven-year history.

The true scope of the problem has been difficult to measure given the secretive nature of the crimes, though industry experts have estimated that organized retail crime losses total an estimated $15 billion to $30 billion annually.

The devastating blow to the retail industry is detrimental at any time, but particularly when higher costs of raw materials and still soft demand have forced weaker profits from retailers such as Cracker Barrel (NASDAQ:CBRL), CVS (NYSE:CVS) and Pinnacle West (NYSE:PNW).

The Modern Heist 

Despite Hollywoods perpetual portrayal of four masked bandits waving a gun during an in-store heist or swiftly swooping from the ceiling at night, retailers say the crime often starts before the merchandise even hits the shelves.

Some 49.6% of retailers said they had been a victim of cargo theft over the last year, with most affected from when products are en route from the distribution center to the store, with others reporting cases between the manufacturer and the distribution center, at the distribution center, and as merchandise moves from one store to another.

Cargo theft is a rewarding, profitable enterprise, and criminals are increasingly finding ways to infiltrate the supply chain, said NRF senior asset protection advisor Joe LaRocca. As thieves target shipping containers, retailers and law enforcement are fighting back with new initiatives and operations to directly address cargo theft.

Organized crime rings generally consist of "boosters," who methodically steal merchandise from stores or trailers, and "fence operators," who convert the product to cash or drugs as part of a criminal enterprise. The members all have designated roles, according to the NRF, from the driver and lookout to the packer and supervisor.

Some criminals use foil-line shopping bags, boxes and signal jammers to defeat inventory control tags, while others use computers to replicate fake receipts for the purpose of making cash returns. Still other boosters use stolen or fake credit cards to make an expensive purchase, or partner with employees.

Many retailers in the survey said that on average 12% of organized crime cases involved both internal and external participants, shedding light on the substantial role corrupt employees play in the crime ring.

The gangs, which target both consumer and other valuable goods such as over-the-counter medicines and designer jeans, often try to hide and sell the products at pawn shops, flea markets or warehouses, according to the NRF.

Retailers Taking Stand

As a still-downtrodden economy forces retail executives to pay closer attention to every line item on their budgets, loss prevention experts say senior leadership is more likely to understand how organized retail crime impacts profits.

More than half of survey respondents believe their top management understands organized retail crime, up 16% from last year, and many have started allocating additional resources, such as more personnel and greater investments in technology, to tackle the problem.

As criminals become more brazen, retailers are working fervently to cut down on organized retail crime activity in order to ensure the safety of their associates and shoppers, LaRocca said.

But its not just an issue of narrowed profits, the NRF says these criminals are becoming more violent, and are often engaged in other illegal activities, such as drugs, weapons and gang activity.

Luckily, retailers have not been left on their own to defend against the rising threats.

The FBI, Immigration Customs and Enforcement of the Homeland Security Investigations Agency (ICE-HSI) and the Department of Homeland Security have all been very active in monitoring and apprehending criminal enterprises known for their organized retail crime activities.

Earlier this year, ICE-HSI expanded its Organized Retail Crime Pilot Program into an ongoing nationwide initiative that will be known as the Seizing Earnings and Assets from Retail Crime Heists, or SEARCH, initiative.

In 2009 the NRF and other industry associations inked a deal with eBay (NASDAQ:EBAY) to tackle organized retail crime together by identifying and stopping criminals that resell stolen good online.

Increasing partnerships between retailers and law enforcement agencies demonstrate the severity of the issue for retailers of all sizes and formats, the NRF said in the annual report. Organized retail crime gangs can wreak havoc on a companys entire operating system as well as potentially causing serious harm to store employees and shoppers should a thief get violent.

The top 10 areas in the U.S. for organized retail crime are Atlanta, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York and Northern New Jersey, Philadelphia and Phoenix.