According to an article by the Associated Press, Wal-Mart’s current practices for managing theft and shrinkage will cost the retailer more than $3 billion this year. The article cited a June 1 filing revealing that the company’s gross profit margin for its Wal-Mart stores segment fell by 0.1 percentage points in the first quarter, partially due to “higher inventory shrinkage.”

Since 2006, Wal-Mart has been arming itself for the wrong loss prevention (LP) battle. While focusing its LP resources on organized retail crime (ORC) rings, traditional shoplifters – Wal-Mart’s real threat – seemed to have made a surprise attack. But it really shouldn’t have been a surprise after all.

Although the retailer’s recent approaches to loss prevention may resemble a tug of war, I am optimistic. Wal-Mart’s transparency about its current situation is a strong indication of the organization’s commitment to strike a balance in its LP program.

The ORC Shopping List

Although organized retail crime seems to be the hot topic for retail LP, the truth is that it should not be at the top of everyone’s priority list, primarily because it is not specifically defined. In fact, it may not be as much of a problem as LP professionals fear. Traditionally, ORC correlates with high-profile brand identity, particularly brands with high market value outside of the U.S. Most Wal-Mart shoppers are not drawn into the doors by brand-name appeal, but to the low prices the company offers.

Wal-Mart’s decision to give up on its zero-tolerance shoplifting policy may have been influenced by scrutiny from outside sources. However, bad press is merely an unfortunate side effect of superpower status. Instead of preventing high-profile thefts, Wal-Mart’s new strategy opened the floodgates for more by virtually eliminating risks associated with everyday shoplifting incidents.

If a retailer will not enforce legal consequences, it must deter shoplifting through alternate activities such as customer service. If not balanced with other proactive measures, increased theft activity – and its immediate impact on earnings – is a natural result of reversing a policy.

These are consequences that could translate to retailers of all sizes. Consistency in addressing external theft can go a long way. Withdrawing from a proactive LP approach can increase shrink, decrease profitability and affect shareholder value. Balancing and allocating resources is critical and, for some retailers, it may not be appropriate to defend against ORC.

Assessing a store’s risk

One of Wal-Mart’s recent LP strategies could have been very wise. Adjusting LP staff levels and providing more coverage to target-theft stores can be successful. Maintaining LP awareness in low-risk stores must be factored into staffing models as well. The key is to realize that there are issues beyond geographic location that should classify stores as “troubled.”

Turnover, for example, can greatly impact a store’s shrink rate because it can undermine the visibility of existing LP programs. An increase in turnover can make a low-risk store convert to a high-risk store very quickly. That means it is critical to define and evaluate stores on an ongoing basis to ensure that staffing needs are calculated accurately.

Immediate vs. long-term LP relief

Wal-Mart finds itself in a challenging situation. For its shareholders, it must implement LP tactics that will show immediate results. That means using the LP payroll to execute and focus on traditional shoplifting programs, including apprehension and re-establishing consequences. Although a necessity, this is a weaker solution to the big picture LP predicament faced by Wal-Mart.

Long-term success for Wal-Mart’s earnings will come from a deeper approach. The retailer must invest in defining shrinkage as a problem to be combated by the entire store, not just the LP department. Such a program involves commitment to education among staff members and measurement of results over time.

SIDEBAR: LP Outside the Big Box

Smaller retailers face similar challenges as retail giants but are often at a greater disadvantage. Common roadblocks to loss prevention success at the specialty retail level include:

• Geographic Models for LP Coverage:
  Often, one individual or a small team of professionals can be responsible for executing LP initiatives across a large area covering multiple locations. This can create a disconnect.
• Smaller LP Budgets:
  Without sufficient resources, LP programs are often reactive.
• Limited Payroll:
  Without the support of a full staff, LP strategies focused on high customer service levels have a slimmer chance of success.