“This isn’t the random shoplifter anymore,” Home Depot CEO Ted Decker told CNBC last week, adding that he fears for the safety of his employees.

In 2021 alone there was a 26.5% spike in organized retail crime incidents, data from the National Retail Federation’s annual report on the subject, released in April, shows. The rise in this type of organized retail theft was responsible for nearly half of the record $94.5 billion in retailer “shrink” that year—defined as the mismatch between retailers’ actual inventory and marked inventory. Retailer shrink rose 53% between 2019 and 2021.

Retailers have been vocal about the consistent issues they’ve faced with shrink as a result of theft since the start of pandemic lockdowns. Walmart CEO Doug McMillon told CNBC in December that organized retail crime could force his firm to hike prices or even close stores if it’s “not corrected over time.” And Target CEO Brian Cornell told investors on a May earnings call that retail theft is “a worsening trend that emerged last year.”

The rise in crime has already seriously affected some retailers’ earnings as well, forcing them to fight back by locking up products in stores that are consistently targeted by thieves. Target said last month that it now expects its shrink losses to reach $1.3 billion in 2023—a $500 million increase from a year ago. 

But Walgreens CFO James Kehoe said in an earnings call earlier this month that shrink at his stores has “stabilized,” adding that “maybe we cried too much last year.” And now, a UBS team led by equity research analyst Michael Lasser is arguing that the shrink era may have hit its “cyclical peak” as retailers and authorities step up their anti-crime measures and focus on the issue.

“There are periods where shrink rises and ebbs,” he wrote in a Tuesday research note, arguing recent data suggests “the peak of the shrink cycle” is already here and investors might be able to profit from the turnaround.

The natural ‘shrink’ cycle?

Lasser points to earnings transcripts as evidence for his theory that “shrink” and retail theft is cyclical in nature. He noted that historically, mentions of “shrink-related keywords,” including those related to retail theft, tend to spike and then remain elevated for two to five quarters before falling back to trend. 

In the second quarter of 2013, for example, mentions of shrink-related terms soared and remained above normal until the third quarter of 2014 before falling. Given this trend, Lasser said that he expects “shrink to improve moving forward” as it naturally falls back to historical levels.

UBS

It’s not just crime that affects retailers’ shrink figures, however, and part of the recent rise in shrink losses at retailers was unrelated to theft, according to Lasser.  

“We believe several factors have been responsible for the growing profit drag,” the analyst wrote Tuesday, arguing that the rollout of new e-commerce initiatives and curbside-pickup model coupled with staffing issues has exacerbated “operational inefficiencies” and increased shrink at retailers over the past few years.

To his point, in 2022, just 37% of shrink was caused by external theft, while 28.5% was caused by internal theft, 25.7% was the result of process or control failures, and roughly 9% was attributed to “unknown” or “other sources,” according to the National Retail Federation.

Lasser argued that as supply chains heal and companies develop a better understanding of how to reduce internal theft and manage their new e-commerce initiatives, shrink will naturally fall. “Soon, we believe, shrink will reach a turning point and become a favorable profit driver for several retailers,” he wrote.

The anti-shrink measures and beneficiaries

One of the key reasons shrink tends to be cyclical is that retailers and authorities typically crack down when it gets too severe, and that’s what’s happening now. Lasser noted that retailers are making “new investments in technology when addressing their plans to tackle shrink,” including the use of RFID chips to track inventory and facial and license plate recognition systems to track shoppers.

Lasser said these tech-based security tools should help prevent theft along with classic strategies like changes to return policies, increased employee screening, and the addition of security personnel. And while retailers have been looking for their own solutions to the retail theft problem, they’ve also been working with authorities. UBS found in its discussions with retailers that there is increasing “cooperation with local authorities to better address shrink and mitigate the effects.”

The news comes after Walmart U.S. CEO John Furner told investors on a May earnings call that the rise in theft has “been challenging really for all of retail” and retailers “can’t solve this” problem on their own. “It will take communities stepping up and enforcing the law to be able to bring this issue back under control,” he said. 

Lasser also noted that the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act (or INFORM Consumers Act) should help with retailers’ shrink problem. The recently passed federal law that will take effect by the end of June is meant to deter criminals from selling stolen, counterfeit, or unsafe items in online marketplaces.

“We believe that this act should alleviate some ORC [organized retail crime] pressures as it imposes a greater burden on organized crime groups and repeat offenders looking to liquidate stolen product,” he explained.

Lasser and UBS also highlighted some companies that will benefit as shrink figures improve, including mass retailers like Target and Walmart, discount retailers like Dollar General and Dollar Tree, home improvement stores like Home Depot and Lowe’s, and specialty retailers like Dick’s Sporting Goods and Ulta Beauty. 

“As shrink improves, we believe that those retailers who have been most negatively impacted will benefit the most,” he wrote, adding that investors should look to take advantage of fading “shrink” in 2024 through these companies.