Yesterday's punishment of Wal-Mart (NYSE:WMT) in the stock market, which caused shares of the consumer goods giant to tumble by 3.5%, was in response to the company's less-than-stellar quarterly performance. Although sales in Walmart stores were fairly robust, the concern of investors focused on the climbing expenses for the company.
What's placing such strain on Wal-Mart's expenditures? In a word, "shrinkage," or the corporate euphemism for loss of inventory, either through poor management or shoplifting.
Based on annual projections, Walmart stores around the world may be shedding some $7 billion in lost inventory this year.
Shrinkage in Walmart Stores
According to national averages in comparable retail stores, over 70% of shrinkage is the result of theft—either by potential customers (38%) or by Walmart employees (35%). Part of the uptick could be explained by the fact that Walmart stores have recently gone through a period of greatly expanding their workforce, as well as giving into social pressures to raise their wages. With such changes in how its labor force is managed, Wal-Mart really couldn't avoid some increase in instances of shoplifting.
More concerning is the amount of shrinkage that is attributable to mismanagement. As poorly run stores start becoming bloated with merchandise, it becomes increasingly likely that some products will be damaged in storage, or neglected to be sold at an appropriate time; some food will go bad before making it onto the sales floor; and certain storeroom supplies will simply be lost or forgotten.
An Uncommon Alibi
In explaining its disappointing quarterly performance during Q2, Wal-Mart repeatedly referenced its shrinkage problem. All euphemisms for impotence aside, most companies don't make it a habit to publicly discuss shrinkage unless they are publicly unveiling a new security protocol or implementing some new measure to combat unnecessary inventory loss.
According to data compiled during 2014, in general, shrinkage usually only represents about 1.4% of total sales for vendors in the retail sector. When your sales are on such a scale as Wal-Mart's are, however, this begins to pile up.
In most cases, executives from major retail companies only mention shrinkage between 1 and 4 times per year. The various "dollar stores" (Dollar General, Dollar Tree, Family Dollar) are usually the most frequent in mentioning it, which makes sense considering their wide selection of low-value goods somewhat encourages a great deal of small-time shoplifters.
Yet, compared to these averages across the industry, Wal-Mart's CFO Charles Holley was extremely prolific with the word: the topic was mentioned 3 separate times in the company's press release following its quarterly report, and specifically came up more than a dozen times in a subsequent conference call. In essence, shrinkage is the company's explanation for its weaker overall performance.
What to Expect
Undoubtedly, the hardest-hit Walmart stores will be implementing new measures to combat shrinkage soon. This may entail retraining workers, developing new (more rigorous) anti-theft procedures, or any number of things to ensure that their inventories are more efficiently managed. As such a global corporation—indeed the preeminent model for multinational conglomerates—Wal-Mart Inc. must also contend with the extremely wide spread of its locations around the world in implementing new ways to prevent shrinkage.