As retail giants across the US close their stores and suffer critical losses due to shoplifting, it appears one has emerged from the crisis relatively unscathed.
During Costco’s quarterly earnings call on Tuesday, Chief Financial Officer Richard Galanti assured that inventory losses were under control. “Fortunately for us it’s not a big problem,” he told investors.
Hours earlier, Target said it would close nine stores in the U.S. because theft and crime were contributing to “unsustainable business performance.”
According to a recent National Retail Federation study, inventory shrinkage or unexplained inventory losses will cost U.S. retailers an estimated $112 billion in 2022, or about 1.6 percent of their total sales.
And with as much as 70 percent of shrinkage due to theft, that means retailers lost approximately $78.4 billion to shoplifters last year.
Costco’s “inventory shrinkage” is about ten times lower than the U.S. retail average. Pictured is a Costco warehouse
Costco CFO Richard Galanti attributed the low theft rate to a membership-only business model and a store layout that places entrances and exits side by side.
The National Retail Federation said the sector is under threat from crime and violence, with shop owners fearing for their livelihoods and safety.
Galanti told DailyMail.com after the call that Costco’s latest inventory shrink rate was “in the low double digits (by basis points)” and between “0.1 and 0.2 percent” – about ten times lower than the industry average.
“Our shrinkage is historically low,” he said. “And we’ve gotten better over time.”
He attributes that success to several things, but emphasized that only paying members can enter Costco’s store warehouses.
“You have to show your photo ID when you enter our warehouse, so the fact that it’s only open to members is a positive,” he said.
The uniform layout of most Costco warehouses also puts physical barriers between thieves and valuable inventory.
“We always had one way in and one way out, and people checked receipts at the door,” he added.
Most retailers operating in shopping centers have multiple entrances and exits.
In a report summarizing its 2022 financial year, Costco noted that “by strictly controlling entry and exit points and using a membership format” it was able to keep inventory losses “well below those of typical retail operations.”
The uniform layout of most Costco warehouses also places physical barriers between thieves and inventory. Employees monitor the entrance and exit and ensure that only members enter and that no unpaid items come out. Pictured is the diagram of a typical warehouse
The photo shows a Costco employee reviewing a customer’s receipt and checking off individual items as she leaves the store. According to Galanti, this practice has helped reduce theft and losses
Costco also sells items in bulk, making it difficult for smaller items to slip past the employees who check customers’ receipts as they leave.
“Many items are larger size items, and if you have smaller, higher value items, they come in packaging that is much larger,” Galanti says. This includes items like Gillette razors, which come in an oversized flat pack.
Costco members must pay membership fees between $60 and $120 per year. These fees have remained unchanged since 2017 and represent the largest share of revenue: $4.6 billion of net revenues of $6.3 billion in fiscal year 2023.
This allows Costco to sell products at very competitive prices and with relatively low markups, keeping customer satisfaction high.
Although Costco’s shrink rate has always been low, about thirty years ago it was more than twice as high as it is today.
Galanti suggested that higher rates in the past could be at least partially attributed to inefficiencies, many of which have now been smoothed out by technology, and pointed out that inventory losses are caused not only by theft, but also by administrative errors, supplier fraud and damage.
He said: ’99 percent of buying and ordering is anow automated. Forty years ago we had baskets full of paperwork.’
During Tuesday’s earnings call, he told investors that inventory shrinkage only increased by a few basis points when self-checkout machines were introduced in some warehouses during the pandemic.
Costco membership fees cost between $60 and $120 per year and represented $4.6 billion of its $6.3 billion net revenue in fiscal 2023
He told DailyMail.com he wasn’t really worried about that revival or continuing to use it in the future.
“Mistakes are made,” he said. “Even at the exit door we find fault in both directions.”
While Costco continues to operate in relative comfort, other retailers argue that theft from their stores poses an existential threat.
Walmart CEO Doug McMillon said last year that if the problem continues, more stores will close and prices will rise.
In addition to hurting the bottom line, McMillon noted that in stores where crime was a problem, employee safety was also an issue.
In April, the chain closed half of its stores in Chicago as millions were lost annually to theft in the city.
When Target announced the closures on Tuesday, it also cited threats to “the safety of our team and our guests.” Some retailers are now advising their employees to retreat if they witness an attempted robbery.
When asked about such practices at Costco, Galanti said he could not comment on specific protocol but noted that employee safety is always a priority.