We've all experienced the frustration of going into a store — usually it's a drugstore of some kind — and hitting the plastic wall and having to press the button and wait for someone to come, and then you're standing there for ten minutes and then they don't have the right key. And so this happened to me recently.
No. Keep going. So they don't come. The stores — I get a few of those emails every week from our leadership, so I gotcha. But some stores have clearly made the decision that it's worth it to them economically to do this. And it is not an easy conversation with your merchants. It's not an easy conversation with your operators. It's a very arduous, data-driven discussion. And so, you know, I can think back when I got here in 2018, middle of 2018, and we were on a trajectory of shrink that was not good. It was going the wrong way at that point. And we started to have some of these conversations, but I'm a data guy, and I'm a test-and-learn guy. I like to have my facts. And so we did some testing. We did a lot of looking into what products we were losing very, very specifically under the microscope. We found that one particular combination of kit that we were selling for $799, we would buy it 4.2 times for every time we sell it.
Now go have that conversation with your finance folks and they go, that's a gross margin mix we don't like. That's a real business opportunity. If you can get me to break even, if you can get me to slightly positive on that, you know, from a gross margin perspective, then they go, okay, there's a little bit of a trade-off. But it's also we're in a unique business. We're in a business that 50% of our revenue comes from pros and contractors. If they leave a job site because their drill broke and they go to the store because it said we had one and we don't, that's a problem to me.
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway and I'm Joe Weisenthal. Joe, we did an episode recently with Reid Bustillo, the chief marketing officer over at the Truck Parking Club. And that was a great episode about the rebound in trucking. But he mentioned one thing, and he did it in a sort of offhand way, and it really piqued my interest. He basically said that cargo theft had become this huge deal. And it wasn't just, you know, some guys stealing boxes off the back of trucks, which is kind of what I have in my head. It was people spoofing actual carriers or pretending to be a carrier, and then picking up entire cargo loads of inventory and presumably reselling it.
No, that totally blew my mind. I mean, it makes sense, right? Like, okay, we're talking in the U.S., there's tens of thousands of trucking companies. And so the degree to which any shipper could really know any carrier is probably kind of loose, etc. It's like, yeah, why not just sort of spring up one day and, you know, get some shipments and then take them on your own way. It makes a lot of sense, but definitely not what I would have had in mind, as you said, about what a cargo theft meant up until that point.
Well, since then, I keep seeing these headlines popping up. There was a great Bloomberg story the other day, actually, called The Great Modern Train Robbery. Thieves steal $200 million a year off of railway cars. And so you can see, like, this seems to be a big deal. Yeah, we know living in New York that it feels like shoplifting has become a bigger deal in recent years, after the pandemic. And we can debate whether or not the statistics bear that out. But certainly if you walk down the street and you go into our local Duane Reade, everything is locked up, right?
Right. That's the sort of core thing is I don't, you know, there's probably various ways to miss our statistics and, you know, all kinds of stuff, but whatever they're locking, it's not them locking the stuff. They're locking it up. They must know that customers by and large hate it, right? They must know that it decreases labor productivity, having to have staffers starting a bell. Yeah. Get a deodorant. It's like they can't think that that's a great operation. So if they're doing it, I presume there are some real issues there.
Well, we're going to get into all of it today. We'll do the sort of low-level locking stuff up on shelves all the way to the high-level pretending to be an entire trucking company and stealing someone's inventory that way. And I'm glad to say we have the perfect guest to try to understand all of this. We're going to be speaking with Scott Glenn. He is the vice president of asset protection over at The Home Depot and an organized retail crime expert. So truly the perfect person to speak to. Scott, thank you so much for coming on Odd Lots.
Yeah. Thanks, guys. Thanks for having me. I appreciate the expert designation. I'm not so sure I can live up to that, but I'll do my best.
I love that you're wearing the The Home Depot apron as well.
Yeah. Look, it's part of our culture. It's part of what we are. You can see our values over our heart is an intentional thing. Today's earnings day for Home Depot. And so we're all supporting the cause.
All right, first question. And then we can get into maybe more serious topics, but what's the most stolen item from Home Depot?
Well, let's do both. Let's do both.
So I would say volume. It's typically something like a power drill. You see a lot of that. And then when you start to get into dollars, believe it or not, copper and wire have a lot of the commodity value out there. And so we see, you know, people come in and they'll take a lot of that stuff out of the building and try to resell it or use it on jobs, things like that. But yeah, so certainly those are two of the bigger ones.
Joe, someone broke into — there's a museum close to where I am in Connecticut called the Nathan Hale Museum. Huh? An old colonial homestead. Someone broke into it recently and stole a bunch of copper.
Like they like old pipes that were — apparently it was in the house next to it, but it was still pretty upsetting for everyone. You know, a historic home you hit for copper.
It happens. It happens everywhere. When I joined Home Depot eight years ago and I moved into my house, between the time I closed on my house and the time that I moved into the house, they took all the copper out of the HVAC units and all the pieces of it. So it's just — it is definitely a commodity that fluctuates in price. And when the price goes up, it becomes really valuable to bad guys.
Well, that's actually a great segue. So you mentioned you've been at The Home Depot for eight years. Well, why don't you give us a quick sort of overview of your career, what your role is, why we're talking to you, like what's been the main thing that has landed you in this chair?
Yeah. So I would tell you, surprised that I'm in this chair. I went to school to be an architect when I was going into college and realized that I wasn't very good at math, so I decided to maybe go work for the FBI. And I got into the criminal justice side of the business. So I was always fascinated by the law. I ended up going to law school after college and did that. But what started working with the Treasury Department right out of law school and worked for the Bureau of Alcohol, Tobacco and Firearms, realized that I did not like government service. It just wasn't my gig. It wasn't what I wanted to do forever. And so I had — during summers, during school, I'd worked at Target and caught shoplifters. So just kind of a side, you know, make some money gig. And luckily I was able to get my foot in the door with Target after I left the government and work for them and just work my way up through the ranks. So then here, then at Kohl's department stores for ten years. I was at Sears for ten years as the CSO. And then I came back here to Home Depot eight years ago.
So before we go any further, why don't we define our terms? Well, when we talk about retail theft, I imagine this covers a range of activities from, you know, someone innocently, perhaps forgetting to scan their deodorant at self-checkout to really organized, seemingly very ambitious heist. What are we talking about exactly here? How do you kind of categorize retail theft in your head?
Yeah, it's a spectrum to your point. You know, there's definitely low-level opportunistic, you know, I'll even call it the need shoplifters that are out there. They just can't afford things. And we know that happens. And that's not what I would say acceptable to us. But it's also not our focus. It's not the place where we spend a lot of our energy and our tactics, up to the most sophisticated criminal organizations that are out there. And I mean sophisticated, cartel-related, transnational, gang-related international organizations whose sole existence is to monetize theft, to do other bad things, whether that's money laundering, drug trafficking, human trafficking, and these are absolutely known things that are happening out there. So there's a lot of space in between that. And it runs the gamut. But we tend to focus our time and our energy and our resources on the higher end.
Just while we're in the business of defining terms here, I think there's helpful — a word like shrinkage is one that comes up with this. Would shrinkage only apply to, okay, the person who walks into a store and manages to walk out with a power drill or something like that? Or is it — if it's like a very, you know, complex heist of an entire truck that never makes it to the destination, is it counted in shrinkage statistics?
It's a great question. When we talk about shrink in retail, we're talking about at the end of the day, I have inventory on my books. And when I physically go to count that inventory, it's not there. There's a lot of different ways that could happen. That is not just the bad guys coming in and stealing stuff. So when we talk about things within our world here, when I talk with our leadership and I talk to our board, we break it out into what we call operational or controllable administrative types of shrink, and then what we call the malicious. And another way to look at that might be like things we do to ourselves versus things people do to us. And that's the way we tend to categorize that ratio. And for us, I'm not going to say this is for everybody at retail, but for us we're pretty good at controlling the operational side of the business. So about 30% of our shrink falls into that operational administrative things we do to ourselves type of category. And then the balance of it falls into more of the malicious side or things that people do to us.
That's very helpful. And then one more question on this in the broader category of retail theft. Do you have a split on how much happens in store versus somewhere else, whether it's a distribution center, warehouse, etc., versus somewhere else on the supply chain?
Yeah. So, and it's a great question. And it's just getting into the weeds a little bit. So we actually break out our shrink in the supply chain separately. Then we break out our shrink in the retail environments versus the way we break out our shrink in our online environment. So we actually have three different buckets of where the shrink can happen that roll up to our larger number. Now in the supply chain you can have operational, financial and malicious shrink. In the stores you can have operational, financial and malicious shrink. And online you can have operational, financial and malicious shrink. So that all rolls up to the big number. But the biggest chunk of it, to your point, does exist in the 2,400 retail stores that we have out there.
So give us a sense of the overall shrink problem versus how much of it is malicious, how much of it is operational across the industry, and is it true that retail theft has become more of an issue? Because, again, you see these statistics, you see the headlines, Target closing two stores because of rising crime, or you see a company come out and say, oh, our shrink has gone up this year. But to your point, it could be because maybe they're just worse at keeping track of their inventory than they were the year before. So give us some context around how big a problem this is and whether or not it's been getting worse.
You're getting to probably the most debated question in retail asset protection loss prevention, which is — and, you know, I wish I could give you a clean answer on that. I can't. I can tell — maybe I'll start at the top and say, how big is it? It's in the billions. It's in the tens of billions. The shrink problem. There's a lot of different estimates out there. Our cohorts, my peers, my friends and peer retailers, we all talk about this. We work with NRF. We work with all to try to get the best estimates on what this number is. But, you know, how people categorize shrink, what somebody calls operational shrink versus administrative versus malicious can vary by retailers. And so you've got the retail component of — we are a retail accounting operation. There are companies that are on cost accounting. And so making that transition between, you know, the dollars and how do you include markup to get to a number, very, very complicated number. What I can tell you is that there's these numbers that are going around. As long as I've been doing this in retail, which is like, you know, 40% of shrink on the malicious side is done by associates working for the company. They cause 40% of your loss. 35% are people walking into your store and causing it. And 25% whatever the balance is, is that self-inflicted operational administrative types of shrink. And so those numbers ebb and flow. They go every year there's surveys that are done. They might go up a couple percentage. They might go down a couple of percentages. What I can speak to is when I got here at Home Depot in 2018, I wasn't even really a big believer in what you would call the organized retail crime problem. Also pre-COVID, also before, you know, omni really took off and has blown up to what it is here. Places where you can resell very impersonally.
So what's omni? Online sales?
Omnichannel. Sorry. Yeah. Sorry. But when you think about the kinetics of all that and how that's changed over time, and I would tell you that I have become a believer in one, organized retail crime exists. It's become more lucrative, it's become more pervasive. And it's become more dangerous when it comes to how it impacts the customers and the associates in the stores. So while those numbers have generally, you know, estimated stayed in the same buckets, I believe they're starting to drift up. And I also believe since COVID, they've been underreported. And so I think that there's a big piece of that that's just not necessarily reflecting in all the numbers that you see showing up in police reporting, FBI uniform crime reports, things of that nature.
So maybe this is a good opportunity to sort of dive into some details. But you said earlier in the episode that you're more interested in the sort of more sophisticated, organized drivers of shrink than perhaps a random person who maybe they can't afford an item, etc. Can you talk to us about what are the — in a given theft, someone goes into a store and they walk out or they take something that they didn't pay for. What are the fingerprints that look like, okay, this we have reason to believe was part of something sophisticated and organized versus this is like, yeah, we don't support that, but just one random person and it's not going to be the main thing we prioritize?
Yeah. You guys have some great questions to get right into the details of how some of this becomes difficult. So, you know, in an individual instance, it's almost impossible. You know, if you talk to somebody, you can — if it's the — you know, we have people in our stores, their whole job is to stop theft. That's what they do. They detain people, they prosecute, they work with law enforcement and they deal with that. And then we have groups of people here in Atlanta whose job is to handle the more sophisticated components of this piece of it. But it all starts locally. It all starts in the stores. And so some of that is, hey, I see somebody steal that drill, and you sit down and have a conversation with that person before they end up going to jail. And they were really using it to work on a project on their desk, on their house, whereas you might have that conversation with them and say, yeah, I was asked to come and steal this, and I was going to go take it to another place and I was going to get money for that, or I was going to get drugs for that, or I was going to get something. Then I was going to get given a list to go to another store and go get something else. And so we cultivate that intelligence. We cultivate those resources and report that back to our folks here, to our organized retail crime experts who do this for a living, most of whom are former federal law enforcement agents or law enforcement agents at state and local agencies. And their job is to figure out which is the wheat and which is the chaff, and what are the things that are the most important thing for us to go. So we have video analytics. We have other technologies that we work on to kind of say, okay, now I know this person, I know this car, I know this vehicle, I've seen them in store A, now I've seen them in store B, we've got a report from that building that says, you know, Johnny with driver's license 123456 has been in now four stores apprehended for theft because they're going to get apprehended. They might go to the — they might be put in jail and they'll be out the next day. You know, they're going to make bail or there's going to be no cash bail or whatever the case may be, and they're going to go back to doing what they're doing. And so that's how we try to, like, you know, I will say, stitch these cases together and understand which ones are the ones that are more valuable to pull on versus the ones that are like, this is really a one-time occurrence, and this is not something that we need to spend a lot of resources on.
To what degree do you actually work with the police? Because when you talk about, well, we observe these people going to different stores and we try to see if we can identify patterns and stitch the sort of ring together. That sounds like something the police should be doing. Sometimes it's hard enough to get the police to show up. And I'm not blaming in this case. I mean, we know that police departments are under-resourced, stretched very thin. When you talk about, you know, retail theft versus, you know, robbery versus carjacking versus murder or the escalation hierarchy, where are they going to spend their time? Right.
So they're not going to always be able to have the capability to come to our store and deal with this. So I would tell you, our — I'll call it our internal behind-the-scenes — our job is to do the work for them. Our job is to hand them a case file that is 80% complete that says, I've given you everything that I can possibly do for you to then walk into a judge, get a search warrant, get an arrest warrant, do everything that I can't do. And they're going to respect that. They're going to say, if I don't have to do all the hard work, I don't have to do all the behind-the-scenes labor, and all I've got to do is walk in front of a judge and say, this is a great case that we believe — we believe everything that's here — and put their hand up and swear on the Bible. Then they're going to take those cases much more regularly than somebody that's kind of saying, hey, you just go figure it out for me.
Just one more question on this. Is it true that some retailers will not stop shoplifting until they observe the shoplifter getting to a certain threshold of goods stolen? Because then they can go for, like, an actual meaningful charge?
You know, I would be hard-pressed to speak to that for what the policies of some of my compatriots are there. But what I would say is we don't do that. There are — when people say that, I feel like they're kind of looking at things in a very narrow scope. And going back to our point earlier, this may be something where we're already working on this person. We know they've been in 50 stores over the last 30 days stealing from us. And if they walk out the door, it may be because we're going to go watch them go to where the fence is or where they're going to resell the product or where they're storing the product. That might be part of an operation versus a, hey, we're letting you go get to a threshold. And that's really what, you know, at least from our end, we're not trying to, like, build up big charges on people. We're trying to say, I want to get the complete picture of what's happening, because when I wrap this up, I want it to be completely wrapped up.
It seems to me like intuitively, it seems like it would probably be pretty hard to prevent someone from, like, stealing a washer, like the little disc or something like that, you know, like put it in your jeans pockets or whatever. It seems like technology should make it very hard intuitively to steal a power drill, because I imagine you could put tags on it that would set off alarms, that you could have video surveillance that could simply set off something if a person was in one trigger. I have to imagine it's not that hard to train a model to identify someone take it off the shelf, and then that person makes a route out the store without ever having gone to the register. This seems solvable by technology alone. Why isn't it? What is it that makes it such that it must still happen all the time, or be it only gets stopped if a person at the end happens to notice it?
I love your thought process. That is a really expensive thought process. And it's, you know, you think about a Home Depot store, 140,000 square feet of a working warehouse. Yeah. To put the cameras that I would need to do that — I, by the way, there are places where we do that. There are places, you know, in some aisles we're able to do that, but we have a lot of valuable stuff at our stores in different parts of the store. The front end, we have eye-based cameras. We have a lot of different, you know, I would say video analytics that are continuing to evolve and we're really leaning into. But it is expensive and it's a lot of processing power. It's a lot of hardware that you have to put into your stores. We have some advantages, but our scale and our size to be able to do some of that, not everybody does. And certainly not everybody has. You know, sometimes it's a little bit of a trade-off, like how much are you willing to take in shrink versus how much you would have to invest in hardware, capital expense, operating expenses, to be able to put it to zero. I mean, the number we aspire to is zero. The number we'll get to is somewhere north of that.
But just like, what about tags and stuff that are — I mean, there are clothing items in many stores that have tags that will set off an alarm. Why at a level of a power drill is that an insufficient technology to get the number to zero?
It's not insufficient. We have played around in the bricking of product space. You know, when you think about the margins in some of these places, does it make sense to go have to re-read your entire production line for a Milwaukee drill in order to insert a Bluetooth chip of some sort? We've tried that. It's very, very hard to scale up. And again, you still have to put hardware in your stores to be able to detect those tags. That's the piece that typically is very expensive. Again, none of this is impossible. It's just like there's always trade-offs and you're working towards that. But it's going to take some time. I mean, to be honest with you, you know, RFID has a lot of promise in terms of tracking not just the theft side of product, but like, where is this product in the store? Has it been sold? What's the replenishment look like? How do you get your on-hands corrected? There's a ton of business opportunities on those pieces. But I think that RFID hardware costs have always been so expensive, it's almost impossible to put it in a store — or the Home Depot store. We have eight separate entrances in and out of our building.
