Is Amazon to blame for potentially rising retail theft rates?

The last six months or so have seen an explosion of news articles about rising retail theft rates.

The general narrative across most media organizations is that shoplifting/retail theft is getting out of control and causing retailers to close stores and adjust financial expectations. Last week executives at Best Buy, a $52B retailer, reported that retail theft was beginning to impact gross margins. Now there are plenty of reasons to be skeptical of the rising retail theft narrative. The biggest is that from 2010-2020, the FBI’s own robbery data shows that cases have declined by a third.

Over at The Column, Adam Johnson wrote a nice breakdown of the narrative.

Johnson concluded:

Retail lobbyists and their Tough On Crime allies have found an extremely effective narrative vehicle to undermine Black Lives Matter and criminal legal reform efforts, and they will almost certainly attempt to duplicate it elsewhere for years to come.

Now I don’t know if retail theft has skyrocketed post-pandemic. I find Johnson’s argument plausible. I also find it equally likely that it is rising, but we’re just experiencing a data lag in incident reporting. With that in mind, earlier this month, there was some very interesting testimony from Brendan Dugan, the Director of Organized Retail Crime and Corporate Investigations at CVS. Dugan was testifying at the Senate Judiciary Committee’s hearing on “Cleaning up Online Marketplaces.”

He begins his testimony by outlining some key statistics surrounding retail theft rates. According to CVS internal data, it loses $200 million every year due to retail theft—with an average take of $2,000 per incident. In 2020, CVS’s Retail/LTC (Long Term Care) segment reported revenue of $91.2 billion, and about $21 billion (23 percent) of that revenue was from retail sales. Using these numbers, a rough calculation reveals that retail theft accounts for about one percent of that segment’s sales.

Dugan pivots to describe how retail theft rings operate. He makes it clear that there’s a difference between shoplifting and retail theft. In retail theft, a Booster steals goods from a brick-and-mortar store, and the stolen merchandise is sold to a Fence who off-loads it to online resellers who sell the products on Amazon to consumers. “When stolen goods make their way online,” he told the Senate Committee, “the unsuspecting customer has no idea the product they just purchased was stolen.”

He continues:

Last year, my team identified and resolved over $40 million in e-commerce fraud across all online marketplaces. Our biggest case last year involved a business named D-Luxe that sold over-the-counter drugs on Amazon. D-Luxe was listed as one of Amazon’s “Top Rated Sellers.” The company was owned by a man named Danny Drago. He was known by boosters and fences as “The Medicine Man.” CVS Health investigators were led to Mr. Drago after weeks of surveilling booster activity in the San Francisco area brought them to a warehouse in nearby Concord, California.

Dugan then describes how Amazon was uncooperative with the investigation and claimed it had no information to offer even after the local police department issued Amazon a subpoena. Generally speaking, I am pro-privacy and appreciate the spirit of Amazon’s stance. However, it’s easy to contemplate that perhaps the company is more interested in protecting its business model of a largely unregulated and unmonitored network than adherents to a strict privacy policy. 

Later:

Mr. Drago and his wife were involved in a nearly $40 million operation which operated at least two Amazon accounts, selling more than $5 million a year in stolen goods on Amazon and through multiple other Amazon sellers. Amazon suspended one of their accounts in 2019 but did not close the other accounts operated by Mr. Drago or the associated sellers until weeks after the CVS Health investigation resulted in his arrest and seizure of the stolen goods. 

So to recap, CVS alleges that it uncovered an Amazon seller account selling over $5 million a year in stolen goods. CVS worked with the local police department, which resulted in the perpetrator’s arrest and recovery of the goods. Amazon did not fully remove the Seller from its listings until weeks after the Seller was arrested.

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I can’t help but be reminded of a section in Brad Stone’s Amazon Unbound throughout this story. 

In it, Stone describes one of Amazon’s key operating principles: leverage. Amazon is willing to invest hundreds of millions of dollars in technology systems if it means it can remove humans from the operation of the system. It started when Amazon automated its own procurement system and quickly spread across the organization. It’s currently the key driver of its third-party Seller ecosystem, which accounts for over 60% of the company’s retail sales.

Stone writes:

Building such systems required a significant up-front investment and added to Amazon’s fixed costs. But over the ensuing years, those expenses paid off as they replaced what would have been even larger, variable costs. It was the ultimate in leverage: turning Amazon’s retail business into a largely self-service technology platform that could generate cash with minimum human intervention.

If you combine Stone’s reporting and Dugan’s testimony, it’s clear Amazon has limited systems in place to ensure the chain of custody of its merchandise. This is a deliberate design decision, made to maximize Amazon’s profit. Amazon’s devotion to leverage has already had a serious impact on CPG innovation. It seems likely that its pursuit of leverage may have created the nation’s largest clearinghouse for stolen merchandise. 

Suppose it turns out that organized retail theft is on the rise, and authorities are serious about stemming it. In that case, policymakers should look not at individuals on the ground but at the legitimate business networks that facilitate it.

That may start and end with Amazon.