By Joyce Beebe, Ph.D.
Fellow in Public Finance
Media headlines over the last few months have highlighted a series of brazen retail crimes across the country, ranging from flash mobs in Minneapolis to smash and grab schemes in Houston. The victims were not only high-end designer stores such as those on Chicago’s Magnificent Mile, but also neighborhood small businesses in New York City. The frequency was also astonishing – in the Bay Area, a string of thefts occurred within a day. These alarming incidents, commonly known as Organized Retail Crimes (ORCs), have prompted calls for policy action from all concerned. This blog post reviews recent discussions about ORC, as well as federal and state policy responses.
How is today’s Organized Retail Crime (ORC) different?
Retail crime is not new, and it can take various forms including shoplifting, fraud, robbery and insider misconduct such as employee theft. ORC is a type of retail crime that generally involves a group of individuals (often known as “boosters”) obtaining retail merchandise in substantial quantities through skillfully arranged, illegal measures. As such, boosters are different from amateur shoplifters, whose wrongdoings usually represent crimes of opportunity. In addition, individual shoplifters typically steal goods for personal use, whereas boosters systematically sell the stolen goods for profit. (This is known as fencing; a fence is a person who knowingly buys illegally obtained goods and sells the goods for profit.)
Traditionally, such crime rings sell their unlawfully acquired goods through flea markets, swap meets and pawn shops; some of these physical locations also serve as recruiting grounds for fences and boosters. With the advancement of technology, crime ring recruitment has become increasingly digital; boosters frequently unload their illicitly obtained goods through online marketplaces (“e-fencing”) such as eBay and Amazon. The online marketplaces not only provide a bigger “market” for boosters beyond local swap shops, but they also offer a certain level of anonymity that allows criminals to hide behind the internet without fully revealing their identities.
Many believe the pandemic has exacerbated the surge of ORC. The pandemic changed consumer purchasing habits and substantially expanded the online marketplace. As such, increased online shopping gave boosters a fast and easy way to monetize their stolen goods. In addition, as a convenience for customers, many retailers promoted multi-channel shopping — such as the ability to buy online and pick up and/or return/exchange the merchandise at the store. This increased inventory at storefronts, which made them appealing ORC targets. Furthermore, shoppers wearing masks complicated efforts to deter criminals and catch them in the act, even with security cameras rolling.
Size of the ORC
How much have retailers lost from ORC? Over time, several government agencies and industry groups have provided estimates. Although the numbers vary widely due to data limitations, comparability, and retailer confidentiality concerns, both government and industry studies conclude that certain products are more susceptible to theft. As such, the losses are not evenly distributed across all types of retailers.
In 2007, the FBI estimated ORC cost retailers between $30 and $37 billion per year. Around the same time, the National Retail Federation (NRF), the nation’s largest retail industry group, estimated annual ORC losses at $15 to $30 billion. Boosters are more likely to target certain types of merchandise, such as the so-called CRAVED items (meaning goods that are Concealable, Removable, Available, Valuable, Enjoyable and Disposable); these goods can be easily taken from stores and converted into cash. In addition, boosters also commonly go after desirable or “hot” products such as alcoholic drinks, cigarettes, over-the-counter medications, health and beauty items, electronics and high-end small home appliances.
A more recent NRF estimate did not provide an aggregate loss amount, but showed that ORC cost retailers 7 cents per $100 of sales in 2020. In other words, roughly 0.07% of total sales were lost due to ORC.
Furthermore, although the details are not disclosed, a witness at a Senate Judiciary Committee hearing last November stated ORC accounts for $45 billion in annual losses for retailers.
A separate report by the Retail industry Leaders Association (RILA), another industry group, estimated $68.9 billion worth of products were stolen from retailers in 2019, which was before the pandemic. In addition to direct losses, the report also states that indirectly, such criminal activities have led to lower business profits, sizable job losses, and lower wages for workers. The drop in economic activity consequently resulted in a $15 billion tax revenue loss for federal and state governments.
Overall, it is not completely clear what estimated losses encompass and whether the results can be generalized across the entire industry. Some estimates only include retailer merchandise losses, while others include losses from additional retail crimes such as employee theft and fraud, or indirect losses like the cost of implementing preventive measures. In addition, some observers wonder whether the surveys include a sample size large enough to represent all constituents. Furthermore, there is limited transparency for the tax revenue loss estimates. Therefore, although several entities provide a range of estimates, they may not be directly comparable – which makes the differences difficult to reconcile.
Beyond retailer loss estimates
Although solid numbers for ORC-related retailer losses are hard to ascertain, the economic and social impacts extend beyond what is lost in the store. When instances of ORC rise, retail associates may not feel safe to go to work and consumers may stop patronizing stores in high-crime areas. Retailers may spend more on loss prevention measures, such as investing in digital video recording systems, hiring uniformed guards, attaching cables and locks to goods, and adding security tags. To the extent that retailers do not absorb these costs themselves, the expenses are eventually borne by customers in the form higher-cost goods.
Moreover, although tax revenue losses are seldom at the center of ORC discussions, they are a real and concerning issue for both federal and state governments and should be emphasized. The potential losses are extensive: tax revenue losses caused by ORC not only involve personal and business income taxes from the federal perspective, but also sales, income, property and certain excise taxes collected by states.
Finally, one sobering trend is that different studies and surveys consistently show that retailers are not only reporting more ORCs, but that the offenders are becoming more violent; they are more likely to physically assault a retail associate or a guard, sometimes with weapon. A high portion of retailers also reported they believe ORC will get worse in the future in the absence of meaningful policy actions. It is against this backdrop that business owners urge policymakers to take action and improve the safety of employees and business operations.
Policy responses
The rise in ORC is causing concerns that extend far beyond the value of lost merchandise. Although the problems are clear, the policy solutions are not immediately obvious. Generally, the disagreements center on whether the federal government should play a more prominent role in combating ORC, and if so, what types of measures are needed.
The first line of policy response, and where lawmakers generate the most momentum, requires online marketplaces to increase information-sharing with retailers and law enforcement to enhance ORC detection. A Senate proposal, the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act (the INFORM Consumers Act, S.936), and a highly similar House version (H.R. 5502), require online marketplaces to collect, verify and disclose certain information from high-volume third-party sellers and to provide consumers with the means of reporting suspicious activity. The required information includes a seller’s government ID, tax ID number, bank account information and contact information such as an email address and a phone number. Both proposals characterize high-volume third-party sellers as those making over 200 sales of more than $5,000 over the previous 12 months in a 24-month period. If these requirements are not met, the marketplace can suspend a seller’s activities.
At the state level, numerous states surfaced proposals this year regarding marketplace data collection and reporting requirements. These marketplace oversight laws are similar to the federal proposals, and they are gaining attention as aggressive retail crimes continue to grow.
Many retailers support federal measures because they prefer a national framework over a series of potentially inconsistent state rules. Certain retailer organizations support the Senate version, whereas the NRF and Amazon support the House version of the INFORM Consumers Act. The NRF and Amazon state that they prefer the House version because it has more limited disclosure requirements for sellers (using $20,000 of sales as the threshold), which they believe “strike the appropriate balance” of not overburdening small sellers and not impeding legitimate commerce. However, the NRF also believes marketplace transparency alone will not stop ORC. It supports federal and state government action to formally criminalize ORC (discussed below) in addition to regulating the marketplaces.
The second line of policy response involves criminalizing ORC. This is primarily a federal-level policy discussion, as over two-thirds of states have already labelled ORCs as criminal activities. Similar ideas about criminalizing ORC at the federal level were discussed over a decade ago.
Currently ORC is not a federal crime. Federal laws do not criminalize the ORC itself. Instead, they penalize activities related to or surrounding ORC, such as money laundering, transportation of stolen goods across state lines, and the sale or receipt of stolen goods.
State and local law enforcement have historically combated retail crime under state criminal laws. State governments usually relied on felony theft (sometimes known as major or grand theft) statutes to investigate and prosecute ORC. However, these statutes vary across states in terms of the dollar amounts that constitute felony theft, leading to inconsistent prosecution standards. Many criminal activities are multi-jurisdictional, meaning the activities are often conducted across state lines. Sometimes different state law enforcement agencies also have different capacities or resources to investigate these crimes. As a result of the recent increase in ORC, the discussion has intensified, with questions that include: are state rules (individually and collectively) sufficient and should criminalizing ORC at the federal level allow a consistent set of rules that lead to more efficient prosecution?
The last line of policy response focuses on helping small businesses with information sharing across federal agencies. The Improving Federal Investigations of Organized Retail Crime Act of 2022 (H.R. 7499) was introduced in April 2022 to help address ORC’s disproportional impact on small retailers. This proposal directs several federal agencies, including the Department of Justice, the Department of Homeland Security, and the U.S. Postal Service, to develop a coordinated approach to combating ORC through enhanced resource and information sharing.
Broader issues
Current policy proposals contain meaningful measures to address the surge of ORC. However, several related issues are also notable. According to the industry reports cited above, many large retailers state they will add technological resources, cameras and security personnel to combat ORC. However, this solution is not applicable for all and may not be as effective as anticipated. It may seem counterintuitive, but in order to avoid massive compensation lawsuits, some retailers may not ask security guards to pursue the criminals. Others say that maintaining a large security department may not be worth the benefits from a financial perspective.
Many small businesses cannot afford to add extra resources at their storefronts. For those that operate online, both stolen goods and counterfeit products have become more common. One anecdotal estimate shows that over $500 billion of stolen and counterfeit goods are sold on marketplaces like Amazon every year. Small businesses that primarily manufacture in the U.S. are disproportionately affected, as the burden in tracking and checking the violations and infringements get in the way of their daily operations. Proactive procedures that properly regulate the online marketplace will generate meaningful benefits for small businesses.