How fighting shrink became a financial priority for The Home Depot

This story is part of our collaboration with CFO Brew on changing retail investing strategies.

In 2023, The Home Depot was one of several major retailers to call attention to the growing cost of retail theft. In the first and second quarters, the home improvement chain highlighted that elevated levels of shrink were squeezing margins and driving up operational expenses.

But the second part of the equation—the higher operational costs that come with mitigating retail theft—is arguably a less-picked-over topic than the cost of shrink itself.

As Home Depot pointed out in its recent annual report, “While we have a number of initiatives underway to address shrink, minimize theft, and maintain safety in and around our stores, these efforts require operational changes that may increase costs and reduce margins…”

• Operating expenses already increased 2.7% year over year in 2023, and they were up around 5% from 2021.

Home Depot’s public financial documents do not provide a breakdown of how much shrink contributes to that increase, but Scott Glenn, VP of asset protection for Home Depot, told Retail Brew that the problem has changed the firm’s thinking around the financial cost and investment needs of theft prevention.

Rising shrink levels over the last few years, he said, “magnified our need to change our thought process on investment.”

Locked cages: Initially, Home Depot focused its efforts on quick and simple fixes such as locking up more expensive items, forcing thieves to essentially trade down to cheaper products. But these solutions only went so far, Glenn explained, and the company eventually saw the need for a “whole house solution.”

This required shifting its focus from the security of individual items to the security of the entire building, an approach that entailed moving high-price items to more centralized locations within the store and extending its security perimeter out into the parking lot.

The retailer also started “moving into more technology plays,” Glenn said. This meant taking tech investments that it had been experimenting with and implementing them on a broader scale. One such case is the rollout of Point of Sale Activation (POSA), which makes it so certain items are inoperable until they are scanned at the register.

As for how Home Depot evaluated the return on these investments, he added that “we’re very disciplined in that regard…We had to prove it out. We had to make sure it worked. We had to make sure that not only were the hard benefits there from a shrink perspective, but the soft benefits that go along with it,” such as store safety.

He said his team is constantly updating leadership on how a given initiative is progressing against a variety of metrics, ranging from how it impacts customers and associates to hard financial measures.

“Then we’ll make adjustments or decide that it is not worth the investment,” he said.

Bang for your buck: When it comes to getting the most bang for its buck, Glenn identified a handful of anti-theft initiatives that Home Depot is rapidly scaling due to their success.

One falls under the tech category: It’s called locking-cart technology, and it ensures that a cart cannot leave the store if it is not engaged with a transaction at a register. This has helped stop thieves who would pile thousands of dollars worth of items into a cart and then just roll out of the store into the parking lot.

Another is “egress controls,” which is a fancy way of referring to additional gates at entrances and exits. Home Depot is experimenting in particular with one-way gates designed to make sure customers can’t exit through non-designated areas.

Lastly, Glenn mentioned a number of different use cases for high-tech cameras.

“I would say broadly, the area of video is really something that we are happy with and we’re spending a significant piece of our investment into,” he said. These range from cameras equipped with license-plate recognition to some that can detect gunshots.

“The advancements in camera technology, the quality of cameras, the analytics that comes along with those cameras, is being used for a lot of different purposes in our world and, and we like what we’re seeing there,” he said.