Virginia ABC inventory losses may be less certain than authority indicated

After discovering at least seven cases of embezzlement at stores around Virginia, the Virginia Alcoholic Beverage Control Authority issued a press release early this month stating inventory losses incurred by the authority “compare favorably to the overall retail market.”

However, the authority’s numbers and explanations for its losses have fluctuated dramatically, causing some ABC insiders to wonder whether the authority is accurately reporting how much liquor is going missing from its books.

In response to questions from the Virginia Mercury, ABC officials claimed they cannot provide a detailed breakdown separating inventory losses at ABC retail stores from inventory losses at the authority’s distribution centers – despite a presentation recently given to ABC’s Board of Directors and authority documents that indicate the authority tracks that data. That distinction is important, according to business experts, because addressing inventory problems can be difficult if the source of those problems is unknown.

Despite ABC’s claims, authority emails obtained by the Mercury through a Freedom of Information Act request indicate the distribution centers may have been the primary source of inventory losses, and warehouse losses in fiscal year 2022 may have been greater than the authority recently reported.

A shrink in distribution center inventory

Jim Bradley, a professor of operations management and information technology at William & Mary, said all businesses experience losses due to “shrink,” an industry term used to describe when a company has less inventory — or liquor, in ABC’s case — than previously recorded. Shrink results in a loss of profits because missing products cannot be sold.

In its June 6 press release, Virginia ABC said it had conducted inventories of its distribution center and 394 stores this March and found approximately $1.5 million worth of shrink from the two combined in fiscal year 2022.

This was the same number authority officials presented to the Board of Directors June 8 while detailing the transfer of inventory from the authority’s old Richmond distribution center – the warehouse where the majority of inventory was kept before being shipped to stores – to its new distribution center in Mechanicsville throughout 2021 and 2022.

But an internal ABC report dated June 29, 2022, which was obtained by the Mercury through a FOIA request, pinpointed over $2.7 million in shrink for the same year tied to the authority’s distribution centers alone. The same report also identified $540,000 worth of “swell” — the opposite of shrink, describing a situation in which products previously recorded as missing are found — occurred in stores that year.

Taken together, the figures put ABC’s overall shrink for 2022 at over $2.2 million, all of which stemmed from its distribution centers.

Even with this higher number, Virginia ABC still falls well below the 2021 national average of shrink as a percentage of gross sales, according to data collected in a 2022 National Retail Federation survey.

Asked about the discrepancy between the $2.7 million and $2.2 million drawn from the internal emails and the $1.5 million noted in the press release, ABC spokesman Pat Kane said the larger figures obtained through the FOIA request “are working documents, and do not reflect the final numbers.”

Where losses come from

Pinpointing the source of the authority’s losses is complicated because ABC has not provided a breakdown of its $1.5 million figure into shrink from stores and shrink from the distribution centers.

Megan Hess, associate professor of accounting at Washington and Lee University, said from a managerial perspective, knowing where shrink is coming from is important for figuring out what controls need to be in place to mitigate losses.

“If you’re trying to solve that problem, you need to know why it is happening. Where is it happening? How much is it happening?” Hess said.

Kane told the Mercury the authority is “not able to provide separated numbers.” ABC Director of Communications Nick Schimick also told the Mercury that “historically separate adjustment categories have not been broken out between the stores and distribution center.”

However, comments at a Board of Directors meeting and internal ABC documents obtained by the Mercury indicate the authority has at different times tracked how much shrink is occurring in stores and distribution centers individually.

At the June 8 meeting, ABC Automation Control and Inventory Supervisor Kate Sheehan told the board the distribution centers’ 2023 “year-to-date shrink is $340,000.”

Schimick said that figure “was and is an internal working number, and as our systems stand today, it is not integrated into our financial systems and not reported out as its own bucket.”

Additionally, a March 30 screenshot of the authority’s new centralized dashboard, which the June press release noted will be used to track shrink, shows annual shrink and sales numbers for stores dating back to 2020.

The screenshot was shared with the Mercury by sources with knowledge of the authority who requested anonymity due to concerns over retaliation.

When the Mercury asked why ABC couldn’t provide separate shrink numbers when the dashboard indicates otherwise, Schimick told the Mercury that “the data referenced in the dashboard does not reflect final adjustments.”

The March dashboard screenshot records the total shrink in 2023 for stores only as $1,127,449 – the same number ABC presented in its press release as the total shrink that year for the authority’s stores and distribution centers combined.

In response to questions about the inclusion of distribution center shrink in ABC shrink data, Schimick told the Mercury in an email, “store shrink is what we reported $1,127,449. The numbers reported for the distribution center represents the net adjustment from the full physical count in March 2023.”

Knowing only total shrink “doesn’t permit a company to manage it,” said Bradley, the William & Mary operations management and information technology professor. “You need to know which items are being lost, where in the supply chain you’re losing it and why you’re losing it and then come up with a strategy to fix it.”

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This article first appeared on Virginia Mercury and is republished here with permission. Virginia Mercury is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Virginia Mercury maintains editorial independence.