Will the Fight Against Fraudulent Returns Pay Off for Retailers?

retail returns

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Wharton's Peter Fader and ASU's Dale Rogers discuss how stores are tackling fraudulent returns.

Retailers such as Best Buy and L.L. Bean, among dozens of others, are cracking down on fraudulent customer returns of merchandise, putting restrictions on customers selected by their risk profiles. Such moves fly in the face of the no-questions-asked returns policies that have helped the U.S. retail industry’s growth.

The retailers’ pushback against returns become controversial after recent reports that electronics chain Best Buy and others are using data analytics firms to identify customers who may be abusing the returns system. Irvine, Calif.-based The Retail Equation (TRE), the data analytics firm that Best Buy has hired, works with 39 of the top 100 retailers, according to its website. Its clients reportedly include Home Depot, J.C. Penney, Sephora and Victoria’s Secret.

Retailers lost $17.6 billion in 2017 owing to merchandise return fraud, according to data analytics firm Appriss, the parent company of TRE, which cited the National Real Estate Federation’s Organized Retail Crime Survey for the year. Merchandise returns accounted for $351 billion in 2017, or some 10% of the total estimated sales of $3.5 trillion, according to NRF survey. The 63 retailers the NRF polled said they expected 11% of their sales in 2018 to be returned, of which they expect 11% to be fraudulent.

As retailers struggle to find the right approaches so as not to alienate the customers they want, they could “reframe” the returns feature, said Wharton marketing professor Peter Fader. “Instead of viewing returns as a God-given right, we could somehow slowly reframe it as a privilege — so that ‘If you are part of our loyalty program and you’ve demonstrated certain kinds of behaviors, we will give you more return privileges than we’ll give our basic economy customer.” That approach will help customers accept that there might be limits to how much or when they could return merchandise, he added.

To be sure, retailers could easily overreach in counterproductive ways if they are not careful. “I really caution retailers to be careful around this because if you look at the history of retailing, the transference of risk from the consumer to the retailer was a big part of building the greatest retail sector the world has ever seen,” said Dale Rogers, professor of logistics and supply chain management at Arizona State University.

“The transference of risk from the consumer to the retailer was a big part of building the greatest retail sector the world has ever seen.” –Dale Rogers

Fader and Rogers discussed options for retailers in the fight against fraudulent returns on the Knowledge@Wharton show on SiriusXM channel 111. (Listen to the full podcast using the player at the top of this page.)

Below are select highlights from their discussion:

Time Up for Fraudulent Returns

It is high time that retailers “call attention to quantifying returns and start weaving them into broader retail business practices,” said Fader. “We spend a lot of time talking about the experience in the store, about shipping and other kinds of customer service, [but] this is really important. [Returns are] big dollars and shouldn’t be viewed independently of the other ones.”

Merchandise returns as a proportion of retail sales have been increasing in recent years, according to surveys Rogers has conducted. “If you go back to the 1990s when we started doing these [surveys], people looked at retail stores in a more honest way,” he said. “It’s pretty clear that consumers are more willing to take advantage of retailers in 2018 than they were in 1998.”

Tread Carefully to Retain Credible Customers

Retailers realize that they run the risk of permanently losing the customers they single out for restrictions on returns, and are considering the tradeoff between that and the lifetime value of those customers, said Rogers. “Do you want those people for customers or not? That’s the question and you have to analyze – what’s the value of irritating a segment of your customer base, although I think it’s generally a small segment.”

Returns are also a legitimate cost of running a business, said Fader. “We shouldn’t be saying that returns are necessarily a loss; in some cases it’s just part of doing business.”

Rogers noted that all returns do not necessarily translate into losses for retailers. Much of the merchandise returns find their way back into the so-called secondary market, or the shelves of value retailers like Ross or Marshalls, he said. The secondary market in the U.S. has sales of more than $500 billion annually, he added. Also, in many cases, retailers send the returns back to the manufacturer or the owner of the brand, he noted.

Finding a Middle Path

Fader said retailers could restructure their returns policies in ways that help both consumers and retailers. “Instead of framing an infinite, sky’s-the-limit returns as the default policy, [retailers could say,] ‘We will give you a reasonable amount of time; we’ll give you more time if you’re part of the loyalty program; and we’ll give you more time if you’ve referred other people.’” That would make “more generous returns a kind of a bonus – something that you get rewarded for instead of something that you’re born with,” he said. “I don’t think the transition needs to be quite so dramatic; it doesn’t have to have this kind of blowback that we’ve seen in the Best Buy case.”

“We shouldn’t be saying that returns are necessarily a loss; in some cases, it’s just part of doing business.” –Peter Fader

Consumers actually prefer transparency and fairness in returns policies, even there are restrictions, Rogers said, citing studies in 2001-2003 of returns polices of retailers including Target. “What consumers really like is a clear structure on how this is going to work. One of the complaints about a system [like that of] Retail Equation is that [although] it may not be just random and ad hoc, it seems to consumers sometimes like it is.”  Added Fader:  “The biggest shock of that Best Buy story isn’t the fact that they limited returns, but the fact that the customer had no idea that this was coming.”

The Omni-functional Approach

Fader also advised retailers to design “omni-functional” practices that are uniform across their policies for shipping, returns and other activities. “They should all be synced up with each other,” he said. “The problem is, if we are pushing in one direction, let’s say on returns, and it’s not aligned with what we’re doing with shipping or some of the other activities, it calls too much attention to it, and it seems somewhat arbitrary. If we could create alignment there, people understand that give-and-take exists across all these functional areas.”

When Returns Make Business Sense

Some online retailers actually encourage their customers to shop with the knowledge that they could return their purchases, said Rogers, citing footwear retailer Zappos and eyeglass retailer Warby Parker. “It’s reducing risk,” he said. “If you order five pairs of eyeglasses and only keep one and send the other ones back, that’s actually not a bad deal for Warby Parker.”

Of course, the retailer would love it if the customer bought all the five pairs, and in some cases, customers end up doing that because they don’t want to take the trouble of going to the post office or wherever to send the returns, he added.

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