Retailers have finally started to scale back liberal return policies in the face of a litany of abuses by customers. Although there are many legitimate reasons for returns—including receipt of a damaged product, the wrong item or a product that looks different from the one on the retailer’s website—there is also much fraud associated with returns. According to the National Retail Federation, returns cost retailers a total of $260 billion in 2015, and that figure could reach $285 billion this year, if returns grow proportionally to retail sales, which eMarketer estimates will grow by nearly 10% between 2015 and 2018.
Return rates are higher for online purchases, at about 30%, than for brick-and-mortar purchases, at less than 9%, according to conversion optimization firm Invesp, and many of us know people who purchase 10 pairs of shoes online, only to return nine. In fact, retailers often cite returns as a major cause of lower margins on e-commerce sales. CNBC hired retail consultant AlixPartners to build a business model for a brick-and-mortar store versus an online store, and the model showed a 32% operating margin for the physical store versus a 30% margin for the online store, although the margins for locations offering in-store pickup and ship-from-store services were lower.
Fraudulent returns have become a major problem in recent years, and have prompted some retailers to curtail liberal return policies and even blacklist abusers. Retail analytics firm Appriss Retail estimates that 10.6% of returns made last year were fraudulent in nature, costing retailers $22.8 billion. Common types of fraud include returns of stolen (shoplifted) merchandise, return fraud by employees or employees collaborating with thieves, fraudulent or stolen payments, organized retail crime, and “renting” or “wardrobing” (using or wearing purchases before returning them). In addition to costing retailers, fraud deprives states and cities of sales tax.
Following an increase in the incidence of abuse of return policies, many retailers are saying, “Enough!” Most recently, L.L. Bean put a limit on its policy of accepting returns. For more than 100 years, the company accepted returns of any of its products after any period of time if customers were unsatisfied for any reason, but abusers, particularly over the past five years, took the company’s return policy as a replacement program to offset normal wear and tear. In the most egregious cases, consumers returned items purchased from thrift stores or fished out of trash cans. These abuses have cost L.L.Bean $250 million over the last five years, leading it to institute a new, still-generous policy that allows customers to return goods within a year of purchase as long as they have a receipt or proof of purchase.
Some retailers have gone so far as to subscribe to a national database that tracks consumers’ returns. Many large retailers, including Best Buy, Home Depot, JCPenney and nine other of the top 50 retailers in the country, subscribe to a service called The Retail Equation, which maintains a separate database of user returns for each retailer (the information is not shared among the retailers). The purpose of the system is to reduce fraud, but if a customer makes too many returns within a given time period, the retailer will decline to receive further returns from that person.
There are also several startups that mitigate the effects of returns. Returnly is a fintech platform that turns product returns into repurchases for online retailers and marketplaces, enabling merchants to offer shoppers a seamless online product return experience. Riskified is an all-in-one e-commerce fraud-prevention solution and chargeback protection service for high-volume and enterprise merchants. It gives retailers a definitive “approve” or “decline” recommendation for every order they review. The Retail Equation, mentioned above, which has merged with Appriss Retail, offers advanced analytics solutions and artificial intelligence models that help retailers increase sales, enhance the customer return experience, reduce loss, tackle sales-reducing activities and improve performance.
The cost of returns to retailers has been mounting due to egregious consumer behavior and outright fraud, and the era of “return anything, anytime” is slowly coming to a close as companies pull back on liberal return policies.
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