The Retail Equation, for instance, works with stores to capture customer data at the point of return to track that specific shopper's returns patterns, says vice president of marketing Tom Rittman. Then it plots them out against the typical returns patterns of that retailer to develop a statistical model to eliminate the outliers: “the 1% of returners that are generating that large amount of returns fraud.”
These systems can identify the people whose past patterns or trends indicate abusive or illegal activity. When a shopper trying to make a return hits a threshold in the model, the retailer can deny the return, restrict the number of returns the customer can make in a set period of time, or warn the shopper, depending on the store's policies.
If a shopper is denied the opportunity to make a return, he or she can dial a toll-free number and find out the reason why. This way, the retailer doesn't have to deal with a frustrated customer at the point of return, Rittman says.
The software is delivered via the Internet as a managed service. It can be integrated with the merchant's point of sale system — or the service can be delivered via a standalone device at the register.
When to say when
Direct merchants and store retailers with returns systems know when a customer has a history of wardrobing or simply making excessive returns. But when do you cut them off? If you had a customer who spent $10,000 with you every year, but returned $5,000 every year — is that still a good customer?
It depends on a customer's gross returns and sales, as well as when they're making the returns, Jones says. This is particularly true in fashion retail, he notes, when a month is equal to a year.
“If you buy my spring merchandise and return it in early summer, I'm writing that off to zero — I've eaten $5,000 worth of loss on those returns,” Jones says. “And you may have bought $5,000 worth of merchandise, and I may have made $2,000 from that, but net-net, I've lost $3,000.”
But if a customer buys a spring item and returns it two weeks later, “and it's still in season and I can resell it for half, that's a different equation. So the timing of the returns, and the velocity of the returns, factor into the decision as to whether this is a profitable customer,” Jones says.
The same holds true for electronics, he adds, as a lot of electronic items are updated with new models on a fairly rapid schedule. “At the same time, the window of time for making those returns is very tight.”
Are merchants getting more stringent with their returns policies as a result of fraud, or should they be?
It's hard to say, Jones says. “My advice to retailers is to take a very data-centric approach to handling returns. Because the profit dollar is more important today than it was two years ago.”
Returns criminals getting organized
About 75% of retail returns fraud is committed by individuals, many of whom are multiple violators, according to Paul Jones, vice president for asset protection for the Retail Industry Leaders Association (RILA). The other 25%, he says, is attributable to organized retail crime — rings of criminals that steal large amounts of merchandise from stores and then sell it to other groups so they can be fraudulently returned at other locations.
“Stolen and fraudulently returned merchandise is certainly becoming more of a problem,” says Joe LaRocca, vice president of loss prevention for the NRF. “We have seen, for the past four or five years now, the growth of organized retail crime, which is the coordinated theft of merchandise from stores for the purpose of reselling it.”
LaRocca says for these criminals, there are several options for converting the goods to cash: “They can just sell it on the street, like some guy hawking watches on a street corner in New York City,” he explains. “Or they will actually sell the product online through eBay or some online auction site. They'll make 70 or 80 cents on the dollar there.”
But the more profitable option, he says, is to bring the merchandise back to the store. This increases the risk for the crook, because of the theft on the front end and the return on the back side.
But if you pull it off, “you get the highest return, because you're receiving full value for the item, plus sales tax,” LaRocca says. “So you're getting 106% or 108% on the item — versus 30 cents on the street or 70 cents on the Internet.”