Fighting Return Fraud This Holiday Season

The holidays are truly a wonderful time of the year -- eventful, energetic and hopefully, extremely profitable for retailers.

However, this exciting season can also present unique challenges to apparel companies. Holiday returns can hinder potential revenue boosts, costing money as well as employees' valuable time.

During these months of gift-giving, apparel retailers face the very real threat of merchandise return fraud. For this reason, they must work carefully to find a balance between preventing the multi-billion dollar problems of retail fraud and abuse, and maintaining fair and consistent return policies that accommodate their holiday and regular loyal customers.

The return counter is an ideal place for retailers to provide excellent customer service and allow flexibility to those requesting returns and exchanges, especially during the holiday hustle and bustle. But these goals can also be accomplished while taking a firm stance on curtailing fraudulent and abusive returns. Retailers nationwide, such as an apparel company noted in the below case study, are taking this proactive approach to ensure that the misdeeds of illegitimate customers do not impact valued consumers.

The reality of holiday return fraud

Retailers can experience return fraud in a wide range of forms during the holidays, all of them expensive and inconvenient. Most often, according to the National Retail Federation's (NRF) fourth annual Return Fraud Survey in 2009, criminals will return merchandise that has been stolen, either for cash or for store credit. Other fraudsters will use falsified, stolen or reused receipts to return store goods. Still others have fallen prey to the practice of "renting" or "wardrobing," in which the person purchases an item -- such as a videocamera or dress -- uses or wears it once, and then takes it back to the store for a refund.

"Criminals have long been fond of using a â╬Ëå"woe is me' mantra because of the economy, but the truth remains that most return fraud is more 'greed' than 'need,'" explained Joe LaRocca, senior asset protection advisor for the NRF. "In many cases, return fraud is committed by people who use technology to produce counterfeit receipts or take advantage of lenient return policies by stealing large quantities of merchandise and returning it to dozens of stores without a receipt."

While fighting return fraud is a continual uphill battle for retailers, the problem worsens considerably when the holiday season arrives. The NRF estimates that seasonal return fraud and abuse is 23 percent higher than typical return fraud rates, creating almost $3 billion in revenue loss during this critical selling period. This return fraud rate increase is due in large part to holiday merchandise return rates that are 20 percent above those during the remainder of the year, as well as to the seasonal hiring of temporary, part-time workers.

In a separate NRF survey, 87.2 percent of consumers felt that retailers' return policies were fair, and more than one-third (34.8 percent) indicated they will return at least one gift item -- which, along with increased sales, drives the large holiday return volume.

For 2009, the NRF is projecting holiday sales to be 1 percent lower than 2008. Yet even so, these sales account for more than 20 percent of a typical retailer's annual revenue.

Tips for reducing retail revenue shortfall during the holiday season

Today's retailers have access to unprecedented methods for stopping return fraud and abuse, as well as other rampant forms of retail crime, during what should be their most exhilarating and lucrative season. For companies using return fraud authorization systems, industry leaders offer the following guidelines to ensure that holiday "returners" are treated fairly -- without allowing additional fraud:

*Allow More Flexibility During this Season -- For retailers that use a receipt age limit and wish to provide a more lenient receipt age policy during the holidays, retail experts recommend allowing for returns on receipts that are older than normal but only during a brief window. For example, consider a policy that, between Dec. 20 and Jan. 31, allows receipted returns on purchases that occurred after Oct. 31.

*Ensure Consistent Use of Fraud Prevention Tools -- Retailers should resist the temptation to forsake their automated return tools in lieu of transaction speed, as this can be counter-intuitive to the reported metrics showing both returns and return spike at this time of year. Consistent use of such tools also prevents fraudulent and abusive returns that could otherwise fly under the radar.

*Don't Underestimate the Importance of Proper Staffing at the Return Counter -- Retailers that have invested time, money and resources to hire seasonal workers should maximize the opportunity to impact customer service during this ideal time. Many consumers making returns are visiting that particular store for the first time and it's a chance to make a positive, lasting impression. Know your return patterns and staff the return desk accordingly.

*Maintain a Smooth Return Process with Proper Training -- Nothing is more frustrating than having a slow-moving line caused by employee confusion over return policies and procedures. In addition to appropriate return transaction training, consider providing a simple script to each new employee to help guide them through common questions and scenarios at the return counter.

*Seize the Opportunity to Convert Lost Sales into Revenue -- Don't forget that returns are lost sales, and utilize any ideas or resources to help convert these returners into buyers. There's an unprecedented level of foot traffic in your store at this time of year -- maximize it by giving the returner a reason to keep shopping and spending their refund dollars with you, right now, instead of spending it elsewhere.

Finally, retailers can rest assured knowing there are carefully engineered solutions for curbing questionable returns, reversing lost revenue and ultimately, protecting their holiday profits -- while at the same time making lenient return policies available to their seasonal and year-round shoppers.

David Speights, Ph.D. is Chief Statistician, and Tom Rittman is Vice President of Marketing, The Retail Equation.
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