Retailers retool to fight rise in return fraud, retail crime

Retailers are now turning to technology to fight the growing problem of return fraud, which can cost the industry billions of dollars, and the growth of retail crimes that drain stores of revenues.
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Retail security experts call it ‘wardrobing.’ A person buys something at a retail store—a holiday dress, for example, in the case of wardrobing—uses it for a brief period, and then puts the tags back on the product and returns it to the store for a refund.

Wardrobing – or using then returning other products -- is just one form of return fraud, which as a whole costs the retail industry about $10 billion a year, according to the National Retail Federation (www.nrf.com). For the past five years, return fraud has generally been on the rise, but some retail companies, including Cabela’s and The Sports Authority, have been improving their return processes to battle this growing problem.

“Return fraud plagues the industry and has been a major problem for retailers over the years,” said Joe LaRocca, senior asset protection advisor for NRF. “Retailers have done a lot to improve their systems and alter policies to really zero in on the major offenders.”

Retail crime rising

According to NRF’s annual Return Fraud Survey, the cost to retailers for fraudulent returns increased from 2006 to 2008: $9.5 billion in 2006, $10.9 billion in 2007, and $11.8 billion in 2008. Last year, the figure dipped to $9.5 billion but, LaRocca said, the general trend is that fraud has increased and it continues to be a major issue. Indeed retail crime in general has increased with the economic downturn: SNEWS® reported in a March 3, 2010, story that retail theft was up globally – click here to read that -- and a Dec. 10, 2008 news release from the Retail Industry Leaders Association noted that crime increases such as fraud are tied to the economy. 

Return fraud, such as wardrobing, drains retailer profits because stores are sometimes not able to put returned merchandise back onto the sales floor. But there’s an even more costly form of return fraud that has been getting worse.

“People are stealing more merchandise and then bringing it back to stores to get a refund— what we call organized retail crime,” said LaRocca. “Criminal offenders are looking for the path of least resistance, and property crime has been cited over and over again as being fairly easy to commit.” It’s not only relatively easy, but criminals generally don’t fear getting caught, because courts hand out light punishments, said LaRocca.

According to the NRF’s Return Fraud Survey released in Oct. 2009, 93 percent of retailers said stolen merchandise had been returned to their stores, up from 88 percent in 2008. Also, 75 percent of retailers reported that they had dealt with returned merchandise that was purchased with fraudulent or stolen tender, and 43 percent said people had tried to return items to their stores using counterfeit receipts. (Click here to read more about the NRF Fraud Survey )

Fighting back

Over the years retailers have adjusted their return policies to combat return fraud, said LaRocca. Most stores now require a customer to have a purchase receipt to return an item, and some retailers put a 90-day time limit on the return. “Some have even shortened it to 30 days,” said LaRocca.

He added that some retailers have made it more difficult for the consumer to get the immediate gratification from returning merchandise. “Rather than giving them cash on the spot, they will send a check from the corporate office. They don’t immediately get the juice with the squeeze,” he said.

But in the past five years, retailers have begun to go a step further, utilizing software that tracks purchases, identifies potential problem customers and examines products that are most at risk for fraud.

“We control return fraud quite a bit with our return management system,” said John Clark, director of corporate security for Sports Authority (www.sportsauthority.com).

Clark said Sports Authority uses software from the company The Retail Equation (www.theretailequation.com) that examines the validity of each return. It tracks returns where the customer provides no receipt, and automatically rejects returns that involve false, duplicate, or over-used receipts.

A year and a half ago, Cabela’s also began using software from The Retail Equation, said Bill Napier, manager of corporate asset protection for Cabela’s (www.cabelas.com). “It’s really analytical and look at trends and where risk might lie,” said Napier.

Retailers are now combining various forms of technology to build more sophisticated systems to sniff out fraud. For example, Cabela’s stores tie closed-circuit TV equipment to point-of-sale records or cash register transactions. “With this, you can use the technologies together to tell the story,” said Napier.

Retailers are also able to tailor new technologies to meet their specific needs. Sports Authority enhanced its return fraud software to identify products that are more at risk for fraud, and then developed procedures to handle returns of those products. Clark said one example is baseball bats. In the interest of customer service, Sports Authority used to accept pretty much all returned bats, but the bat manufacturers refused to take back the used products. “We would end up just throwing them away,” said Clark.

“So, we made a program around baseball bats that said they have to be re-sellable for the store to take them back,” said Clark. Sports Authority developed a SKU-denial process, where any returned bat could not be returned until a store manager inspected it to ensure that the store can re-sell it.

He said the advantage of this process is that it gets a manager involved with the transaction. This not only raises the level of customer service during the return process, but it also addresses the fact that most people who are denied a return want to speak to a supervisor. Because customers are given a high level of service and special attention, they are less likely to protest when their return is denied.

Cabela’s takes a similar approach to dealing with returns. “We’re very careful about saying no to any customer, so we reserve that for senior management in the building,” said Napier.

A careful balance

While retailers are cracking down on fraud, product returns are an important part of the retailer-consumer relationship, and retailers don’t want to alienate shoppers with overly strict return policies.

“Early on, we made a commitment to our customers that we would not impede the honest customer, and we would be very careful in our approach,” said Napier.

He said Cabela’s uses consumer focus groups to ensure that its policies are not overly restrictive, and store employees are encouraged to talk with customers to explain return policies and find the best way to solve their issues.

Napier said the stores also use ample signage to alert shoppers to the return policies, which are also printed on receipts. “We don’t use just one method to convey the message,” said Napier.

Though return fraud remains a serious concern for Cabela’s, Napier said the company has seen a “significant” reduction in fraud by using more comprehensive and technologically advanced procedures. Also, the updated return procedures at Sports Authority have saved the company about $101 million since 2006. 

Unfortunately, return fraud will likely continue to plague the retail industry, said LaRocca of NRF, and the statistics probably won’t look rosy when NRF publishes the result of its next Fraud Survey in the fall. “From the mid-cycle conversations we’ve been having,” said LaRocca, “this is a problem that continues to get worse, not better.”

--Marcus Woolf

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