There’s yet another downside to this painfully weak economy: Retail crime is on the rise. And it’s not just an increase in shoplifting and petty thievery — bricks-and-mortar retailers are seeing a hike in more sophisticated schemes, primarily in returns fraud.
As it is, returns fraud costs retailers more than $10 billion annually. And with the economy in a tailspin, loss prevention experts say it is only going to get worse.
According to the National Retail Federation’s 2008 Returns Fraud Survey, released in November, retailers will see a total of about $219 billion in returns from sales made in 2008 — a 19% increase over the $178 billion in returns recorded in 2007. Of those returns, about $11.8 billion will be fraudulent; an increase of about 8% over last year’s figure of $10.9 billion.
“All of the financial crimes that retailers are experiencing are trending up,” says Paul Jones, vice president for asset protection for the Retail Industry Leaders Association (RILA) and the former head of loss prevention for apparel retailer Limited Brands.
Criminals have several strategies to fraudulently return goods. There’s receipt fraud, in which falsified, stolen or reused receipts are used to return merchandise. This is an area where the scammers are getting increasingly sophisticated, Jones says.
“With the computers and the printers we have today, realistic receipts aren’t a problem — [criminals] have it almost perfect at this point,” he says. Some fraudsters keep the computers, scanners and printers in their cars so they can quickly produce fake receipts in the store’s parking lot.
“That’s something that we never even would have thought of three years ago,” Jones says. “But it’s happening today on a regular basis.”
Price arbitrage typically involves a criminal using the price tag or packaging from a higher-priced product to return a lower-priced item and pocket the difference. For example, a crook might buy two watches, and then return the cheaper one in the box that the more expensive watch came in.
Some criminals will even take a chance that the sales clerk won’t open the box of the returned item, and they’ll fill it with rocks or objects of about the same weight.
Then there’s “wardrobing” or “renting”: This is when a customer buys merchandise for an occasion — a dress for a dance, a video camera for a wedding, a big-screen TV for a Super Bowl game — with the intent to return it when the event is over. Sometimes this returned merchandise can be resold quickly, at full price, but often it can’t.
It’s actually not illegal to buy an item, use it and then return it for a refund, says Joe LaRocca, vice president of loss prevention for the NRF. But retailers must fight this type of fraud because it’s growing in popularity: About 64% of the retailers that participated in the survey said they witnessed this form of fraud in 2008, up from 56% in 2006.
Striking a balance
So how can retailers protect themselves against fraud? The challenge for retailers is coming up with ways to curb returns fraud, while at the same time allowing lenient return policies to remain in effect to please their customers.
“Retailers recognize that taking back returns is part of the customer relationship,” says LaRocca. “They know that customers will come back to the store to buy items with confidence, when they know they can come back and return those items that don’t quite work for them.”
The first line of defense is to enact policies that make it harder for criminals to make fraudulent returns. Most retailers already have basic returns policies with stipulations, such as requiring a receipt for cash returns.
It’s typical to issue refunds only in the same form of currency used for the purchase. For example, if the item was purchased with a credit card, the retailer will issue a credit only to that same card.
Offering store credits or equal exchanges to limit or eliminate cash refunds can help you curb returns fraud. So can limiting the length of time you will allow for returns.
But you need to train employees to spot returns fraud and enforce the store’s returns policy when they do encounter it. And there is a lot of ground to cover in terms of training employees how to handle every type of situation.
For example, Jones says, many of the people committing returns fraud today purposely cause unpleasant confrontations at the register to get the clerk rattled and expedite the transaction.
“They’ll try to create scenes at the cash register, and make the sales associate uncomfortable enough to accept the items,” Jones says. “Then it becomes a bad experience for the good customers who are waiting in line to buy — and it becomes a troubling atmosphere.” Jones says some retailers have adopted a policy of simply accepting returns when this happens, “just based on the safety aspect — they don’t want people creating scenes in the store.”
Retailers need to support employees by putting up signs at the registers and printing the policy on receipts. “Your associates will do the best they can, but the more you can support them systemically with clear signage and good training, the better off they will be,” Jones says.
Most catalog and Web merchants already have the data to track returns fraud, but stores may need to implement an automated return authorization system. “A majority of the national or larger retail chains have some system in place to monitor or manage returns transactions,” LaRocca says.
Returns fraud was a problem when Jones was at Limited Brands. The retailer went from an internally-built program to implementing an outside system from The Retail Equation in 2004, he says. The system saved Limited Brands $50 million within the first 18 months.
Systems from vendors such as The Retail Equation and ACI Worldwide keep track of fraudulent returns activity by requiring customers to present some basic form of identification when making a return.
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.”— PB