Are Higher Return Rates a Blessing in Disguise for Retailers?

In response to a survey by the National Retail Federation, retailers reported a median return rate of 10 percent. This equates to $351 billion in sales that were made and then lost.

Legitimate returns are expensive for retailers — labor, overhead and opportunity costs all impact performance. Added to these necessary returns, the 2017 increase in return fraud and return abuse hits hard.

According to the 2017 Consumer Returns in the Retail Industry Report issued by Appriss Retail, return fraud and abuse has grown, and it costs retailers $5 to $6.50 for every $100 returned. Nationwide, return fraud costs U.S. retailers $17.6 billion, and when return abuse (such as wardrobing/renting) is factored in, the value rises to $22.8 billion.

Retailers could do many things with that lost revenue, including hiring up to 775,000 more employees.

Omnichannel Returns and Fraud

Consumers enjoy the convenience of being able to buy online, return in-store (BORIS), and retail corporations enjoy the boost in revenue this provides to the direct channel. When well executed, it's a profitable situation for the retailer. Unfortunately, BORIS transactions negatively affect corporate revenue in two ways. First, they typically have a higher return rate (10.7 percent vs. 10 percent), and second, retailers estimate those returns are fraudulent 9.4 percent of the time — nearly double the rate of return fraud from store purchases.

A less obvious impact of BORIS is on store performance statistics. Returns taken into the store count against the day’s sales regardless of where, or how, the sale was made. The higher fraud rate further decrements the store’s revenue. This is a crucial point. Store performance ratings and loss statistics affect the merchandise that a store is shipped, frequency of LP audits, manager bonuses, and even whether a store remains open. When buy online, pick up in-store (BOPIS) was first introduced, retailers had to find ways to ensure both channels shared in the revenue. With BORIS transactions becoming common, retailers need to ensure they distribute the burden of the return as well.

One of the main selling points of BORIS is that it increases foot traffic and, presumably, conversions and sales. In practice, however, most retailers do not optimize the return experience for this unique market segment. Therefore, they don't enjoy the very real benefit of these proven customers visiting their stores. For those retailers, most of the sales revenues are simply lost.

Challenge Accepted: Limiting Extreme Behaviors

All the money lost through return fraud and abuse can be traced back to only 1 percent of consumers and to a fraction of employees. The challenge for retailers is how to recognize and limit the transactions of this small group while still allowing the remaining 99 percent of consumers to make returns easily. The knee-jerk reaction of tightening return policies has been shown by Appriss Retail statisticians to reduce profits. Instead, retailers are finding success in using artificial intelligence to reduce the fraudulent transactions while welcoming good customers’ returns.

Tom Rittman is the vice president of marketing at Appriss Retail, a provider of artificial intelligence-based solutions to help retailers protect margin, unlock sales and cut shrink.