The Retail Equation (TRE) is pleased to incorporate the results of the NRF 2009 Return Fraud Survey into the 2009 Customer Returns in the Retail Industry report. This executive summary document provides return-related information that retailers may use to help compare and improve their business processes. Report objectives included:
Identify retail industry return metrics—total return amounts, receipted/ non-receipted percentages, and various forms of fraudulent and abusive returns, as identified by retail respondents.
Identify current practices for processing customer returns.
Begin industry discussion regarding best practices for accepting customer returns and controlling return fraud and abuse that help to maximize profits and minimize losses.
Merchandise Returns and Return Fraud
(1) NRF retail industry sales figures exclude autos, restaurants, and gas stations. Sales and returns are reported in billions of dollars. (2) Return fraud/abuse estimates come from previous issues of the TRE Customer Returns in the Retail Industry report. (3) 2009 retail sales estimated by NRF.
Retail sales are expected to decline 3.5% in 2009, reducing the actual dollar amounts that feed the return and return fraud calculations.
Although down from last year, the annual retail return rate is still up 10.7% over 2007. This rise is likely related to the stagnant economy and leads to $185.5 billion in lost sales for retailers.
Including the concept of return abusers (heavy returners) expands the picture—in four independent studies conducted between 2003 to 2007 (performed by KingRogers International and the Loss Prevention Research Council), retail return fraud and abuse estimates were never lower than 8.23%. Factoring a slight decline to 8.0% (to reflect a 3% downward trend as seen in the table above), the amount of fraudulent/abusive return dollars may still be as high as $14.8 billion.
While return fraud dollars dropped, the majority of this is due to the decline in retail sales ($84B) and return amounts ($22B). The percentage of return fraud/abuse remains largely unchanged; creating a sizeable revenue drain (dollar loss) for individual retailers.
Financial Summary of Return Fraud and Abuse
The Retail Equation Conclusions
With industry-wide return fraud and abuse estimated to be in the $9.6 to $14.8 billion range, retailers need to be looking closely at policies and procedures, as well as technology solutions, that will help them reduce loss.
While one explanation of the declining fraud trends is that control over return fraud is improving, another possibility is that budget and staff cuts have reduced the LP department’s visibility and monitoring of fraud scenarios.
The economy continues to drive significant numbers of returns, but controlling return fraud is not simply a Loss Prevention objective, it has company-wide impact—leading to lower return rates, improved customer satisfaction, increased net sales, and higher margin dollars.
Holiday Returns and Return Fraud
(1) NRF holiday sales are defined as retail industry sales in the full months of November and December. Sales and returns reported in billions of dollars.
NRF estimates show return fraud during the holidays is 23% above full year rates, due in large part to 20% higher return rates and seasonal hiring practices, creating a $2.7 billion negative impact on retail during this critical selling period.
According to an NRF survey of gift recipients from last December, one-third (34.8%) will return at least one gift item.
Compared to last holiday season, only 4% of retailers plan to loosen their return policy, but more than 80% expect to keep their policy the same as last year (a time when many retailers loosened policies). Overall, holiday return policies are now more lenient than prior to the recession.
In a separate NRF survey from last December, 87.2% of consumers felt retailers’ return policies were fair. This perception positively impacts customer service, but this may also be a sign of resource strapped LP departments working with store operations to create workable policies in the wake of cut backs.
The Retail Equation Conclusions
A retailer’s return policy plays a significant role in consumer spending, so this holiday season it’s critical to strike the delicate balance necessary to protect against return fraud while enhancing the customer experience. By automating the return authorization decision process, retailers can do more with less staff.
Examples of Return Fraud
Wardrobing/renting (returns of used, non-defective merchandise) saw an 18 point drop in occurrence, most likely due to a much broader mix of non-apparel retailers in this year’s survey.
Additional retailer feedback shows a growing concern that there is a strong link between internal (associate) fraud and return fraud/abuse that was not measured effectively by this year’s survey tool.
In a related question, more than two-thirds of companies (69%) say they have changed their return policies specifically to address return fraud.
The Retail Equation Conclusions
Almost half of those surveyed (43%) found forged receipts used in committing return fraud this year, repeating a yearly finding, which may render receipt-based return authorization systems more vulnerable to fraud.
Organized retail crime and internal theft have become more sophisticated—internal/external collusion, fraudulent receipts, and other techniques are making traditional manual methods of return fraud prevention less effective.
Despite these figures, retailers appear to be overly focused on stopping return fraud on non-receipted transactions, and are very likely missing out on controlling a much larger revenue leak occurring with receipted returns.
The next three charts provide a look at how the retail industry presently manages returns and return fraud/abuse prevention. They are re-printed from the 2008 Customer Returns in the Retail Industry report because corresponding data was not collected in the recent NRF survey.
Although manual processes still outnumber automated, there is a growing movement (over the previous surveys) toward the use of automated return authorization systems.
The 2008 National Retail Security Survey report showed that while 94.3% of companies use some form of refund control, it is also the second most cited tactic (19%) for increased use in the upcoming year.
Vendor packages for returns are more prevalent in the specialty, apparel, and discount segments, while in-house development leads in department stores and home centers.
There is a dramatic difference between procedures for receipted and non-receipted returns.
Comparing these results with the previous surveys, there is a trend toward requiring identification for all returns, especially the non-receipted returns.
Identifying "bad returners" is a common objective across all retail segments.
Of those who identify bad returners, a variety of tools are employed including: abuser lists, exception reports, real-time fraud detection systems, video analysis, and more.
Impact of Return Fraud and Abuse
Another significant goal of NRF’s 2009 survey was to understand how retailers strategically view and manage return fraud and abuse.
A related question asked: How effectively do you believe your current return policies and systems are in deterring return fraud? Using a similar 5 point rating, the result averaged 3.2.
The Retail Equation Conclusions
Surprisingly, given the direction of the return trends earlier in the report, effectiveness of current return policies and systems is only slightly above the mid-point, which indicates that there is still much room for improvement in implementing systems and programs to address this important issue.
There are high levels of “manual” activities listed in the current return processes graphs above. One conclusion is that manual processes do not protect retailers well enough from return fraud and abuse, leading to a lower effectiveness scoring.
Participating Company Demographics
The NRF Return Fraud Survey was conducted by the National Retail Federation from October 6-15, 2009 by polling loss prevention executives at 134 retail companies. Every effort was made to include as many retailers as possible, across all vertical segments and revenue sizes.
There were not enough responses to publish detailed return rates by retail segment, like in previous reports, but some information is reported below.
The segment reporting the highest estimate of return fraud was discount retailers (8.9% for the year and 12.9% during the holidays).
Specialty, discount, and department/large-box all reported higher than average rates of wardrobing.
Discount, department/large-box, and drug noted higher than average experiences of counterfeit receipts.
Department/large-box and drug saw higher than average returns of items purchased with fraudulent tender.
The Retail Equation would like to thank all of the retailers who participated in the NRF Annual Return Fraud Survey. You will notice that no retailer names are mentioned per the NRF and the sponsoring company’s commitment to maintaining the confidentiality of each organization’s data.
The fifth Customer Returns in the Retail Industry report represents the second year that The Retail Equation sponsored the NRF Annual Return Fraud Survey as a means to present a single source of metrics to the retail market. Specifically, the goal is to understand the extent of return fraud and abuse (estimated between $9.6 and $14.8 billion), thereby raising the awareness of the problem in order to stimulate a dialogue that will lead to best practices and solutions.
In the competitive world of retail it is critical to understand how returns and return fraud reduce net sales and contribute to inventory shortage (shrink)—clear causes of lost profits. The results within offer the industry’s best look into the subject of merchandise return policies and procedures, as well as potential fraud and abuse. This information can be used by loss prevention professionals to compare and contrast their own program results to those reported here, with an eye towards reducing losses from this source.
This survey indicates that many retailers believe they are closer to understanding the need to find the right balance in their return processes. But it also highlights an on-going performance gap. While some have made progress in implementing smarter programs, most think still more effective solutions can and should be deployed. Others believe that return fraud and internal fraud are inextricably linked and require deeper examination. (Look for more information in next year’s report.) Ultimately, implementing the right solution, combined with employee training that encourages diligent attention to the issue at the store level, will help result in reduced return fraud and abuse—leading to lower return rates, increased net sales, higher profits, and improved customer satisfaction.
For a copy of the 2009 NRF Return Fraud Survey results that generated portions of this executive summary report, please contact the National Retail Federation at www.nrf.com.