Retailers Fight Issues of Return Scams in Post-Holiday Season

In two days, the annual flood of post-holiday returns will begin at merchants. And unbeknownst to many shoppers, retailers will be wrestling behind the scenes with two dueling industry trends:

On one hand, new technology is making it easier to crack down on customers who either abuse return policies or commit criminal fraud. But on the other, retailers are facing pressure to put a kinder face on returns to avoid backlash from legitimate customers.

"The predominant trend is to tighten up (return policies)," said Jack Trlica, founder and publisher of Charlotte-based retail industry magazine Loss Prevention. "But good customer service is still the primary focus of retailers."

For the past two years, some stores have generated publicity by shortening the time window allowed for returns; becoming stricter about requiring receipts; and in some cases reinstating restocking fees for some electronics and other items.

They're trying to lessen the damage returns do to their bottom lines. About 8.6 percent of all merchandise bought in 2003 was returned, according to KingRogers International figures cited recently in the Wall Street Journal. At department stores, the rate is 13 percent.

The issue has taken on added urgency with a recent increase in organized return fraud, which costs retailers an estimated $16 billion a year. The National Retail Federation cites a recent case in which a group of criminals generated 16 copies of a fake $500 merchandise receipt and used them to get refunds at 16 stores within an hour of each other.

Retailers including Staples, Sports Authority, Limited Brands (which includes Victoria's Secret, The Limited and Express) and Guess have generated recent headlines by working with a California-based company called Return Exchange to use software to monitor customers' returns. If the software detects possible fraud, the store can refuse to accept the return.

Stores are looking both for hard-core criminals and the type of serial returners who buy outfits, wear them over the weekend and return them the following Monday. The system is designed to catch crooks including shoplifters returning stolen merchandise and price switchers who buy two items and then try to claim the higher amount while returning the lower-priced item.

The system involves asking customers for a driver's license or other ID at the time of a return. The ID is swiped into a machine, which logs the shopper's name, address, birth date and details of the transaction. If a customer's history of return behavior is unusual, a transaction can be denied. The customer is instructed to call the company's toll-free number for a copy of a report detailing his or her return activity.

As retailers have rolled out the Return Exchange system, they have generated complaints from privacy advocates concerned about the collecting of personal information, as well as offending some customers who say their denied returns are legitimate, the Wall Street Journal recently reported.

Among the critics of the system is Jonathan Dampier, vice president of marketing for Newgistics, which makes another return-monitoring software system used primarily for online and catalog returns. Clients include Abercrombie & Fitch, Lands' End and J.Crew.

Dampier believes the Return Exchange system doesn't place enough emphasis on monitoring how much unreturned merchandise customers buy. Those who buy more are likely to return more, he noted.

"What retailers need to do is understand that not all returns are bad," he said.

The company commissioned a Harris Interactive poll that underscored reasons for retailers to be generous with return policies, Dampier said. It found 75 percent of consumers say a convenient return process is an important factor in deciding where they buy gifts; the survey also noted 34 percent of adults procrastinate two months or longer before making a return.

His advice to retailers: Use the return process as a way to reach out to customers with coupons inviting them to come back and spend more.

But Trlica said the trend of using technology to become more sophisticated about monitoring returns isn't going anywhere. "Ninety-nine out of 100 normal customers will never notice a difference," he said.

"Ultimately, that helps the good customers of that company, too," Trlica added. "The more you can reduce loss, the less you have to inflate prices."