Consumers and retailers both understand that merchandise occasionally needs to be returned. Supply chain journalist Helen Atkinson suggests that savvy retailers accept the inevitable and use their returns policy to differentiate themselves from their competitors. She explains, “Depending on which statistics you follow, consumers return something like a fifth of all purchases these days. … Whether these are items bought at brick-and-mortar stores or online, they end up in consumers’ homes, and need to find their way back into the supply chain — not just at minimal initial cost, but also in a way most likely to generate repeat sales. Or, to be more realistic, in a way that minimizes lost future sales. Because returning items remains one of the more dismal parts of shopping.”[1] Dennis Moon, Chief Operating Officer at Roadie, told Atkinson, “The differentiator from a consumer standpoint is not just how you get product to me — how fast, what day of the week — but if I need to return it. What’s that process like? Retailers are trying to differentiate themselves.” Although retailers want to make consumers happy, they are increasingly confronted with thieves and abusers who make the returns process a lose-lose proposition for both retailers and consumers.
The Returns Challenge
Journalist Liz Young reports, “The National Retail Federation estimates more than $100 billion in merchandise was returned fraudulently in the U.S. in 2023. That amounted to about 13.7% of the overall returned goods retailers received last year, more than twice the level of bogus returns in 2020.”[2] Nefarious consumers use a number of strategies to defraud retailers. Young writes, “Some companies processing returned televisions for retailers have gotten a surprise when opening the boxes — packaging filled with bricks rather than newly purchased TVs. Others examining returned purchases of purported luxury goods are instead finding counterfeits sent in by customers looking for refunds on full-price, deluxe merchandise.”
Correspondent Gabrielle Fonrouge reports that a survey conducted by Riskified mirrors NRF estimates of losses resulting from fraudulent returns. She writes, “About 90% of the companies polled in Riskified’s study said offering generous refunds, return policies and promotions to drive sales and increase customer loyalty are important to their overall business strategies. However, the misuse of such policies is proving to be a major drain on profits, forcing some to think twice about offering such freebies as retailers look to protect their margins while they face high costs, rising shrink and a slowdown in discretionary spending.”[3] In addition to the fraudster tactics noted by Young, Fonrouge lists a few more duplicitous practices. They include buying multiple items with the intention of returning most of them and wearing an item with plans to return it and not pay for it.
Of course, returns fraud and abuse isn’t the only way retailers are losing money. Some consumers claim they never received merchandise, when they actually did, so they can receive a refund and get merchandise for free. Abusive customers also create fake accounts to take advantage of a steeply discounted items for first-time customers or special promotional items. These practices cost retailers millions in lost revenue.
What Can be Done
Young reports that some retailers are using a version the “trust but verify” strategy by requiring in-person returns or requests for refunds of damaged items. She explains, “Retailers are … encouraging shoppers to bring returns to stores where items can be examined on the spot and consumers who might be abusing returns policies can be tracked.” Riskified CEO Eido Gal told Fonrouge that the returns process for the smartest companies begins before items are sold to abusive customers. He explains, “Let me give my best customers free returns always because that’s the convenient thing and that’s what I want to do to be competitive and let me work through and understand the identities of who’s not my best customer, and they would [have to pay a] restocking fee.” How do retailers identify abusive customers? They use artificial intelligence (AI). It’s an approach Yifat Baror, co-founder, chief marketing officer and chief growth officer at Osa Commerce, believes more retailers should adopt. She writes, “It’s time for retailers to embrace a different approach. By predicting returns instead of trying to prevent them, they can reduce return rates and improve customer satisfaction.”[4]
Some retailers have decided that changing returns policy is the best way to go. Journalist Amanda Mull explains, “Quietly, and largely unnoticed by many buyers, the returns landscape is shifting. All kinds of retailers have begun to tweak their policies: Kohl’s, the suburban mecca of affordably priced clothes and housewares, now charges for return shipping, as does REI, the yuppie mecca of camping and hiking gear. Neiman Marcus won’t charge you for shipping as long as the product is back in their hands within 15 days of when you received it, but after that, you’re out $10. Even Amazon has made some tiny adjustments in its famously returns-friendly policies, charging customers $1 for dropping off packages at a UPS store if they forgo drop-off at a Whole Foods or Amazon Fresh location closer to them.”[5] Baror, however, believes the AI approach is better. She explains, “While policies like rigid return windows, restocking fees and damage waivers may prevent some returns, they’re ineffective in avoiding all returns. Even worse, customers may see these rules as punitive.”
Erhan Musaoglu, founder and Chief Executive Officer of Logiwa, Inc., agrees with Gal and Baror that leveraging AI can help improve returns processes. He notes, “AI can find the underlying causes of returns, including identifying problems in fulfillment operations, which may be causing an influx of returns. Specifically, it can evaluate data such as customer reviews or track returns communication channels. This helps organizations react to consumer behavior, customize returns management operations and make changes to fulfillment processes where needed.”[6] He goes on to point out a few other benefits of using AI. They are:
• “AI get returned goods back into the supply chain faster, with applications that enable organizations to make returns allocation decisions based on real-time data. AI algorithms can assess product condition, resale price, processing costs, future touch points, transportation fees and storage requirements to get returns sorted for the highest possible recovery rate. With the ability to automatically calculate the total returns management cost, AI can determine the best course of action for each return scenario and cut returns processing time by 75%.”
• “AI can recover higher profits from returned goods. Once items are back in inventory, a common mistake is to list second-hand items on a single online marketplace at one set price. With AI support for returns management operations, organizations can use intelligent dynamic pricing (or data-driven intelligent pricing) to ensure that the maximum value can be earned on all returned items.”
• “AI can route returns to the best fulfillment centers. Once a returned order arrives at a warehouse or returns center, AI can route it to the next best internal storage location, fulfillment center or geographic region. The decision is based on demand, item availability and the costs associated with transferring the item somewhere else in your fulfillment network. Just like smart inventory management and directed putaway algorithms, AI provides clarity and control to manage returned inventory like it never even left the warehouse.”
Concluding Thoughts
Musaoglu concludes, “Artificial intelligence is now an indispensable asset in improving the quality and efficiency of returns.” And most retailers understand the importance of good returns policies and processes. The staff at SupplyChainBrain reports, “Nearly three quarters of U.S. shoppers (72%) show greater loyalty to retailers that provide free returns, according to the latest research by SAP Emarsys Customer Engagement, which surveyed over 2,000 shoppers in the United States. The research found that 88% of U.S. consumers have stopped shopping with a retailer because the retailer introduced a paid returns policy, while over half (54%) actively avoid retailers that charge to return items.”[7] In order to provide the best possible returns policies and practices, retailers need to get ahead of the fraudsters and abusers whose reprehensible behavior ends up costing honest consumers in the long run.
Footnotes
[1] Helen Atkinson, “Retailers – Quit Bellyaching and Differentiate Yourself on Returns,” SupplyChainBrain, 2 February 2023.
[2] Liz Young, “Brick-Filled Boxes. Bogus Receipts. Retailers Battle Fraudulent Returns.” The Wall Street Journal, 10 January 2024.
[3] Gabrielle Fonrouge, “Retailers are losing $100 billion a year from return fraud, bots and coupon stacking, study says,” CNBC, 14 September 2023.
[4] Yifat Baror, “From Prevention to Prediction: Revolutionizing Returns Management in Retail,” SupplyChainBrain, 25 August 2023.
[5] Amanda Mull, “The Free-Returns Party Is Over,” The Atlantic, 8 May 2023.
[6] Erhan Musaoglu, “Using Artificial Intelligence for Returns Management,” SupplyChainBrain, 26 September 2023.
[7] Staff, “Majority of Shoppers Stay Loyal to Retailers That Offer Free Returns,” SupplyChainBrain, 11 January 2024.
