From the frenzy of Super Bowl season TV return fraud to the daily abuse of consumer returns through wardrobing and bracketing, retailers are grappling with severe 'return anxiety.' This stress is particularly acute when it comes to dealing with Organized Retail Crime (ORC) groups, which are driving some companies out of business. The 20% year-over-year surge in retail return fraud and abuse has peaked to an all-time high of $101 billion in costs for retailers in 2023.
The increasing complexity and magnitude of retail returns fraud compelled us to delve further into this issue with our goTRG Fraud Survey Report: Spring 2024, which gathered data from over 400 retailers across the United States. These retailers shared how the escalating problem is influencing their operations, prompting the adoption of stricter return policies, leading them to implement additional fees, and in some cases, banning of chronic returners altogether. While these strategies are intended to curb fraud, they also pose potential risks to customer satisfaction, brand loyalty, and overall financial performance. Our findings reveal the intricate challenge retailers face in trying to effectively counteract fraud while still ensuring a positive shopping and post-purchase experience.
The Impact of Organized Retail Crime on the Retail Sector
The tactics employed by fraudsters vary widely and inflict significant damage. Our survey indicates that an alarming 57% of retailers report the return of stolen goods as the most prevalent form of return fraud, closely linked to the escalation of Organized Retail Crime (ORC). These criminal acts frequently involve coordinated smash-and-grab incidents, where groups of masked thieves create disruption, steal merchandise, and later return it with counterfeit receipts. Our data shows that 42% of retailers contend with returns of items fraudulently obtained, while 35% encounter counterfeit receipts and other forged documents like IDs.
Amazon recently endured losses exceeding $700,000 due to several refund fraud schemes orchestrated by groups that promoted their activities on TikTok and Telegram. In one such scheme, fraudsters enlisted a warehouse employee to falsely mark items as returned in Amazon's system without actually sending them back, in exchange for a $3,500 pay out. Other ORC rings leveraged the company’s lenient policies on returnless refunds, claiming refunds for items they reported as undelivered, which they then sold on alternative platforms.
The severity of ORC has reached such heights that on April 9th, Florida Governor Ron DeSantis enacted legislation imposed stricter penalties for retail theft and inciting looting through social media. The law classifies theft by groups of five or more as a third-degree felony, punishable by up to five years in prison, which escalates to a second-degree felony with a potential 15-year sentence if social media is used in the recruitment process. Such measures set a precedent likely to encourage other regions in the U.S. to bolster protections for retailers increasingly preyed upon by ORC networks.
Wardrobing: A Normalized Form of Return Abuse
The phenomenon of "wardrobing"—purchasing items to use them temporarily with the intent to return—currently affects 50% of retailers, ranking as the second most prevalent form of return fraud. Fueled partly by social media trends, wardrobing has become increasingly popular among consumers who frequently update their outfits to showcase a diverse wardrobe online. This trend is particularly common in eCommerce, where the ease of returning used items anonymously exacerbates the issue. As a result, retailers are left to shoulder the substantial costs arising from these manipulative return practices.
However, some innovative companies have leveraged the wardrobing challenge into a profitable business model. Companies like Rent the Runway, Nuuly, and Armoire have launched clothing rental subscriptions that cater to the consumer desire for variety and one-time wear options. These services allow customers to indulge in the latest fashion trends, document their experiences, and return the items afterward, aligning with the growing interest in sustainable and circular fashion economies.
Assessing the Financial Impact of Return Fraud on Retail
Our Retail Return Fraud Survey highlights a significant concern—68% of retailers report a distressing surge in fraud, raising serious questions about the industry's financial health and fairness to consumers. The numbers clearly delineate a mounting crisis. In 2015, the cost of return fraud to retailers was considerable but still manageable, amounting to $10.9 billion. However, by 2023, these costs skyrocketed to a staggering $101 billion, according to figures from the NRF and Appriss. For that year, 37% of retailers experienced losses exceeding $1 million, and 10% saw losses greater than $5 million. These figures emphasize the urgent need for innovative strategies to navigate the complexities of the modern retail landscape, ensuring the sustainability of businesses and fairness for consumers.
Designing a Balanced Response to Return Fraud
In response to the increasingly complex nature of return fraud, around 80% of retailers have tightened their policies to address this issue. Notably, 44% have introduced fees to dissuade frequent returns, while a significant 69% have enforced complete return restrictions on customers, and 40% have gone as far as banning problematic customers from their platforms.
Although these stringent measures can effectively reduce fraudulent returns, they also carry the risk of alienating honest customers, potentially eroding their loyalty and trust. In a sophisticated move, 70% of retailers are now utilizing customer profiling software to differentiate between fraudulent and genuine consumers. This technology examines purchase patterns, return histories, and other relevant data, enabling retailers to make more informed decisions. By adopting a more nuanced approach to analyzing consumer behavior, retailers strive to strike a crucial balance—minimizing return fraud while maintaining excellent customer service and satisfaction.
The Complexities of 'Keep It' Policies
'Returnless' policies, designed to reduce the costs associated with processing returns, hinge on customer honesty but are prone to exploitation. Retailers do not verify the condition of items, relying instead on customer declarations. Unfortunately, this trust is sometimes betrayed by customers who falsely claim dissatisfaction to both retain the product and receive a refund. According to our 2023 Holiday Returns Survey Report published last November, 59% of retailers adopted these returnless options during the peak holiday season to alleviate the financial burden of return shipping and restocking.
Post-holiday, slightly fewer retailers continue to offer these customer-friendly return options. However, among the 52% of retailers that do maintain 'Keep It' policies for returns deemed cost-ineffective, stricter regulations are emerging. Our research indicates that the algorithms determining eligibility for ‘keep it’ items now applies several factors beyond mere cost and shipping logistics. These include the customer's lifetime value (LTV), purchase frequency, and a comparison of their return volumes and values against their purchases. Notably, the frequency of a customer's returns is a critical metric, influencing nearly half of these decisions.
Strengthening Retail's Resilience: Adapting to Rising Return Fraud
As fraudulent schemes become more sophisticated, retailers must devise strategies that protect their profits while still preserving customer trust—a delicate balance indeed. The surge in return fraud, with associated costs reaching $101 billion, highlights the critical need for immediate action.
Retailers have responded assertively with many tightening their return policies, although this raises concerns about potential negative impacts on customer relationships. The adoption of advanced customer profiling technologies has emerged as a key strategy, designed to maintain high service standards without sacrificing fraud prevention efforts. However, as fraud techniques continue to evolve, it is crucial for retailers to continually update and refine their approaches, ensuring that their personnel and systems are equipped to handle these complex challenges.
Currently, only 11% of retailers utilize specialized third-party providers, presenting a substantial opportunity for growth through partnerships that could improve returns management and reverse logistics. As retailers enhance their strategies to mitigate fraud, the demand for sophisticated detection techniques and focused employee training becomes increasingly apparent. The path forward is intricate, demanding a strategy that embraces innovation, fosters trust, and maintains constant vigilance.
