Driver and warehouse shortages combined with historic return rates and opportunistic scammers have conjured up the perfect storm for retailers this post-holiday season. Retailers have never excelled at reverse logistics, but the e-commerce holiday shopping boom combined with the worldwide pandemic has only exacerbated the struggle. With a supply chain in crisis and rising returns, retailers must also deal with a precipitous increase in fraudulent activity.
Despite today's radically different reverse landscape, organizations continue operating in a pre-pandemic capacity, accepting returns anytime, anywhere, while stopping short of re-imagining their returns management policies. Fortunately, retailers have significant opportunities to stop the bleeding and recover lost profits while keeping consumers happy.
Supply chain delays and labor shortages
Even before the pandemic, returns were on the rise due to increased online shopping, which yields two to three times the amount compared to in-store purchases. As a result, transportation companies started routing more small parcel packages and less than truckload orders over the last few years. This increased demand has required shippers to increase capacities with limited drivers– a recipe that has led to premium price hikes. What's worse is the routes have been historically inefficient, forcing truckers to make multiple stops to bring the items back to the store for inspection and then around the country to a series of consolidation centers, returns centers, and in some cases, to the original manufacturers.
The reverse logistics network is even more stressed today with such a shaky foundation. Online sales grew 11.3% this holiday season to reach $218.9 billion. At a conservative 20.8% return rate, logistics providers will need to manage $45.5 billion worth of merchandise. Yet the American Trucking Association predicts the industry is at least 80,000 drivers short of what they need. Driver deficits combined with inefficient reverse routing procedures mean consumers will have to wait longer than average to receive refunds for the foreseeable future. The ATA predicts the shortage could double by 2030.
To cut the costs and improve operations, retailers have a few options: They can either optimize shipping and warehousing operations themselves or work with returns management providers to do the job. Additionally, they can reduce the number and cost of returns through better policies and customer service.
Reducing returns with excellent customer service and enhanced policies
Returns are a reality. But excessive returns are not, and one of the best ways to reduce the load is to provide excellent customer service before the sale occurs. Several omnichannel retailers are already making strides in this area, but more need to follow innovators like 1822 Denim. The New York-based online retailer recently launched virtual try-on technology that leverages consumer data to make size recommendations. As a result, the sustainably focused brand has reduced return rates by 48% while growing sales conversions by four times.
Another way to reduce returns is by narrowing the acceptable return window. This can seem like a scary move because most customers say they prefer at least 90-days to change their minds about a holiday purchase. Brands like Macy’s, Target and Bed Bath & Beyond have obliged because they want to inspire greater customer loyalty. Still, returns windows don’t appear to make or break purchase decisions. Despite preferring three months to return items, customers do not indicate it as the most critical factor in determining where to spend their money.
On the other hand, extended returns windows absolutely cost retailers significant profits. Why? A winter jacket returned in March, is valued much lower than one returned in January while still in season.
This marks a notable opportunity for major retailers to reconsider their lax 90-day policies and recover lost profits without fear of losing loyalty. In fact, 39% of retailers already have 30-day returns policies, and customers are ok with it. And a handful of online-only brands, like The RealReal and thredUP, have reduced the time frame further to 14 days, allowing them to receive unwanted items faster and get the highest resale value.
Reducing profit loss by optimizing shipping and warehousing
Like the examples above, every retailer should have the desire to reduce their returns, but they should also be looking into optimizing their returns management strategies. Let's face it; most organizations haven't changed much about their reverse operations over the last few years, and time and money are certainly factors. Instead, retailers focus on what they excel at – sales. The best course of action at this point is to outsource operations to companies that exist for the sole purpose of solving the multifaceted returns problem.
The best returns providers should have a network of processing facilities in locations close to their stores. These strategically placed returns centers would ensure that items are routed quickly and directly to the correct location, reducing transportation time, processing time, and costs. Returns providers should also have solid partnerships with transportation companies to negotiate reduced fees and ship as few partial loads as possible to further optimize savings.
Scammers exacerbating the problem
The post-holiday season is arguably the single largest time of returns during the year, but that doesn’t mean that scammers aren’t at the ready at other times. At this time of year specifically, the sheer volume of returns flooding retailers’ warehouses and stores is massive. Retailers are trying to process product as fast as possible to maintain a stable flow and prevent their warehouses from getting clogged up with items. Additionally, with the labor shortages and staff working around the clock to process returns, there are windows of opportunity that scammers continuously take advantage of.
When retailers take a structured approach to reducing their returns rates, that effort has the added benefit of minimizing the inevitable accompanying fraud. Return fraud has intensified with the massive amounts of shopping online due to Covid-19. And with that, both increased foot traffic and e-commerce traffic inevitably bring opportunities for bad actors to target stores and take advantage of their lenient policies. Today, more than two-thirds of retailers said the pandemic increased their organization's overall risk, and 57 percent indicated a rise in organized retail crime.
A recent report calculated that retailers lost $23.2 billion, or a whopping 10.6 percent of overall returns, to fraudsters this holiday season. When you add ancillary processing costs, like shipping, inspecting, and disposing of fraudulent returns, Signifyd estimates an aggregate loss of $43 billion.
Fortunately, retailers can significantly reduce fraud with better returns policy and fraud monitoring technology.
Better returns policies
Returns policies are one of the most significant determining factors for how much fraud a retailer will face. Organizations that offer lenient terms and various returns methods, like No-ID and contactless, provide ample scam opportunities. Additionally, retailers that accept every low value return regardless of whether it makes financial sense, further exacerbate the problem. Retailers can mitigate this by using data to understand customer purchasing preferences and how they return items. Retailers can also educate customers on the environmental impact of their return habits, with the intent to discourage customers from making unnecessary returns.
Of course, seamless policies are essential to garner brand loyalty, but retailers must start creating logical rules that support their business and their customers simultaneously.
Simple returns requirements should entail:
- Only accepting returns with a receipt, ID, and matching payment method.
- Ensuring that all tags are intact and inspecting the item before issuing a refund
- Only processing refunds using the original payment
- Setting a deadline for returns between 30 and 90 days.
- Monitoring customers that engage in excessive returns and restricting their future purchases
On the other hand, retailers can look out for a few things to ensure what they’re receiving is not fraudulent, including: items that are different than what was originally purchased; customers swapping items for the same model but different serial numbers; returns of items that have been gutted out (removed hardware components); returned empty packages; returns that have been claimed as returned, but never were.
Bringing technology into the mix
NRF reported that more than half of retailers are allocating more resources toward fraud prevention technology today, while another 50 percent are explicitly investing in machine learning and AI systems for loss prevention. In addition, intelligent retailers are partnering with returns management companies equipped with fraud monitoring technology and processes.
Returns management providers will occasionally receive returned electronics with missing parts. When this happens, using tracking software to investigate the issue is a great first step. In one recent case, we received a dissected smartphone and followed the IP address to the scammer's eBay storefront. The software we use allowed us to flag suspicious accounts and ensures that purchases from known scammers in the future won’t get through. Similar industry technology can also monitor consumer trends and flag suspicious customers using intelligent software. Such tech can monitor individual behaviors and then recommend actions to take to prevent fraudulent purchases and returns. This happens in real-time behind the scenes.
Additionally, retailers can minimize returns fraud by investing in top-level identification software, which allows them to verify customers' identities and implement "red flag" alerts for issues like inconsistent billing and shipping information–right from the point of sale. Advanced POS systems are the first line of defense for both online and in-store purchases.
The bottom line
After riding high from the recent holiday sales spikes, retailers must face the grim reality that returns season is in full swing. Coupled with transportation costs, labor shortages, and multi-billion-dollar fraud losses, retailers may face record-breaking losses coupled with irritated customers who are waiting to receive their refund. Yet, amidst these hard truths, returns management providers, coupled with common-sense changes, can make a significant difference.
