With the holiday season out of the way, next to come is a wave of returns that will stretch into the new year. Given the heightened focus on return policies during this period, it is an opportune time for customer fulfillment leaders to raise awareness within their organizations about a persistent challenge confronting retailers: the rise in retail returns fraud.
The value of merchandise being fraudulently returned to retailers hit an all-time-high in 2024 at over $100 billion, up four-fold compared to just four years ago, according to industry sources. Effectively managing returns fraud is crucial for controlling an organization’s costs. This type of fraud diverts store labor from more productive activities and can significantly disrupt the accuracy of inventory records.
According to a Gartner survey, 39% of retailers identified cost management – the mitigation and control of volatile or uncontrollable supply chain costs – as one of the top three internal obstacles to achieving their supply chain goals and objectives. To overcome this challenge, organizations must focus on addressing returns fraud.
Strategies to prioritize should include these three actions:
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1. Anticipate Future Returns Fraud by Analyzing Sales and Delivery Patterns
To avoid returns fraud, retailers must be proactive. The likelihood of fraudulent returns occurring can be forecasted and anticipated by closely monitoring sales activity to identify unusual patterns that could subsequently lead to fraudulent returns.
Such crimes are committed by both organized criminal groups and individuals, and different types of sales patterns need to be observed — for example, an unexpected spike in sales for specific, usually high-priced items within a very short time. Organized criminals operate in this way so that the sales increases happen quickly and then return to normal levels, offering retailers no opportunity to understand the sudden sharp rise in sales.
It’s also important to monitor if deliveries are being rerouted to different addresses than those presented at the time of purchase. This could indicate that a stolen credit card was used to purchase an item, with the thief then redirecting the delivery to their own address. Additionally, put a process in place so that carriers return back to you packages for which an in-transit reroute is requested.
2. Rigorously Enforce Your Returns Policy
Clearly state your return policy on your website and ensure all employees are familiar with it. Your return policy needs to find the right balance between enough flexibility to be useful but enough restrictions to stop people from committing fraud.
Additionally, you want a return policy that’s easy to understand. When formulating, ask yourself questions like: What types of goods qualify for a return and refund? What exceptions are there to these qualifications? What does the customer need to provide before they are given a refund?
It’s critical to verify the customer’s name, address and other information before processing a return or refund. This can help prevent fraudsters from using stolen identities. Also, adhere rigidly to the number of days post-purchase the consumer is given to make their return and avoid cash refunds wherever possible.
3. Ensure that All Business Functions Impacted by Fraudulent Returns are Tackling the Problem
As the majority of retail fraud happens within the store environment, combating returns fraud cannot be the sole responsibility of retail fulfillment leaders. However, leaders must play a key role in influencing other functions to take on their responsibilities in combating the problem.
Review the four main methods of fraud with key functions within the business, such as store operations, returns management and finance, and discuss strategies they can employ to identify fraud, such as:
- Consumer Behavior Fraud: This involves practices like free renting, where consumers use an item once or twice and then quickly return it. To combat this, inspect returned clothing and footwear for signs of wear, labels or swing tags being removed.
- Physical Fraud: This includes stripping electronic items of parts or returning boxes with different contents. Address this by conducting thorough inspections of returned items, even during peak store hours when thieves are more likely to try fraudulent activities. Establishing a dedicated returns area for detailed checks can help deter fraudulent consumers.
- Financial Fraud: Involves credit card misuse, fake receipts or placing a higher-priced label on items and returning them for cash. Implement fraud prevention software to block automated threats and train employees to carefully examine receipts for authenticity, ensuring they match the returned items.
- Internal Fraud: Occurs when employees process refunds for items stolen by accomplices and share the refund. Monitor return processing patterns among staff and investigate any irregularities to identify potential dishonest behavior.
Retailers can largely prevent returns fraud by developing and managing effective returns processes. However, due to the various methods used in returns fraud, no single department within a retail organization can tackle it alone. It requires a coordinated effort across multiple teams.
Tom Enright is a VP Analyst in Gartner’s Supply Chain Practice, specializing in supply chain strategies and operations across all retail product sectors. His focus areas include distributed order management, returns management, recommerce and last mile fulfillment.
