Ho! Ho! Humbug. Retailers Lament Losses From Criminal Shoppers

Scourge of return fraud costs retailers, and consumers, billions of dollars this holiday season.

Jan 4, 2014 at 3:00PM

Deck the halls with boughs of holly.
Fa la la la la, la la la la.
'Tis the season ... for retail return fraud?

We interrupt the seasonal holiday cheer with this message from the U.S. National Retail Federation. The NRF would like to point out that they're the ones getting "decked" this year, as shoppers engage in a traditional practice that probably cost America's retailers close to $8.8 billion in 2013.

"Retail return fraud" is its name, and putting one over on store owners is its game. But what is retail return fraud, exactly? According to NRF, any number of crimes, large and small, fall under the category, including:

  • "Wardrobing," sometimes known as "renting" -- buying an outfit or jewelry, perhaps just to wear to a party on night, and then returning it for a refund.
  • "Receipt falsification" -- altering a receipt to show that an item was purchased for some higher amount other than what was actually paid for it, and then returning the item for the higher price.
  • Outright theft -- shoplifting an item, and then returning it and demanding a "refund."

How big of a problem is this?
Bigger than you think. The $8.8 billion figure alone should give you some idea of why retailers aren't happy about retail return fraud. But what's even worse, according to NRF, is that return fraud is getting more and more common. Fraud rates may have increased by as much as 25% from 2012 to 2013. NRF says as many as 5.8% of returns taking place this holiday season have been fraudulent to one extent or another -- costing retailers close to $3.4 billion for the season.

After surveying its members, NRF discovered that 94.8% of retailers it polled say they have suffered from the most serious form of return fraud -- where items are first stolen, and then returned for cash payment. Sixty-nine percent of retailers believe they've been tricked into "refunding" purchases that were originally bought with stolen tender -- such as counterfeit cash, or stolen gift cards. Twenty-nine percent of retailers have uncovered incidents where counterfeited store receipts were tendered as evidence of purchase to support a refund.

Who's to blame?
Among the more surprising revelations from NRF's survey is the likelihood that many instances of return fraud are "inside jobs" -- and some even have connections to the mob. Fully 93.1% of stores have caught employees working in cooperation with thieves to perpetrate return fraud -- a 15% increase over last year -- and 60.3% of retailers cite evidence of organized crime connections in their fraud cases.

Despite the severity of the phenomenon, retailers are at a bit of a loss as to how to counteract it. Catching the criminals isn't easy. On average, customers return 8.6% of all retail purchases -- nearly one in 10 -- and that number spikes to more than one in 10 during the holiday gift-giving season. Worse, criminals hide in plain sight amid of the rush of people exchanging gifts that were given in the wrong size, the wrong color, or just plain ... wrong. Retailers suspect that about 3.4% of all returns they accept on an ordinary basis are fraudulent in nature, but that number spikes to 5.8% -- a 70% increase -- after the presents are unwrapped.

What it means to you
Of course, you may think none of this affects you. You don't break the law. You don't try to defraud store owners. Yet in many ways, you do still pay the price.

For example, to combat the problem of wardrobing in particular, Macy's (NYSE:M) Bloomingdale's chain has been presenting its customers with a difficult choice: Buy a dress costing more than $150, and it will come with a "highly visible black tag" attached. Cut it off if you want that dress to look nice at the party -- but don't try to return the dress without the tag afterwards, because Bloomingdale's won't take it back.

In a more widespread practice of combating retail return fraud, 73.7% of stores say they now require customers to produce identification when returning items without a receipt, and more than 12% require ID even when a receipt is produced. These are all prices paid in inconvenience.

The price of fraud is paid more directly by store customers, too ... and store employees as well. Losing $8.8 billion in revenues to fraud means $8.8 billion that the stores have to find a way to make up. Part of this, the stores make back by charging higher prices than they would have liked to charge, absent the losses from fraud. This is a price taken right out of your pocket.

But stores are loath to pass all losses on to their customers, for risk of alienating these customers. Some losses, therefore, are made up by stores cutting costs in-house. Shopper advocate The Retail Equation estimates that every year, return fraud costs upwards of 524,000 retail workers their jobs, as stores try to make up lost revenue by cutting expenditures on payroll.

And that's perhaps the most surprising revelation of all. In stealing from stores, thieves are actually stealing American jobs, and slowing down the recovery for all of us.

Bad retailers will fail even without fraud
But to learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Fool contributor Rich Smith and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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