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The Holiday Shopping Season Has a $2 Billion Problem

By Daniel B. Kline – Updated Nov 28, 2016 at 3:01PM

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Return fraud hits hard during the busiest buying time of the year, but it's a $16 billion annual issue.

While Americans are expected to spend a near-record $952 billion during the 2016 holiday shopping season, retailers will be plagued by about $2 billion in fraudulent returns, according to the National Retail Federation (NRF).

That seems like a small number (if any number with nine zeroes in it can be considered small), but it's a problem that hurts shoppers, stores, and even municipalities that lose out on taxes. Part of a $15.9 billion annual problem, return fraud hits consumers the hardest because ultimately, it's honest people who are forced to pay the price for the criminal actions of others.

"Certainly there's a loss of tax revenue," NRF VP of Loss Prevention Robert Moraca told the Chicago Tribune. "And every item stolen has to be replaced, and that's passed on to the consumer."

Some of these Black Friday sale items will likely be returned fraudulently. Image source: Best Buy.

This is not a small problem

Overall, on an annual basis, total merchandise returns come to about $260.5 billion for retailers in the United States, according to NRF (opens in PDF). About 6.1% of that number is people either abusing the return process or making fraudulent returns (coming to the aforementioned $15.9 billion number).

During the holiday season, the NRF estimates, overall returns come in at 10% (about 2% higher than the rest of the year). About 3.5% of those returns end up being fraudulent, a $2.21 billion problem.

"Return fraud remains a critical issue for retailers with the impact spanning far and wide, in-store and online," said Moraca in an NRF report. "While technology has played a significant role in deterring many in-person fraudulent transactions that would have otherwise gone unseen, there is little that can be done to prevent a determined criminal who will find a loophole one way or another. When it comes to retail fraud, retailers can build taller walls, but criminals continue to find taller ladders."

How do the frauds work? 

Thieves use a variety of scams to commit return fraud, but nine in 10 retailers told the NRF for its report last year that they have experienced people returning stolen merchandise. In addition, a little over 70% of stores told the trade organization that they deal with "wardrobing," the practice of someone using/wearing an item then returning it.

Other examples of return fraud and the percentage of retailers that say they have experienced them include:

  • The return of merchandise purchased with counterfeit money (75.8%).
  • Return fraud made by "known organized retail crime groups" (71%).
  • "Employee return fraud or collusion with external forces" (77.4%).

"Retailers have the difficult task of providing superior customer service by always giving the benefit of the doubt to their shoppers when it comes to returns, while simultaneously working to make sure they protect their business assets," said Moraca.

What can stores do?

Retailers must make their return policy clear to consumers, including info on whether they track returns or require an ID. Of course, that info is on receipts, signs posted near registers, and in online disclaimer copy that few people read.

Return tracking has been a controversial practice and ultimately it's effective, but only to a point. Despite new efforts at enforcement by retailers, holiday season return fraud has been cut from an estimated $3.4 billion in 2013 and $3.8 billion in 2014 to $2.2 billion in 2015. This year, the NRF expects a number similar to last year if not slightly higher.

Retailers do not yet have the silver bullet that can end return fraud, which ultimately costs all honest shoppers a little bit more every time they buy something.

Daniel Kline has no position in any stocks mentioned. He bought a coffee maker he does not need on Sunday of Black Friday weekend. The Motley Fool has no position in any of the stocks mentioned. We Fools may not 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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