Bed Bath & Beyond (NASDAQ:BBBY) is turning miserly, and that could be bad for business, undermining the stock's hard-fought yearlong recovery.
Next month, the home goods retailer will swipe 20% from customers who return merchandise without a receipt. If Bed Bath & Beyond can't locate the purchase in its point of sale system, the retailer will give the consumer only 80% of the item's value. This change also applies to the retailer's buybuy Baby and Harmon Face Values concepts.
It's a big change for the company, which until now has been known for its fairly liberal and customer-friendly return policy that gave store credit or an exchange on returns without a receipt.
The customer is always right
While some companies such as Comcast seemingly go out of their way to insult customers and provide subpar service, damaging their reputations in the process, others bend over backward to please their customers. Nordstrom, for example, has become almost synonymous with excellent service.
Most other businesses fall in between the two extremes. But because Bed Bath & Beyond is probably viewed closer to Nordstrom than to Comcast when it comes to customer service, this new return policy is curious.
Shopping website Racked was first alerted to the change earlier this week and confirmed with the retailer that the new policy will go into effect next month. Considering Bed Bath & Beyond has a seemingly never-ending 20% off coupon policy, it's interesting that the retailer chose that percentage as its "restocking fee."
No doubt some customers abuse the current policy, but being more lenient on returns still makes good business sense as it creates a level of comfort about shopping at a store without fear of being stuck with an unwanted item.
The rule of unintended consequences
Although it might seem counterintuitive, a study published in the Journal of Consumer Psychology found that stricter return policies actually increase the likelihood of returns by all customers.
Of course, there can be significant costs associated with returns. The National Retail Federation estimated returns fraud and abuse cost the retail industry between $10.8 billion and $17.6 billion in 2014, a 20% increase from the prior year. Yet fraud represented only about 3.4% of the total number of returns made, according to the trade group.
In last year's annual filing with the SEC, Bed Bath & Beyond reported it allowed for some $700 million in sales returns and allowances in the preceding fiscal year, a seemingly high 6% of its $11.5 billion in annual revenue: almost double what the NRF says is the industry average.
However, Bed Bath & Beyond doesn't actually lose all that money. It can resell a lot of the returned goods or send them back to the manufacturer for a credit. So the actual cost incurred by the company is probably pretty low overall, which raises the question: Is it really worth it to make the change?
Point of no return
Certainly Bed Bath & Beyond isn't the only retailer tightening its return policies, and it's still better than some like lululemon athletica, which has a super-strict 14-day return policy -- even for gift purchases -- and will only accept items in pristine condition. Best Buy gives you just 15 days to return an item, and only with a receipt (up to 45 days, though, if you're an Elite member). Barnes & Noble lets you read a book for 14 days and still get a refund: not too bad, considering the product. Wal-Mart, on the other hand, offers a 90-day return policy on most items, though like Best Buy it limits many electronics goods to just 15 days.
Others, though, are going in the opposite direction by liberalizing their policies. Target just announced it would extend its return policy from 90 days to one year for all 32 of its store brands and exclusive merchandise, representing some 70,000 items.
A return to stilted growth?
Bed Bath & Beyond has been struggling to move the needle on revenue and profit growth recently. However, its stock has started to recover after falling roughly 30% in the first half of 2014 due to disappointing earnings growth.
Its stock dropped again this past January after the company again reported weak fiscal third-quarter results, and maybe the policy change is just one more piece in a broader cost-cutting initiative. But as academia and experience suggest, taking 20% from its shoppers' purchases might not be good for the customer or for Bed Bath & Beyond.