Winning the Returns Management Race

By  Deena M. Amato-McCoy — December 03, 2010

Returns are an unavoidable cost of doing business, but rigid returns practices could kill customer loyalty that is precious to apparel retailers in this fragile economy. By integrating returns policies across multi-channel operations, and applying data analytics to streamline returns operations, however, chains will gain visibility into incoming returns, sustain relationships with valuable shoppers and still keep criminals at bay.
 
The slowly recovering economy continues to take its toll on the retail industry, and as a result, apparel chains are eager to find new ways to drive revenue and deliver customer service. While more lenient returns policies have become one popular way to rebuild customer loyalty, this practice is making retailers more vulnerable to returns fraud.
 
Apparel retailers nationwide constantly struggle with return rates that range between approximately 6 percent and 12 percent, according to The Retail Equation, a retail transaction optimization solutions provider based in Irvine, Calif.
 
This battle only intensifies during the holiday season when returns fraud tends to run rampant. According to the Washington, D.C.-based National Retail Federation (NRF), for example, return fraud rates can jump 23 percent higher than typical return fraud rates, a factor contributing to approximately $3 billion in lost revenue.
 
While most consumer returns are on the up-and-up, savvy "thieves" are using new tactics to take advantage of lenient returns policies. Some criminals seek cash or store credit by returning stolen merchandise; others falsify or reuse receipts. Still others become experts at "wardrobing," or purchasing an item, wearing it once, and returning it for a full refund.
 
And these incidents are on the upswing as apparel companies expand their multi-channel presences, and in kind, the option to accept returns at any sales channel. "As we expand our reach through new retail channels, so do offenders," explains Bill Napier, senior manager of corporate asset protection for Sydney, Neb.-based Cabela's, a 31-store multi-channel retailer that also has catalogs and an e-commerce site.
 
While localized returns are opening new doors for criminals, companies operating channels with disparate returns policies and practices are becoming even more vulnerable to potential losses.
 
"Too often a company's direct-to-consumer returns are handled differently from those made at brick-and-mortar locations," says Kevin Brown, director of marketing for Newgistics, an Austin, Texas-based returns management company. "Multi-channel retailers are all in the business of selling goods and building loyalty, but too many companies still consider their returns practices as an operational challenge. It remains a black hole."
 
At this stage of the game however, retailers cannot rebuild their brands -- or the bottom line -- by mismanaging merchandise returns. Instead, they must revamp returns to beat offenders at their own game. The first step in this process is to gain enterprise visibility into returns operations.
 
A clear view
 
 Many chains continue to try and connect siloed systems and multi-channel operations across the enterprise, but oftentimes band-aid patches and disparate middleware creates more challenges and silos than before. And the longer that enterprise solutions, such as inventory management and payment processing, remain disconnected, the longer inter-channel returns management will be impossible to reconcile.
 
"If you are going to allow consumers to make a purchase in one channel and return merchandise to another one, it is imperative to recognize all merchandise on-hand across channels, and support the proper documentation to update inventory levels, manage credits, even flag fraud," says Brown.
 
By taking initial steps to integrate merely inventory management and payment processing across channels, apparel retailers can more easily trace transactions back to their origin and accurately reconcile returns. By integrating a custom application from Newgistics into the mix, retailers can immediately gain insight into that initial purchase and all of the items that were part of the transaction.
 
The application was created to assist shoppers in postal-based returns. Newgistics' retail partners supply consumers with a return-shipping label, or a dedicated URL where shoppers can print their own. The labels contain a bar code encoded with order-specific data, such as the customer's name and address, the merchandise that comprised the original transaction, and a final destination address of a dedicated Newgistics returns depot. As returned merchandise is shipped to the returns facility, the vendor tracks and communicates all data to retailers via an online portal.
 
"This allows retailers to estimate the amount of merchandise arriving on any given day, and they can tie this to workforce management systems to allocate the proper amount of labor to process the returns and handle documented merchandise," he says. "It makes the returns process more accurate, and instead of spending hours manually researching undocumented returns, chains will spend 15 minutes researching the transaction and issuing a credit."
 
Taking the process one step further, apparel chains are improving customer loyalty by merging returns management with multi-channel order fulfillment -- especially on back ordered merchandise.
 
"If there are 50 pending orders for a hot-selling blouse, and 23 units of this SKU are en route back to the retailer, and we can ensure that the merchandise is in good condition, merchants can satisfy the order, gain the revenue and eliminate canceled orders," Brown adds. "This operation is an efficient, cost-effective way to fulfill orders, while positively impacting the customer experience and lifetime value of a customer. If you can satisfy consumers and deliver value, chances are they will return and continue to shop with you."
 
An inside view
 
Processing returns is only half the battle. The information that retailers can glean from that return transaction is of equal importance. In fact, it is that data that can strengthen internal returns policies and customer service practices, both of which can impact shopper loyalty.
 
"A number of things can be done with a customer file, it just depends on how a merchant decides to use that information," explains Brown.
 
For example, analytics can keep merchants abreast of returns from "first time" vs. loyal shoppers. This data also helps chains put a positive spin on the situation, follow-up with a discount in hopes of providing additional service and securing their business.
 
From an operations perspective, data analytics can also reveal a hiccup at point-of-manufacture or about the performance of merchandise -- two issues that can cause a retailer to incur unnecessary labor or handling costs to recall product, or pull merchandise from assortments. Without accurate data across the enterprise however, retailers will find themselves behind the eight ball. This was Cabela's exact Achilles' Heel.
 
"As the enterprise continued to add channels, we continued to attract more ill-intentioned visitors," says Napier. "We lacked accurate consistent data across our enterprise, which made it difficult to capture and analyze any returns information or specific offenders."
 
While Cabela's existing analysis practices did reveal that only a small percentage of visitors were causing a challenge, the chain needed a better way to root out these offenders, and still uphold the high level of customer service it had built its reputation on. It was time to re-examine point-of-sale processes, including cashier accuracy, throughput rates and effectiveness of customer service policies. By adding a solution from The Retail Equation, Cabela's is in a better position reach these goals.
 
The solution, which is integrated at a payment device housed at POS, is initiated as a cashier begins to process a return. During the transaction, the software captures all transaction data, including the employee's identification code, the shopper's loyalty card number, the number of returned items, the transaction tender amount, the item SKU number, and whether the item is a return or exchange.
 
All data is transmitted to the vendor's database and predictive modeling instantly alerts the retailer to how often the shopper makes returns. Based on benchmarks comprised by Cabela's, The Retail Equation sends the cashier a message via POS alerting them to whether the transaction is accepted or unauthorized. Unapproved consumers also receive a receipt with a dedicated 800 number that connects them to a Retail Equation representative who can address any questions.
 
Cabela's also receives reports of enterprise-wide returns, broken down by channel. "It allows us to compare benchmarks, and ensure that we are delivering a consistent message and returns policy across all channels," Napier reports.
 
Overall, the solution has slashed return rates by double-digits across its enterprise, "and this had a strong impact on our comparable store sales," he says.
 
"Every fraudulent return that is intercepted stops a negative sale, and that revenue goes back into the bank," adds Napier. "Fewer returns also means a reduction in labor to process returns, to re-ticket the merchandise, and restock it or send it back to the vendor -- which makes the effort a financial and operational success."
 
Englewood, Colo.-based Sports Authority is also a long-time partner of The Retail Equation. Riddled with two POS systems as the result of acquiring Gart Brothers Sporting Goods, the company realized it was futile to deploy a centralized returns management system in the midst of systems integration projects already underway. The Retail Equation's non-intrusive configuration was perfect for the growing chain, and it helped the chain get a handle on fraud in high returns locations.
 
"Having it in place for a mere two months was enough to justify the cost of the program enterprise-wide," John Clark, director of corporate asset protection, Sports Authority, said during a recent webinar, "Reduce Fraud and Shrink, and Stop Lost Sales by Optimizing Your Returns," produced by NRF and The Retail Equation.
 
With the solution's help, the chain has "stopped or recovered over $101 million simply by reducing returns from 2006 to present," he added. "We constantly monitor and change our attitude and methods through our denial processes. More importantly, we have created a controlled environment for the return process for both the associate and customer."
 
Deena M. Amato-McCoy is a New York-based journalist who covers retail technology.

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