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Retailers expect more fraudulent returns this holiday season

An array of tees from American Apparel.
An array of tees from American Apparel.
Kristen Lepore

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After the holidays, crowds of shoppers will go into stores to return unwanted gifts.

But in some cases, all retailers will get is a load of coal. The National Retail Federation says fraudulent returns -- when customers attempt to return used or stolen items -- will represent 5.8 percent of all holiday returns, resulting in a loss of nearly $3.4 billion for retailers. It's an increase from 4.6 percent of all holiday returns in 2012, the federation said.

"Recent efforts to combat fraudulent activity are slowly starting to work, but criminals are becoming more savvy and technologically advanced in their methods, making it even more difficult for retailers and law enforcement to keep up with the growing problem," said Rich Mellor, vice president of loss prevention at the National Retail Federation.

For the entire year, the federation estimates retailers will lose $8.76 billion in return fraud. The federation based its estimate on a survey of 62 retail companies.

Among the problems are employees assisting in the stealing of items, the faking of electronic receipts and customers returning items they bought with fake money. 

How to catch a thief

Retailers are fighting back. Los Angeles-based American Apparel said it increased its training of employees over recent years on how to spot fraudulent customers.

Here's how they would catch a customer trying to return clothing they had already worn at a party with the tags on:

American Apparel employees would check the armpit area of the shirt for stains, look for food or wine marks and feel the fabric to see if it’s been washed, said Blue Montez, American Apparel’s director of asset protection.

“It gives the cashiers a telltale sign that the items have been worn,” Montez said.

Ramping up that training has helped reduce the amount of return fraud over the last three years, Montez said. He declined to say what percent return fraud represents of the company's sales, but estimated return fraud has been reduced by 2 percent over a two year period. 

Unlike most major retail chains, American Apparel doesn’t give customers their money back when they return items. Instead, customers are given a gift card with the value of the returned items. That has helped prevent some fraud, Montez said.

The retailer also keeps tabs on how its employees handle returns. Employees fill out information on the return, such as the customer’s name and the receipt number, Montez said. If a piece of information is missing, Montez’s team gets an alert and they can go back and check the store’s video footage of the return. They also have systems in place to track customers who make multiple and frequent returns.

Other retailers have changed their return policies. For example, The Bon-Ton Stores, which operates department stores in 25 states outside of California, began requiring customers to present their ID when making a purchase in October 2009, according to a blog run by the National Retail Federation. The change resulted in a savings of $400,000 to $800,000 a month, according to the 2010 blog post.

Challenges ahead

Return fraud takes away just a small fraction of a retailer’s overall sales each year. It’s part of a larger category called “shrinkage” which represents two percent or less of a retailer’s annual sales, said Joe Feldman, senior managing director and assistant director of research at the Telsey Advisory Group. Feldman cautioned that shrinkage doesn’t just account for stolen items; it also represents items that were damaged, such as rotten fruit or a busted item during shipping.

“They budget for that year in and year out," Feldman said. "They try to reduce that number every year."

Montez said American Apparel measures whether its loss prevention policies are working by looking at a store’s annual and monthly sales and the number of returns. If the number of returns is stable and the store’s sales are increasing, then that would be a sign that things are working well.

But Montez said there are challenges ahead. There have been organized retail crimes and growth of mobile coupons and e-receipts may also leave room for more fraud in the retail industry, he said.

Still, returns aren't always a bad thing. It gives customers a reason to go back into the store and buy something else, Montez said. For example, a customer comes back to American Apparel to return a $20 item.

"They may like additional items and that $20 return ends up into a $40 sale," Montez said.