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When Christmas Brings Retailers Many Unhappy Returns

Shoppers pass clothing stores and outlets inside the Westfield Stratford City shopping mall in London on Dec. 27, 2012

Photograph by Chris Ratcliffe/Bloomberg

Shoppers pass clothing stores and outlets inside the Westfield Stratford City shopping mall in London on Dec. 27, 2012

(An earlier version of this story ran online.)

Now that the holiday shopping frenzy is over, merchants are bracing for a less-welcome wave of business: merchandise returns and the con games that go along with them. According to a National Retail Federation survey, return fraud cost merchants an estimated $8.9 billion in 2012, with nearly 30 percent occurring during the holiday season. Overall, the survey shows that about 4.6 percent of holiday returns are fraudulent.

Of 60 retailers surveyed, 96.5 percent reported being ripped off by criminals who collected refunds for stolen items this year, and almost half said they’d received fake receipts. Nearly two-thirds of the retailers said customers had returned items they’d worn or used. NRF spokesmen were not available for comment. Vicky Brock, chief executive officer of Clear Returns, a Scotland-based startup that’s developing data analysis software to track and prevent retail fraud, says wear-and-return scams can be surprisingly costly. “When a product comes back covered in makeup, and it has clearly been worn, that comes out of somebody’s pocketbook,” says Brock. “You can’t just wash it and resell it as new. That stock gets shredded in most cases.”

In interviews conducted by Clear Returns with 65 shoppers, 10 percent admitted having worn and returned an item. “But when we asked them what their naughtier friends might have done, that really opened the floodgates,” Brock says. “Nearly 25 percent said they knew somebody who did this on a more regular basis. Their techniques ranged from putting plastic wrap on the bottom of shoes to choosing outfits that have labels in a nonvisible place, through to removing labels and reattaching them.” Some offenders even purposely damage items and claim they were defective upon purchase.

Clear Returns, which says it’s testing its software in partnership with three retailers, including a New York-based leisure-wear company it won’t identify, helps merchants better manage inventory by predicting which items are most likely to be returned. “When it comes to fraud, we’re trying to identify the people who do it more habitually,” Brock says. In the case of online sales, stores may disallow serial offenders from making certain purchases by declaring an item unavailable for purchase. She adds: “You might want to get to a point of certainty where you’ve predicted that it will happen 9 times out of 10, and on the 10th time, you choose to make it out of stock.”

The bottom line: Almost 5 percent of retail returns during the holidays are fraudulent. Return fraud cost merchants an estimated $8.9 billion in 2012.

Winter is a reporter for Bloomberg Businessweek in New York.

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