The impact of retail returns on profitability continues to pose a challenge for retailers. In 2024 alone, consumers returned $685 billion worth of products —13.21% of total retail sales—with $103 billion in lost revenue tied directly to return and claims fraud in 2024.
While returns may be viewed as a source of margin leak, they are also a cornerstone of the retail experience, where customer experience can be enhanced, losses can be minimized, and long-term revenue can be preserved if executed seamlessly. Retailers are now challenged with the balancing act of devising a product returns strategy that minimizes returns while improving working capital and generating positive cash flow.
The hidden connection between returns and retail shrink
Traditionally, retailers have viewed product shrink as a controllable issue tied to internal and external theft—more security should mean less shrink. However, shrink can also result from less visible threats, such as return fraud and return policy abuse, which are often overlooked but can significantly impact profits.
Due to a more omnichannel shopping experience, retailers are now tasked with multipronged pathways to return fraud, such as wardrobing, excessive bracketing, receipt fraud, and repeat offenders. Poorly managed return programs and reliance on policies lacking automation decrease working capital while decreasing efficiency due to increased human error, such as manual overrides and inventory discrepancies.
Retailers must take a holistic view of their return rate to inform their return programs. Instead of treating returns as just a transactional hub for customer satisfaction, they should devise retail return strategies that prevent loss and shrinkage, ultimately reducing revenue loss from product returns in a way that benefits both consumers and retailers. Given that Appriss Retail and Deloitte recently uncovered that 15% of all returns and claims are fraudulent, now is the time to shore up the drivers of shrink before rising return rates erode your stores’ bottom line.
Impact of retail returns on customer loyalty and profitability, and why traditional returns processes fall short
One-size-fits-all return policies open the door to exploitation and negatively impact customer satisfaction; 55% of consumers have decided not to buy from retailers due to restrictive return policies, while 31% stopped shopping at certain retailers due to negative return experiences. Additionally, traditional return policies conflict with the core mission of the retail employee; therefore, employees are less prone to cross-selling during the product-return process, an effective strategy Harvard Business Review recently identified for reducing revenue loss.
Without data-driven decisions, retailers struggle to identify high-risk return fraud patterns vs. customer loyalty; research has shown that the highest-spending customer segments additionally make the most returns. Thus, a strict or rigid return policy can be a source of friction for your best consumers, leading to a negative shopping experience and shopper attrition.
Smarter return programs: Improve cash flow with returns optimization
Retailers can unlock working capital that allows for greater investment back into the business to drive growth, even in the face of margin compression. Additionally, programmatic return programs can offer personalized return policies that offer unique shopping experiences for loyal customers and grow revenue by increasing the average transaction value from their now-recurring customized experiences.
Retail is omnichannel; consumers interact with brands through all of that brand’s channels. By centralizing and automating the returns process, retailers can provide consumers with a seamless and sometimes tailored returns process across all channels. The additional benefits are fewer resources invested in policy training of staff whose overall turnover rate is 60%, and a decrease in friction caused by human error by when policies are poorly executed by customer facing staff.
The profitability payoff: More than just shrink reduction
Every time a return takes place, net sales decrease. Return fraud and abuse can ripple throughout an entire business, from P&L to where the buyer engages with the brand. In the case of outright return fraud, the retailer is not only reducing net sales, they’re actually creating shrink. If an item is shoplifted and then returned for some sort of stored value to be used later, the retailer has just created shrink and lowered net sales in a single transaction.
Return policies or policies built into a rules engine that are implemented in the POS or ecommerce portal just don’t work anymore. Streamlining the returns process through real-time fraud protection by leveraging AI to deliver behavior-based recommendations provides a dynamic solution across all channels. The result? Fewer fraudulent returns, leading to lower shrink, higher net sales, and higher margins.
With effective returns, authorization comes with cleaner inventory data and better allocation planning and forecasting. Better inventory data means better replenishment, delivering better in-store conditions and customer experiences.
Finally, a central return authorization solution not only provides lower shrinkage, but also delivers enhanced customer trust and loyalty, rewarding the good and allowing those 89% of consumers to purchase more if they had a positive returns experience.
Unlock additional cash flow with smarter returns authorization
Every time a retailer allows a return, they’re buying back their inventory. In many cases, the inventory has been used or damaged, which means less valuable. With return fraud, the impact is compounded because the retailer is using cash to buy back shrink; ouch!
The ROI of retail returns fraud software begins with immediate gains to cash flow by lowering returns overall and keeping that cash where it belongs. By analyzing returns data in real-time, retailers can reduce return fraud, which hurts overall profits and cash flow. Although not as damaging, but still significant to sales, margin, and cash, the application can reduce return abuse from regular shoppers. Traditional policies are brittle, provide an inconsistent user experience, and create in-store conflict for the majority of great shoppers. Retailers should leverage AI-enabled returns fraud software that delivers a consistent experience across all channels.
Schedule time with our experts today to learn more about Appriss Retail’s groundbreaking returns management solutions. To learn more about the state of returns, check out the Appriss Retail and Deloitte report, 2024 Consumer Returns in the Retail Industry Report