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Returns – A Fact of Retail Life

merch_return_statIt is estimated that worldwide, $US642.6 billion worth of goods are returned every year, and in the US alone merchandise returns accounted for $US284 billion of lost sales during 2014. As many as 58% of customers return goods, so it is inevitable that retailers will have to deal with customers who wishes to return something they have either bought themselves, or have received as a gift.

This does not mean however, that the retailer should lose out. Retailers can plan their returns policy to ensure they get the maximum benefit, or at least minimize their losses, while also making sure their customers are satisfied with the returns process. In many markets, stores are not legally obliged to offer refunds if the customer has changed their mind about the product, or it is the wrong size, but only if the goods are faulty. In order to maintain a good relationship with the customer however, many will offer store credit as a goodwill gesture. The issuing of gift (merchandise) cards is an effective way of doing this.

Why issue gift cards for refunds?

Firstly, the merchant is not giving back cash that the customer might, and probably will, spend elsewhere. Giving store credit loaded on to a gift card ensures that the value of the refund can only be redeemed with the retailer issuing the card. In this scenario, the retailer’s bottom line is not adversely affected by the goods being returned because the goods, if not faulty, can be resold, and the customer will buy alternative goods of (at least) the same value.

Secondly, it is widely acknowledged that the value of a gift card is often seen by customers as a “minimum spend” threshold. Research shows that as many at 69% of gift card holders spend more than the face value of the card. In the retail industry, this is known as “uplift” – face value of the card + cash. In this scenario, the retailer does not lose the value (profit) due to the goods being returned because the value is loaded on to a gift card that can only be used in their store, and may also gain additional revenue when the shopper redeems the gift card.

Thirdly, rechargeable gift and loyalty cards are proven to improve customer engagement and encourage customer loyalty. While it is up to the retailer to make any incentives attractive, the effort put into getting a customer to come back is worthwhile. A customer who receives a gift or loyalty card is given a reason to return and take advantage of whatever incentives the retailer is offering, and will ultimately spend more money. With a cash or credit card refund, this is less likely to happen because the money can be spent anywhere.

While cash may offer the greatest flexibility in what the customer can buy, within the limitations of a retailer’s strict returns policy only limited options are allowed. A gift card is therefore preferable to a like-for-like replacement, exchange, or no return at all, because customers are given the means and time to find something they would like to buy.

Help prevent “return fraud”

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While the majority of customers have a genuine reason for returning goods and should not be regarded with suspicion for doing so, retailers must also be aware of, and be on their guard against, “return fraud”. It is estimated that around 6% of goods returns are fraudulent, equating to anywhere between $US9.1 billion and $US16 billion a year. The main aim of return fraud is to gain cash. By not offering cash refunds, retailers become a less attractive target. It is already a common practice for customers making returns without a receipt to be issued with gift cards.

In this scenario, the value of the return is not given in cash, or reimbursed to the customer’s credit card, but placed on a card that can only be spent with the issuing retailer. This deters fraudsters in the first instance, but also means that the returned value can only be redeemed with the issuing retailer, keeping the money within the organization.

One of the most common forms of return fraud is “wardrobing” or “renting” where an item of clothing, a video camera, or home-improvement tool is bought, used once for a “special occasion”, and returned within a short period of time in order to then receive a full, cash refund. This can be prevented by making certain items non-returnable, or making it a policy to only refund for store credit – loaded on to a card.