SAMS CLUB

Nandy, Sayantani & Beach,

Abstract
Adrian
Isenberg
School
of Management
Businessand
Intelligence
Analytics
A brief discussion
on retail
return
fraud, the methods
possible&means
of
prevention and detection.

Retail Return Fraud Analysis

Retail Return Fraud Background

Retail return fraud is the manipulation of the return process to defraud or gain some
unearned or undeserved benefit, by the perpetrator, from a retail store, most often
in the form of money or merchandise. There are many known schemes and
variations of schemes that are practiced. Most of these schemes take advantage of
the retailers competitive need to be able to accept returns at many different store
locations, via the internet or brick & mortar, on demand and often without proof of
purchase. The National Retail Federation, NRF, estimates that retail return fraud,
including friendly fraud, is up approximately 20% from 2013 to approximately
$17.6B in 2014.
The retail industry experiences a significant fraud and abuse problem, losing money
in the range of $9.6 to $14.8 billion per year, according to studies conducted by the
National Retail Federation (NRF) and the Loss Prevention Research Council. A certain
percentage of returned merchandise must be marked down or discarded in order to
sell the product. After being returned, out-of-season clothing may have to be placed
on the sale rack, for example. Or retailers may be forced to discard returned lingerie
for health reasons. The retail company also incurs restocking time from returns,
which could be time an associate spends driving new sales revenue by assisting
customers. The problem has historically caused retailers to raise prices for shoppers
in order to offset and recover the losses incurred from fraudulent returns.
Alternatively, many stores have created stricter return policies such as no receipt,
no return or imposed return time restrictions such as a 30-day limit on all returns
that impact all shoppers. Many honest customers dont like the changes, which they
view as a sign of a retailers mistrust. Since theres no shortage of competitors,
chains often are reluctant to press the issue. Its a delicate balance of loss
prevention and good customer service, and the relationship has to be handled with
appropriate finesse.

Customer driven Retail Return Fraud:

1) Wardrobing/Renting: Buying merchandise for short-term use with
intent to return, such as video cameras for weddings, big-screen TVs
for a Super Bowl game or a dress for a special occasion.
2) Price Switching/Price Arbitrage: Putting lower priced tags on
merchandise with intent to return for full retail price. For example,
when a customer buys differently priced, similar-looking items and
returns the cheaper one as the expensive item.
3) Receipt Fraud: Using falsified, stolen, or reused receipts to return
merchandise. When a customer procures a used or stolen receipt (or a
modified e-receipt) and uses it for return.
4) Cross-Retailer Return: Buying sale items at one retailer for a
discounted price and returning at another retailer at full retail priceeither for store credit or cash.

5) Returning Stolen Merchandising: Shoplifting with intent to return

for full retail price. This is the most common retail return fraud when
customers steal merchandise and return at full price without receipts.

Employee driven Retail Return Fraud:

1) Employee theft and return: When an employee steals items from
the floor and returns them at a later time under a fictitious name or
has a friend return them at a later time.
2) Employee Receipt Fraud: When an employee keeps or recreates a
receipt from a legitimate sale, then processes a fake return at a later
time undetected. In this case the items do not get physically returned
but a return transaction is recorded.
3) Employee collusion: Returning stolen goods assisted by employees
for full retail price. In this case the customer returns stolen goods but
assisted by employees.
4) Discount Abuse: Result of inadequate employee purchase system
that doesn't properly monitor employee purchases. Employee
purchases products at employee discount rates but return the items at
full retail price (self or through a friend, without receipt).
5) Lowest price return scam: When a customer returns an item
without a receipt, the employee indicates to the customer that they
cannot give credit for the full price of the item, they can only provide a
return for the lowest price sale that has happened in the past for that
item. They ring the return for the full amount, provide a portion (the
lower amount indicated) to the customer and pocket the difference.
Analytical Review Procedure:

Scheme
Wardrobing/
renting:

Preventative/Detection
Method - Common

Preventative/Detection
Method - Unique

Customer Driven
1. Customer profiling: Can we
1. How many items are returned
identify a customer who is a
within 3 days & 3-7 days of
frequent returner?
merchandise that are not faulty or
damaged? (3, 7 are example
numbers)
2. What is the price of the
2

returned item? (high value versus

low value returns)

Price
switching/Pr
ice
Arbitrage:
Receipt
fraud:

Cross
Retailer
Return:

Returning
stolen
merchandis
e:

Employee
theft and
return:

1. Customer profiling: Can we

identify a customer who is a
frequent returner?

1. How many lower price or sale

items are in inventory that have
higher volumes on hand than are
showing in stock?
2. Which items were sold at the
lower or sales price?
1. Customer profiling: Can we
1. Do we have a volume of same
identify a customer who is a
item being returned, without any
frequent returner?
sort of identified manufacture or
shipping damage?
2. Is there an identified pattern in
the reasons of returns for specific
items that have a volume of
returns?
1. Customer profiling: Can we
1. Is the sales transaction of the
identify a customer who is a
item recorded in the system?
frequent returner?
2. How many returns are without
receipts?
3. How many items are returned
on an average which do not
belong to the store?
1. Customer profiling: Can we
1. What is the shrinkage rate for
identify a customer who is a
specific items being returned?
frequent returner?
2. How many returns are with
unmarked receipts (checked by
Sam's Club employee as customer
leaves store)?
Employee Driven
1. Employee profiling: Can we
1. How many customer names (in
identify an employee who is
return records) looks fake (text
registering frequent returns?
mine for names of customers)?
2. What is the shift time for
2. How many returns are from
high returns (is there a
non-members or one-time
relationship between an
customers?
employee and a specific shift
time associated with high
returns)?

Employee
Receipt
Fraud:

1. Employee profiling: Can we

identify an employee who is
registering frequent returns?
2. What is the shift time for
high returns (is there a
relationship between an
employee and a specific shift
time associated with high
returns)?
1. Employee profiling: Can we
identify an employee who is
registering frequent returns?

1. Do we have more return

transactions than actual returned
items in inventory than what we
should?
2. Is there a cluster of returns
during certain shifts? If so, which
employees work these shifts?

Discount
Abuse:

1. Employee profiling: Can we

identify an employee who is
registering frequent returns?

1. Which employees are returning

high value items frequently under
their name in full price?
2. Does the employee identify
themselves as an employee when
returning the goods?
3. Are the returns for employees
happening at stores that they do
not work at?

Lowest
price return
scam:

1. Employee profiling: Can we

identify an employee who is
registering frequent returns?
2. What is the shift time for
high returns (is there a
relationship between an
employee and a specific shift
time associated with high
returns)?

Employee
collusion:

3. Does the employee return

items at a different store than the
one they work at?

Bibliography
Grannis, K. (2014, December 1). 2014 Consumer Returns in the Retail Industry,
Annual Survey. Retrieved November 10, 2015.