With all the opportunities facing retail these days, it is easy to understand why some executives may not fully realize how much money their operations may be losing due to return fraud, one of the least dramatic and less obvious ways that fraud is committed in retail.
The “real costs of retail return fraud and warranty abuse are vastly under-reported,” says Paul Rosengard, president of Anatwine, the company behind a software platform that facilitates vendor-direct shipments and real-time inventory optimization.
“Retailers selling high-end goods want to protect their brands and their reputations for trustworthiness, and ensure a positive customer experience, so they frequently accept returns without questions,” says Rosengard, a former president of Perry Ellis.
The Appriss 2017 Consumer Returns to the Retail Industry survey, which integrated the findings of NRF’s 2017 Organized Retail Crime survey into a report analyzing retail returns, return fraud and warranty abuse, found that fraud reaches an average 7 percent when retail return abuse is measured along with refund fraud; losses due to fraud jump to an estimated $23 billion.
The cost of counterfeit returns, even at the highest range, “transcends the dollar losses because counterfeiting threatens the brand’s most important asset — its reputation for quality with consumers,” Rosengard says.
AN ‘INVISIBLE RECORD’
Primarily due to higher margins and generous return policies, losses for retailers selling high-end products are likely to be 20-30 percent higher than estimated retail averages, says Perry Everett, business development manager for Arylla, a provider of nanotechnology systems to monitor and reduce shrink.
For more than four years, Arylla has been developing an advanced nanoparticle technology system to more effectively combat retail return fraud and warranty abuse. Two high-end luxury goods brands have been testing the system in stores for two years; it is also being tested by four other high-end retailers.
While the companies aren’t yet ready to speak publicly about the tests, Everett says they are moving toward rolling out the system over the coming year.
Arylla helps retailers create an “invisible record of authenticity,” Everett says. Nanoparticles convert incident light from a camera flash into invisible fluorescent light, embedded by inkjet printers into logos or labels. Sales associates scan the embedded codes at checkout when a customer buys something or when an item is processed for shipment at a fulfillment center, creating a chain of custody.
The nanoparticle code can also be stamped onto labels; a process under development now can dye it onto a cotton thread that can be embedded in a label.
When a shopper brings back an item for a return or to be repaired or replaced under warranty, the associate uses the flash of a smartphone to find the code which, through the Arylla app, verifies that the item is authentic and was purchased in one of the retailer’s channels. The code also lets associates know if the product was stolen or purchased from another retailer.
Rosengard, who has been tracking Arylla’s evolution for more than a year and recently joined its board of advisors, describes the technology as “elegant” in its ability to address “the magnitude of the returns fraud problem.”
Before Arylla, “there was no way for a sales clerk to determine whether a customer asking for a return had purchased the item in one of its stores or from its website or even whether the item was real or counterfeit.”
One of the brands conducting Arylla tests, a high-volume outerwear brand sold with a lifetime guarantee, estimates 15 percent of the items returned under its lifetime warranty now are fake.
“This unnecessarily and unfairly damages the brand’s reputation,” Rosengard says.
Another test company, a high-end spirits brand, has uncovered diverted products in Asia with serial numbers scratched out; it’s now using the Arylla coding process and app to screenprint Arylla’s technology onto foil caps, creating a chain of custody that verifies the integrity of shipments, helping to identify where and how their products are being diverted.
Arylla gives retailers “insight where they are most vulnerable to return fraud and abuse,” Everett says. “It can take away as much as 30 to 60 percent of that fraud.”
If retailers have return fraud and abuse at just the 10 percent level, he says, “bringing that down by 1 percent for a mid-size luxury goods retailer would deliver a meaningful ROI … within a month or two of full-scale deployment.”
A MARKETING ADVANTAGE
The item-level technology is comparable in price to item-level RFID tags, but beyond its ability to go undetected or be removed by fraudsters, it does not need expensive in-store scanning towers at checkouts to read the codes. It also is long-lasting — dry cleaning, washing or high heat will not harm, erase or deteriorate the nanoparticle codes embedded in labels or brand logos.
By the end of this year, Everett says Arylla will have the capacity to produce and deploy the nano codes at full scale for the two brands they are currently testing.
Rosengard believes the technology will also work on other high-end products, “any place there is a premium product where the customer is paying for quality.”
Currently, 80 percent of the high-end brands using or expanding deployments of Arylla’s technology have both bricks-and-mortar stores and ecommerce websites, Everett says; the remaining 20 percent are purely ecommerce.
Everett says the plan throughout 2019 is to form a series of partnerships with companies who can apply the technology even though a retailer may not have a vertically integrated supply chain. The partnerships would include using people certified to authenticate products even though they are not the original manufacturers.
As the deployment of the technology heats up, Rosengard says, retailers who use it will enjoy a marketing as well as a loss reduction advantage: Brands will be able to post a notice that their products have been authenticated through advanced counterfeiting technology.
“When a brand and/or retailer can build trust with their customer, everyone wins,” he says.
In addition to the savings from reductions in return fraud for bricks-and-mortar stores, he says, “I believe that promise to customers has value in ecommerce, creating a culture of legitimacy and trust, plus it will dissuade dishonest people from trying to trade on their site.”
A two-dimensional QR barcode can be used over a “significantly large number of data points which makes it possible to cover septillion combinations of numbers, which is a thousand raised to the 22nd power,” Everett says.
“I think we could operate for decades without coming close to running out of serial numbers.”
Everett says Arylla hopes to launch a pilot with additional U.S. brands and online marketplaces sometime in 2019.
Liz Parks is a Union City, N.J.-based writer with extensive experience reporting on retail, pharmacy and technology issues.