Loss Prevention, Auditing & Safety Conference 2009 Title Sponsor:

Unlocking the Value of Returns

Speaker Panel  Dr. Read Hayes – Director, Loss Prevention Research Council  Libby Rabun – Vice President, Loss Prevention, AutoZone  Kevin Darnell – Director, Loss Prevention, Brown Shoe  Mark Hilinski – EVP, Strategic Accounts, The Retail Equation

Interactive Question Placeholder Q1: What retail segment are you? 1.Large format/ Discount/Department 2.Grocery/Drug 3.Home Center/Hardware 4.Specialty/Apparel 5.Other Q2: What is your return rate percentage? Unknown

Presentation of Return Fraud/Abuse Survey Findings Dr. Read Hayes – Director, Loss Prevention Research Council

Customer Returns In The Retail Industry  Conducted on 2007 data and released in 2008  Survey Objectives  Identify retail industry return rates including: total returns, receipted returns, non-receipted returns, and the various forms of fraudulent and abusive returns as identified by the retailers.  Identify current practices in the retail industry for processing customer returns.  Identify issues related to customer returns that are common among retailers.  Share the results of the survey with the retail industry as a whole.

Key Finding  $15.5 billion annual return fraud and abuse problem

Key Metrics: Survey Averages  Return rate: 7.32%  Return Fraud/Abuse percentage: 8.23%  Percent returns non-receipted: 14%  Calculation: $2.581 trillion total retail sales * 7.32% total return rate $188.9 billion total returns * 8.23% fraudulent return rate $15.5 billion return fraud and abuse

Demographics

Segment Specific Results

Findings: Importance  70% of the respondents indicated that return fraud is an important issue to their company.  The majority of retailers (64%) report that focusing on reducing refund fraud is a high priority.  Almost half of the respondents believe they have the opportunity to achieve return fraud reductions of more than 30%.  Two-thirds of retailers believe that their current return policies and systems are “ineffective” or only “somewhat” effective in deterring return fraud/abuse.

Findings: Receipts  The majority of retailers’ current processes and systems for reducing return fraud continue to focus on non-receipted rather than receipted return transactions.  But, well over half of those surveyed have found forged receipts used in committing return fraud.  This may indicate a trend and closer attention should be paid to the vulnerability of receipted returns.

Industry Trends  Fraudulent and abusive returns are a persistent problem that will likely get worse in this economy  Across the board return policy changes affect good customers as well as problem shoppers  Intelligent solutions are available

Interactive Question Placeholder Q3: Have you recently changed your return policy in order to address return fraud? 1.Yes, it’s changed 2.Planning to change 3.No 4.Unknown Q4: With state of the economy, have you observed incidents of return abuse and fraud… 1.Increase 2.Decrease 3.Remain unchanged

How AutoZone is Addressing Return Fraud and Generating Real Results Libby Rabun – Vice President, Loss Prevention, AutoZone

At AutoZone, our philosophy is… “Always put Customers First!” Before:  Previous policy provided very limited scrutiny and controls  No ID  No receipt required  Warranty data base acts as receipt  Stated a 90 day return policy with little adherence AutoZone – Returns Management

At AutoZone, our philosophy is… “Always put Customers First!” During (how did we convince our operations partners):  Small pilot program  Delivered proof of concept and initial ROI  Internal IT solution with full system integration  Consistent, deliberate communication & training plan  Training, signage, brochures  Gained and utilized field operators feedback  Continuous analysis  Proof is in the numbers AutoZone – Returns Management

At AutoZone, our philosophy is… “Always put Customers First!” After:  Our philosophy does not change  New program began with clearly stated goals:  Reduce overall return rate through  Reduced internal related fraud and abuse  Reduced external related fraud and abuse  Increase net sales  Increase Store Manager satisfaction  Ensure consistent following of written returns policies AutoZone – Returns Management

At AutoZone, our philosophy is… “Always put Customers First!” After:  We now:  Reserve the right to limit a return regardless of receipt  Ask for ID  Ask for receipt  Still use transaction file and warranty data base  Use third party to review authorization requests and respond with approval, warning, or denial response AutoZone – Returns Management

Control versus Program Stores Control stores: Returns Ratebps.Rate Reduction % % Program Stores: Returns Ratebps.Rate Reduction % % AutoZone – Returns Management

Customers’ Responses to AutoZone's Overall Return Policies & Ease of Returning **All KPIs remained flat or showed improvement

The best is yet to come!  Override percentages began at mid 90’s  Majority of stores on program for less than 9 months  Currently at 43% override percentage  Weekly KPI reporting  On-going communication plan  Continuous ROI analysis AutoZone – Returns Management

 Quotes from SVP-Stores AutoZone – Returns Management

Interactive Question Placeholder Q5: Is reducing return rate on your current initiative list? 1.Yes 2.No 3.Unknown Q6: Have you performed an analysis to see if high returns correlate to high shrink? 1.Yes 2.No 3.Unknown

Example of Return Fraud Solutions in Action Kevin Darnell – Director, Loss Prevention, Brown Shoe

Return Authorization at Brown Shoe  2006 Rollout  Information captured  ID  Name  Phone Number  Address  Reports  Compliance Reports  Internal/External

External Fraud 49 Total Returns Returns at 6 different stores $2,328 in returns

Internal Fraud – Our Challenge  Tie the Return Data with Exception Reporting  Write Exceptions with in the Software:  No ID Swipe  No ID Entered  Different Name / Same Address  Same Name / Different Address  Refund % to Sale by Cashier

Video Overview  The subject “Jason” had been with the company for 6 weeks (3 weeks running the register)  The 3 weeks he was working the refund % to sale went from 8% to 30%  89% of all refunds did not have the required Return Information (No ID Swiped or Entered)  50% of the information that was entered was fictitious  After the interview “Jason” agreed to make a post interview video to be used for awareness orientation for new managers and the Loss Prevention industry

Make The Right Choice (Play video)

Interactive Question Placeholder Q7: What is the leading factor keeping you from implementing a return authorization solution? 1.Cost 2.Customer Service 3.Store Operations changes required 4.Too many other projects 5.Other

Possible Solutions to Address Return Fraud and Abuse Mark Hilinski – EVP, Strategic Accounts, The Retail Equation

Solutions  From the LPRC survey:  Retailers continue to use a variety of methods, both manual and automated, in order to identify “bad returners” and stop the attempted return transaction.  Tools employed include: policy changes, abuser lists, exception reports, real-time fraud detection systems, pos receipt validation, video analysis, and more.

Recommendations  Ask for an ROI. Reducing fraudulent returns is a measurable action and should come with a documented ROI.  Think twice before you let a restrictive return policy impact your good customers.  Fraud occurs in both receipted and non-receipted returns.  Do your research yourself; other functional areas do not always think like a loss prevention expert when selecting solutions.

Questions?