Understanding Target’s New Return Policy

Target Corp (NYSE: TGT) has raised the stakes in the retail wars by giving customers up to one year to return some merchandise. That is in stark contrast to the normal return period in the retail industry, which is around 90 days, Time reported.

The idea here is clearly to differentiate Target from the majority of retailers. Data collected by ConsumerWorld.org shows that most retailers’ return policies in 2014 remained the same as in 2013. ConsumerWorld’s 2014 survey of return policies found that some retailers had added a few days to their return window but not a year.

News stories indicate that a few retailers, such as Bed, Bath & Beyond (NASDAQ: BBY), are tightening their return policies in an effort to limit abuse. Bed, Bath & Beyond currently offers an indefinite return period for customers with no receipt willing to accept store credit. Starting April 20, it will only give customers with no receipt an amount of store credit equal to 80% of the item’s price.

Target Tries to Keep Up with Amazon and Costco

Target is also hoping to duplicate the success of Amazon.com Inc. (NASDAQ: AMZN) subsidiary Zappos.com, which offers customers a 365-day return window. Zappos even gives customers free shipping on qualified returns. Ease of returns is one of the attributes that has lured clothing shoppers away from brick and mortar retailers.

Between December 2013 and December 2014 Amazon’s TTM revenue grew by $14.54 billion, rising from $74.45 billion to $88.99 billion. Between January 2014 and January 2015 Target’s TTM revenue grew by $1.34 billion, rising from $71.28 billion to $71.62 billion. Target’s quarterly year to year TTM revenue growth rate was 1.15%, while Amazon’s was 14.62%.

Target’s return policy is also designed to counter Costco Wholesale (NASDAQ: COST), which offers an unlimited return window for everything but electronics. Costco has a standard 90-day return limit on electronics. Such generosity seems to have paid off; Costco’s TTM revenues increased by $7.75 billion between February 2014 and February 2015, rising from $107.89 billion to $115.64 billion. That gave Costco a quarterly year to year TTM revenue growth rate of 4.36%.

By liberalizing its returns policy, Target is trying to catch up to some of the most successful retailers. The company is also attempting to reestablish its reputation as a cutting edge retailer that offers a high level of customer service.

Target Is Not Taking a Big Risk with Return Policy

Naturally, investors are asking, how big a risk is Target taking with the new return policy? The answer is not as great a risk as you might think.

The available numbers indicate that the value of merchandise returned is tiny when compared to overall retail sales. Forrester Research analyst Sucharita Mulpuru estimated the cost of returns to U.S. merchants in 2013 at $20 billion. The value of American retail sales for the month of February 2015 was $437 billion, according to the U.S. Census Bureau.

Benefits from Returns

The amount and value of goods that actually get returned is small, and the losses from returns are not necessarily that great. Returns also generate some benefits for retailers that often get overlooked:

• Returns generate goodwill by demonstrating that the retailer trusts the customer and is willing to take a risk for her.

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• The possibility of a return takes the fear out of making a purchase because the customer knows he or she can return the item.

 

• Returns serve as a loss leader. People who come to Target to return something are likely to buy something else while there.

 

• Monitoring returns can provide retailers with a great deal of valuable data about customer behavior. For example, they can be used to identify problems with merchandise and patterns of behavior that indicate fraud.

 

It must be also be remembered that Target’s return policy is still fairly restrictive. The 365-day return window is only available for Target’s house brand items purchased through its gift registries.

The brand name goods at Target are still subject to the 90-day policy, although holders of Target’s RED cards get an extra 30 days to return stuff, making an effective 120-day return window. The extra 30 days can be added to the 365 days, giving RED card holders an effective return window of 395 days.

Target might also have technology that its management team believes could limit return abuse. ConsumerWorld reported that Walmart’s cash registers are programmed to “flag” customers that make more than three returns without receipts within 45 days. Under Walmart’s system, a manager’s approval is needed for returns by flagged customers. There is a strong possibility Target has such a system in place.

The risk Target is taking is not that great, and it is giving its customers a stronger incentive to buy its more profitable house brands. Target’s return policy is a shrewd move because the potential gains outweigh the risks.