Dollar Scholar Asks: Why Are Store Return Policies Suddenly Getting Worse?
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This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
Have you ever heard of the Baader-Meinhof phenomenon? Technically it’s a type of cognitive bias, but it’s most simply defined as “that weird experience where you notice something one time and promptly begin noticing it everywhere, so you start believing it’s occurring more often.”
And I think I’m falling victim to it.
Last year, I tried to return a trio of ill-fitting shirts to Big Bud Press, and… the company wouldn’t take them back. It said my two-week return window had closed. I argued that was too short, as I’d been out of town, but no dice: I couldn’t even get store credit.
Then, in April, I learned of Amazon’s decision to charge customers a $1 fee if they return items to a UPS store instead of a nearby Whole Foods, Kohl’s or Amazon Fresh. By summertime, I straight-up couldn’t escape stories about America’s changing return policies — The Atlantic and the Wall Street Journal published features within days of each other — and now I’ve grown fully suspicious.
Is it the Baader-Meinhof phenomenon? Or...
Are store return policies suddenly getting worse?
I called Marie Driscoll, chartered financial analyst and managing director of luxury and retail at Coresight Research, to try to find out what’s going on. She began with a history lesson: Before the advent of online shopping, return policies were largely a sales technique. If a customer was “hemming and hawing” over whether to buy an item, she says, the retailer would dangle the option to entice them to pull the trigger.
“It just makes a consumer feel more comfortable — ‘if I think about it later and I think I made a mistake, I can return it,’” Driscoll says.
The money-back guarantee actually dates to the 1700s, when it was popularized by an English potter (who, by the way, also happened to be Charles Darwin’s grandpa). In the late 1800s, it got picked up by Sears, which would send out catalogs printed with the slogan “Satisfaction guaranteed or your money cheerfully refunded.”
In these scenarios, Driscoll points out, there was one major difference from the modern system: The customer bore the burden. If they’d ordered from a catalog, there was a shipping cost for returns; if they bought something at a store, they had to pay for the gas (or bus fare) to travel there to make the return. The fact that returns cost the customers time and money kept the ecosystem more or less in check.
Then came the internet.
Driscoll says Zappos was one of the first online retailers to offer a free 365-day return policy. It knew that convincing people to buy shoes online was going to be a hard sell because shoe sizes vary so much from brand to brand, so it built in a failsafe: “‘Don’t worry about your shoe size, buy three pairs and return two or all of them and we won’t charge you,’” she says. “That kind of behavior moved from footwear to apparel, and as it moved, the expectation has been that there's no cost to shipping.”
The rise of Amazon (which now owns Zappos) cemented this belief. The only issue? With this new industry standard, the financial burden shifted from the customer to the company.
“People buying three pairs of something and taking 45 to 90 days to return [them] — the cost for the retailer is incredible,” Driscoll says.
That was fine when they were new to the scene like Zappos in the early 2000s, and it was fine when retailers were desperate for any revenue at all during the pandemic. But time’s up now that things are returning (ha) to normal.
With a federal funds rate at 5.25-5.5%, the cost of capital is high.
“That forces accountants and CFOs and treasurers to look at their finances and look at where they can have cost efficiencies,” Driscoll adds, “and one of these places is returns.”
The numbers are staggering. In 2022, the National Retail Federation estimated that consumers returned more than $816 billion worth of merchandise.
That’s $816 billion in T-shirts and other items sitting in apartments like mine while customers deliberate. That’s $816 billion in product that’s off the floor for weeks. That’s $816 billion of stuff that, when it does get returned, is going to be out of season and can’t be sold at full price.
(Not to mention the sustainability concerns of all that packaging, as well as the extra inventory merchants need to produce to account for the items still trapped in people’s houses.)
The sheer volume and cost of returns means they’ve become a big priority for companies lately, says Jess Dankert, vice president of supply chain at Retail Industry Leaders Association. Hence the changes: JCPenney instituted an $8 flat fee for returns by mail, Banana Republic tightened its return window from 45 days to 30, Bath and Body Works put a $250 limit on returns without receipts in a 90-day period, et cetera.
It’s not just me, and it’s not the Baader-Meinhof phenomenon. This really is all happening at once.
Dankert says retailers aren’t just cracking down on returns but also searching for ways to make the whole shopping process more efficient — like by providing enough accurate sizing information up front for me to feel confident that I’m ordering jeans that will actually fit me and therefore don’t need to buy multiple pairs.
“How do you refine that purchase experience so you don't have as many returns on the back end?” she asks. “How do you maintain the integrity of that merchandise so it’s not lost entirely and you're able to resell it and get it to another consumer?”
While the industry is figuring that out, I should tread carefully. Because while stores care about their customers, they care more about their profits. These return policy adjustments are often detailed on receipts or the retailers’ websites, Driscoll says.
“You just have to read the fine print,” she adds.
The bottom line
Return policies are getting stricter because the economic environment is tough and shopping is finally recovering from the roller coaster of COVID-19. It’s important for savvy customers like me to pay attention to various stores’ rules… and get used to the changes.
“Retailers were trying to make their customers happy and make them feel safe [during the pandemic],” Driscoll says. “But now we have a new reality.”
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