Chapter 3

A Review: Customer Returns

in Fashion Retailing

Mack A. Diggins, Chen Chen and Jing Chen

Abstract Customer returns are a common practice in the retail industry. Due to the
unique characteristics of fashion retailing, including short product life cycle, high
returns rates, fraudulent returns, and low salvage value, customer returns are critical
to fashion retailers. In this paper, we briefly discuss issues related to customer
returns in fashion retailing. We then review the studies in the literature considering
the impact of customer returns policies, methods of reducing customer returns, and
management decisions related to customer returns, as these topics relate to or can be
applied to the fashion retailing industry. We finish with a discussion of future
research directions on managing customer returns in the fashion retail industry.

Keywords Customer returns Customer returns policy
Fraudulent returns




Fashion retailing Fashion market Literature review

3.1 Introduction

Returns of products from customers to retailers are a common phenomenon in the

retail industry. Some consumers return products that perform unsatisfactorily, while
others return products that function satisfactorily for other reasons, such as not
meeting expectations or tastes. Returns are growing at a significant rate; Stalk
(2006) reported that “returned goods are estimated to exceed $100 billion per year
in the United States and in many categories; the number of returns is growing at
around 50 % a year”. Customers receive either a partial or full refund for the

M.A. Diggins (&)
C. Chen
J. Chen

Rowe School of Business, Dalhousie University, 6100 University Avenue,
Halifax, NS B3H 4R2, Canada
e-mail: mack.diggins@dal.ca
C. Chen
e-mail: c.jesschen@gmail.com
J. Chen
e-mail: jchen@dal.ca

© Springer Science+Business Media Singapore 2016 31

T.-M. Choi (ed.), Analytical Modeling Research in Fashion Business,
Springer Series in Fashion Business, DOI 10.1007/978-981-10-1014-9_3
32 M.A. Diggins et al.

returned product from a retailer, according to specific returns policy articulated by

the retailer. The National Retail Federation (NRF) reported in “2014 Consumer
Returns in the Retail Industry” that total merchandise returns accounted for almost
$284 billion in lost sales for US retailers.
Toktay (2003) stated that customer return rates ranged from 5 to 9 % of sales for
most retailers. Returns rates, however, vary greatly between industries (Langley
et al. 2008), categories (Barry 2000), and distribution channels (Ofek et al. 2011).
Barry (2000) pointed out that “Not surprisingly, the category with the highest rate
of return is fashion apparel, at a whopping 25–40 %”. In comparison, business
products are rarely returned. It is easy to see that items that involve size, colour,
fashion, or that unquantifiable “it’s not me” factor, are more likely to be returned
(Barry 2000). While typical returns rates in a traditional retail channel average at
8.9 % (according to the NRF’s report, 2014), retailers in the USA report a return
rate of between 20 % and 40 % for online sales, with poor fit cited as the number
one reason (Ratcliff 2014). A recently released study by Murphy and Berns (2015)
with HRC Advisory also suggests that online returns are expensive and present an
important barrier for retailers adopting a customer-centric, omni-channel model.
Although free shipping and lenient return policies have given online retailing a
huge boost (Banjo 2013), online retailers, especially online fashion retailers, may
experience serious customer returns problems. Returns rates for online sales can be
much higher than in a brick-and-mortar channel (Kim 2013; Millar 2013). Since “fast
fashion” is one of the main characteristics of the fashion industry throughout the
world (Thompson 2013), and consumers are progressively spending more time
online, the rise of mobile and e-commerce is especially relevant in the fashion
industry (Cecilio 2015). For apparel items, return rates are around 20 % for
brick-and-mortar retailers and twice that for online sales (VandeVate and Bedir 2005;
Martinez 2009). As pointed by Banjo (2013), behind the uptick in e-commerce,
however, is a little known secret that as much as a third of all Internet sales gets
returned. European online retailers experience product returns rates of 40 % or higher
in product categories such as fashion. Mostard and Teunter (2006) stated that return
rates of certain fashion items have been estimated to be as high as 74 %.
The increase of online sales in fashion retailing creates new challenges, as
customers cannot try on clothes prior to purchase, and higher return rates result (see
Walsh et al. 2014). Customer returns is positively correlated with losses in sales, as
well as with significant costs associated with handling returned products at the
retailer. The Economist (2013) showed that handling each returned item costs an
online retailer between $6 and $18, in arranging staff, receiving, repacking, and
restoring the returned products (see also Banjo 2013). Costs are not the only
consideration; returns demand precise reverse logistics as well as excellent cus-
tomer service is needed to ensure that the customer is satisfied and will be likely to
return and shop with the same retailer (Melendez 2013).
As competition intensifies, retailers are forced to create sustainable competitive
advantages while adding value for their customers. One way to do this is through
product returns management: offering a customer returns policy and managing the
reverse logistics.
is there virtual try-on option available in
fashion brands? - SUGGESTION
3 A Review: Customer Returns in Fashion Retailing 33

The costs of reverse logistics vary. Grant et al. (2006) concluded that the cost of
moving a product back from the consumer to the producer could be as much as nine
times that of the forward flow. Each return has to be opened, diagnosed, and then
processed (Norek 2002). Furthermore, product returns may diminish current assets
because of lower inventory values of returned products, increase order cycle times
due to the reshipment of ordered items, increase short-term liabilities due to ch
required repairs and refurbishments, and reduce revenues due to lost sales (Min and ec
Ko 2008). Hewitt (2008) suggested that returns can reduce profits by 30–35 %.
k
Consequently, it has become important to predict and control the costs of product
returns by forecasting how much will be returned from which customer and why
(Foscht et al. 2013). The findings of Stuart et al. (2005) demonstrated how the da
returns process can be re-designed to reduce costs and improve order fulfilments. ta
Their research suggested that in order to make the algorithm more efficient, the
re-design needs to consider backorders earlier in the inspection stage, as well as
inventory level, net return value, lead time, and marketing patterns.
Gecker and Vigoroso (2006) stated that many companies identify the manage-
ment of product returns as the most challenging aspect of reverse logistics. Chen
and Bell (2009) pointed out that product returns represent a serious problem for
both retailers, who must process the incoming returns, and the product suppliers,
who must cope with the inventory of returned products. In addition, suppliers and
retailers must negotiate some form of agreement around how physical returns are
handled and who pays the costs of processing the returns and refunding customers.
These decisions include, among other things: what returns policy should be offered
(money-back guarantee, partial refund, or no refund), price for the product and
wholesale price, refund price for the returned product, and order quantity.
Although the issue of customer returns has attracted ongoing attention in aca-
demic studies, studies focussed on fashion retailing are very limited. This paper
examines the current literature on customer return-related decisions and practice in
the fashion retailing industry. In particular, it reviews factors and approaches that
are unique to customer returns within fashion retailing, the current state of academic
research in managing customer returns, and its applications in fashion retailing, and
finishes by suggesting some possible directions for future research.

3.2 Issues of Customer Returns in Fashion Retailing

One reason why fashion retailing faces a high returns rate is that many fashion
retailers sell fashion products through Web sales and catalogues and offer lenient
return policies. Web sales cannot provide the customers with “feel and touch”
experience of the product to determine how well the product will fit their tastes and
expectations (Ofek et al. 2011). It is difficult to judge the appropriateness of a
product by reviewing the description and displays on a Website. Fashion products
are generally categorized as high-risk purchases because of the sensory and inter-
active nature of the purchase process (Bhatnagar et al. 2000). Physical examination
34 M.A. Diggins et al.

of fashion products to assess the fabric, colour, size, design, fit, and match with
other items could be crucial for customers in their purchasing decisions (Ha and
Stoel 2004). Due to the absence of “feel and touch” experiences, ordering decisions
for fashion products are deemed to carry more risk. In order to reduce customers’
risk, retailers offer lenient return policies (Wood 2001), although there is no law that
requires any retail merchant to have a specific refund policy. Generous return
policies (“no questions asked”) result in significant customer returns rates, which
can be reduced through restrictions on returns (such as asking for the return of the
original packaging materials or requiring no visible signs of use) (Davis et al.
1998). Restrictive policies can range from offering no returns at all, to offering
shorter time limits, requiring restocking fees, requiring a receipt, or requiring the
original packaging (Kang and Johnson 2008). As pointed out by Shulman et al.
(2009) charging restocking fees can discourage customers from returning the
products.
Return policies are important in fashion retailing because they affect customer
purchase behaviours and decisions on whether or not to return the product the
customers have purchased. Fashion retailers often offer money-back guarantees or
allow refunds for any reason (“no questions asked” policy), even if the product or
service had adequately fulfilled its intended function (Che 1996; Davis et al. 1995,
1998). For instance, Zappos (an online fashion retailer specializing in selling shoes,
accessories and clothing) has proven to see results in using a lenient return policy.
Zappos proudly advertises their free delivery and returns for fashion products
purchased online. As a result, it has built and retained their customer loyalty. Its
Webpage also stresses the leniency of their returns policy by highlighting that
customers are able to return items for any reason and can even return products one
year after the product had been purchased online. If customers then decide they
want to return an item, Zappos provides customers with the ability to print the
mailing label and return the item to the nearest post office (Zappos 2015). To reduce
higher returns rates as well as fraud returns, most fashion brands provide a
full-refund policy for products in the original condition, such as in original pack-
aging, unworn, and with original labels. Some allow full refund with some
restrictions. For instance, Nike’s return policy requires, such as “must return pro-
duct within 30 days of the purchase date”, “products must be unworn, unwashed,
and in the original packaging”, and “provide a valid receipt and photo ID”.
Furthermore, when customers meet the guidelines for returning a product, if an item
is purchased in store, it must be returned at the same location (Nike 2015).
Table 3.1 summarizes consumer returns policies of some brands of fashion product.
Consequently, return policies are an aspect of marketing practice (Autry 2005),
and therefore, returns management is certainly an aspect of the value creation
process (Hjort et al. 2013). Lee (2009) pointed out fashion products purchased at
home via online shopping or catalogue shopping are much more likely to be
returned than any other types of products because such fashion products can easily
be returned and products that have been tried on or damaged are often returned.
Fashion retailing is typically characterized under the consumer goods market,
which is described by short life cycles; high volatility; low predictability; fickle
3 A Review: Customer Returns in Fashion Retailing 35

Table 3.1 Returns policies for some brands of fashion product

Laura Returns: within 14 days; exchange: after 14 days
Stylebop.com Within 14 days of purchase
Ally fashion Within 14 days of delivery
Simons 30 days for regular-priced items and 10 days for sale items; shipping fee is
non-fundable
Dynamite Within 30 days
John Lewis Within 90 days
The findings are based on our online searching of the reported consumer returns policies in these
fashion brands

consumer preferences; high impulse purchasing; and a myriad of manufacturing,

marketing, and retail alternatives (Richardson 1996; Christopher et al. 2004; Masson
et al. 2007; Fernie et al. 2010). Fashion products, along with products such as
perishables and high tech products, are initially very interesting for the customer, but
as time passes, these products become less popular (Ahangarkolaei and Zandi 2010).
Thus, when these products are returned, they have very low salvage value, and this
makes product returns management even more challenging than in other markets.
Some aspects of customer returns in the fashion industry, however, are unique.
Some customers may take advantage of generous return policies and buy mer-
chandise with the intent to return it once it has been used for a specific purpose
(Piron and Young 2001). With lenient return policies, consumers are also more
likely to commit return fraud (Bahn and Boyd 2014). As classified by Foscht et al.
(2013), this behaviour is referred to variously as a “moral hazard in consumption”
(Davis et al. 1998), “retail borrowing” (Piron and Young 2001), “deshopping”
(King 2004; King et al. 2008), or “fraudulent returning” (Zabriskie 1973; Harris
2008, 2010). Schmidt and Sturrock (1999), as well as King et al. (2007), reported
that this behaviour is a growing trend in consumer shopping behaviours. A report
from the National Retail Federation showed that return fraud and abuse is about
6.1 % of total returns in US retailing in 2014. Piron and Young (2000) found that
18 % of customers they investigated had experience of product borrowing, while a
majority (98 %) of the borrowed products were apparel items. Social need (e.g. to
attend a wedding) was the main reason for fashion product “borrowing”.
Specifically, customers who carry out product “borrowing” often return high-priced
suits or dresses immediately after they use them for special occasions (Piron and
Young 2000). Through interviews and data analysis; Harris (2008) identified ten
main factors that appear to be related to customers’ likelihood of fraudulently
returning products. The study provided insights to practitioners who routinely deal
with incidents of fraudulent returns.
Handling of the returned products becomes a serious issue in fashion retailing.
From a survey, Creutz and Larsson (2012) pointed out how the fashion industry is
faced with greater difficulties when handling the needs in the supply chain and
reverse logistics processes, since the industry is challenged with shorter life cycles
and an unpredictable market.
36 M.A. Diggins et al.

Another special case is mass customization. As innovations in production

technology and efficient operations continue apace, many products can be produced
through mass customization of production processes. As pointed out by Choi et al.
(2013) and Choi (2013), it is common that a no-refund policy will be applied to
fashion products offering customization (such as monogramming). It may be less
easy to decide what returns policy should be adopted for products created using
mass customization production processes.
Finally, in the fashion e-commerce business, a trend towards more liberalized
delivery and return conditions has become evident. This trend represents a method
of coping with competition inside the industry while simultaneously attracting new
consumers from the traditional retail chains.

3.3 Managing Customer Returns

In this section, we will review literature on managing customer returns: the impact
of returns policies, handling customer returns, and decisions in the presence of
customer returns, with a focus on fashion retailing. As we mentioned above, cus-
tomer returns-related issues have received extensive studies in the past two decades,
but few studies have focused on customer returns-related issues in fashion retailing.
We thus propose some research directions for further research.

3.3.1 The Impact of Customer Returns Policies

The core concept of marketing is to drive maximal profit by employing service

strategies to satisfy customers. Service strategies include better shopping environ-
ment and experiences (Boyaci and Gallego 2004), better product availability and
on-time delivery (Chen et al. 2008), and post-purchase services (Lele 1997; Cohen
et al. 2000). Among the variety of services provided by retailers, the ability to
accommodate customer returns of unsatisfied products represents one of the key
competitive advantages. Davis et al. (1998) analysed the return policies of 133
retailers. They showed that return policies vary with how quickly a product is
consumed, the salvage value of returned merchandise, and whether there are
opportunities to cross-sell or substitute other items when returns occur. Davis et al.
(1995) showed that fashion retailers are more likely to accept returns of “regularly
priced merchandise” than “clearance” items; this provides evidence that return
policies are more liberal when the product has a higher salvage value. Xu et al.
(2015) pointed out that in general, retailers give a short allowable return period to
products with a short life cycle, such as seasonal products and fashion products,
while give a relative long allowable return period to products, such as durable
goods.
3 A Review: Customer Returns in Fashion Retailing 37

Stalk (2006) studied a case of a fashion retailer, Baby Gap and Gap Kids, to
provide an example of the importance of providing a consumer-friendly returns
policy. His research outcome suggested that companies should look at return
policies as a way to market their brand and increase the level of customer loyalty
towards the brand. He also suggested that offering a generous and easy return policy
would attract more customers and it could be used as a strategy to gain competitive
advantage. Pralle and Stalk (2006) also explained using return policies as a mar-
keting tool to attract more customers. Petersen and Kumar (2010) analysed six-year
purchase data and concluded that a lenient return policy can encourage customers to
be more willing to make other purchases, thereby increasing the company’s rev-
enues from increased sales.
From the perspective of customers, Bahn and Boyd (2014) concluded that
implementing a restrictive return policy can be detrimental towards a customer’s
behaviour. They reasoned that potential consumers who are faced with a restrictive
return policy may experience high levels of perceived risk. Biederman (2005)
explained that online shoppers would not revisit a retailer who did not provide a
returns policy. Bonifield et al. (2010) found that there was a positive relationship
between the level of leniency of return policies and consumers’ perception of
quality in an online retailer. Desmet (2014) demonstrated how a money-back
guarantee reduces the perceived risk a consumer might feel towards a product,
implying that charging a premium price (required to cover the guarantee) signals
greater quality. Ramanathan (2011) showed that performance of e-commerce in
terms of product returns will have a significant impact on customer loyalty, which
depends on the risk characteristics of the product. For instance, a returns policy will
be of greater significant to customer loyalty. Che (1996) indicated factors to
determine when it is beneficial to offer a return policy, including a consumer’s
degree of risk adversity, whether the product is considered an experienced good and
retail price. Pei et al. (2014) empirically examined the effect of a return policy (the
degree of leniency) on a consumer’s perceived fairness of a return policy and
purchase intentions using a structural equation model (SEM).

3.3.2 Reducing Customer Returns

The second stream of research focuses on how to reduce customer returns. Barry
(2000) noticed that returns are increasing, in particular with products involving:
size, colour, and fashion style. He provided a three-step process in order to reduce
the amount of returns: measuring and analysing the causes of the returns, calcu-
lating costs associated with returns policies, and developing a strategic plan to
reduce the costs while simultaneously maintaining a high level of customer service.
Anderson et al. (2006) demonstrated how return rates can be better predicted by
understanding that retail price and return rates are positively correlated.
Furthermore, after analysing historical returns of an online fashion retailer, they
showed that customers are more likely to return products if more sizes are available,
38 M.A. Diggins et al.

but availability of more colours has potential in decreasing the likelihood of the
products being returned. (Foscht et al. 2013) found through their research that
perceived uncertainty with risk in mail orders of fashion products increases the
probability of a consumer returning a product. Online shoppers may order multiple
sizes and colours as a risk alleviation strategy, in order to have the ability to return
the products that did not match their criteria. The research also found that people in
similar demographics tend to shop similarly. Therefore, retailers can adjust a return
policy by identifying “returning groups”. Heiman et al. (2001) found that retailers
can use money-back guarantees and demonstrations to reduce non-defective
returns, in order to compensate for a lack of information and knowledge at the time
of purchase. Explaining how an online retailer can turn an unpleasant product
experience into a pleasant service experience, Ramanathan (2011) discussed how
providing an easy and hassle-free returns process will increase the customer’s
experience and trust for the retailers’ Website and increase the likelihood that the
customer will repurchase from the same online retailer. Chu et al. (1998) investi-
gated how an optimal partial refund rate (what customers pay to have the right to
return items) can be determined in order to reduce the frequency of fraudulent
returns. Hess et al. (1996) proposed using partial refunds to curb returns in online
sales.
Mass customization has become a competitive strategy that a lot of fashion
retailers have adopted. However, there are difficulties when dealing with returns and
the associated charges for these mass customization products. Hjort and Hellstrom
(2014) explained how the impact of delivery and return policies has an effect on
consumer behaviour. They showed and explained how offering free delivery and
free returns significantly increases the quantity of apparel sold. When an online
fashion retailer offers a free return policy, this tends to decrease the average value of
products being returned. Moreover, the research suggested that in order to optimize
the effects of offering a free return policy on consumer shopping behaviours, the
fashion e-commerce company must also provide a free delivery policy.
A frequent reason for apparel returns is improper fit. Online shoppers cannot try
on garments before they purchase, and this increases the likelihood of poor fit,
which increases the likelihood of customer returns. The patent developed by Rose
(1996) provided innovative software to facilitate the experience of electronic
fashion shopping. This software will help customers to choose the right fit and style
to match their body type.
Bernon et al. (2011) adopted a case study to explore supply chain integration
(SCI) practices and their implications in a retail product returns process between an
OEM and its two retailers. They found that reducing retail product returns could
significantly benefit both an OEM and its customers when appropriate SCI enabling
practices are deployed. Ferguson et al. (2006) reported on the cooperation between
manufacturers and retailers who reduced non-defective returns by training their
sales force to communicate well with customers or by improving the description of
the products. They investigated retailers’ efforts to reduce returns of non-defective
products in order to get rewards from the manufacturer (through a target rebate
contract) if returns could be lowered to a certain level.
3 A Review: Customer Returns in Fashion Retailing 39

3.3.3 Decisions Related to Customer Returns

Studies on decisions related to customer returns discuss extensively the choice of

MBGs or no-refund policies by comparing the payoffs from the two different
policies, and deciding whether or not to implement a partial refund policy with a
determination of refund prices.
Alptekinoglu and Grasas (2014) investigated how a retailer’s product assortment
decision is influenced by its associated return policy. They assumed that the retailer
selects its assortment from an exogenous set of horizontally differentiated products.
Consumers will then make a purchase and decide to keep/return based on the nested
multinomial logit fashion. They found that the optimal assortment has a distinct
structure for relatively strict return policies. Li et al. (2013) investigated the impact
of an online retailer’s return policy, product quality, and pricing strategy, and its
effects on the customer's purchasing and return decisions, by developing theoretical
models.
MBGs (or full-refund policies) are widely used in practice as customers perceive
low risk when purchasing a product with an advertised full-refund policy. MBGs
can enhance the store’s image (Davis et al. 1995), increase customers’ loyalty
(Schmidt and Kernan 1985), increase storewide profits (Schmidt and Kernan 1985),
indirectly stimulate growth in sales (Davis et al. 1995), generate customers atten-
tions (Anderson et al. 2006), reflect high product quality (Moorthy and Srinivasan
1995; Shieh 1996), reduce consumers’ perceived risk (Grewal et al. 2003; Lei et al.
2008), increase consumer satisfaction (e.g. McCollough and Gremler 2004),
enhance purchase intentions (Davis et al. 1995; Wood 2001), and help retailers
reduce costs on in-store demonstrations (Davis 1995). MBGs tend to protect cus-
tomers against product mismatch. However, offering a hassle-free full-refund policy
can impose substantial costs on retailers.
In the literature, there are two types of models to describe demand: using utility
function to derive demand and using aggregate demand assumption.
Most of the studies on MBGs have, until recently, considered a monopolistic
retailer. With survey data, Davis et al. (1998) argued that a MBG with some degree
of hassle or inconvenience is better than a partial refund policy, because it is likely
to be less negatively perceived by consumers. They assume that the consumer’s
potential value from the product is a random variable. Consumers know the dis-
tribution of the valuation, but no individual knows the exact value she will receive
until the product is bought and tested. Developing a monopoly model, they showed
that a retailer is more likely to offer a low-hassle return policy when: (1) its
products’ benefits cannot be consumed in a short period of time; (2) its product line
offers opportunities for cross-selling; and (3) it can obtain a high salvage value for
returned merchandise. Davis et al. (1995) studied a monopolistic retailer facing
risk-neutral consumers who are equally satisfied with the product but are different in
product valuation. By comparing optimal retailer profits under MBG and no MBG,
respectively, they concluded that the retailer should offer MBGs if it can handle
customer returns efficiently, that is, the salvage value of the returned product more
 40 M.A. Diggins et al.

than offsets the total transferring costs from the retailer (handling cost) and con-
sumers (cost incurred when they return the product) related to the product return.
Nizovtsev and Novshek (2004) considered a two-period problem with two types
of customers: high value and low value. Each type of customers includes some who
has a portion that will not be satisfied by the product. They showed that extending
the customer base in the second period by using a money-back guarantee can be
optimal only if a monopolist faces an uncertain distribution of buyers. Within the
second period, a money-back guarantee allows the monopolist retailer to discrim-
inate between new and repeat customers, while a pure price reduction does not.
Chen and Bell (2012) examined how customer returns policies can be used to
segment a firm’s market into a dual-channel structure, by using a returnable channel
and a non-returnable channel the retailer is able to enhance the firm’s profit by
segmenting customers using different returns policies.
In a duopoly model, McWilliams (2012) found that MBGs benefit the low-
quality retailer while hurting the high-quality retailer. Although an MBG always
benefits the monopolistic retailer, it is not necessarily beneficial to the retailer when
there is competition involved. In a competitive environment in which a manufac-
turer supplies a product to a duopoly, Chen and Grewal (2013) examined how a
new firm entering the market can use a full-refund policy or a no-refund policy as
a competitive marketing strategy to compete against an existing firm that offers
a full-refund policy. All the above studies use utility functions to derive demands.
With the assumption of aggregate demand, Chen and Bell (2009) discussed the
impact of customer returns on a firm’s pricing and ordering decision under a
newsvendor framework. They assumed that the amount of returns is a proportion of
the products sold and increases in proportion to the retail price. [These assumptions
are supported by the empirical studies of Anderson et al. (2006) and Hess and
Mayhew (1997).] Chen and Zhou (2014) investigated the loss-averse retailer’s
sugge ordering policies for perishable product with customer returns. With the segmental
stion: loss utility function, the study developed the retailer’s loss aversion decision bias
and established the loss-averse retailer’s ordering policy model. They found that
fix the
both the risk-neutral and the loss-averse retailers’ optimal order quantities depend
max on the inventory holding cost and the marginal shortage cost. Vlachos and Dekker
no. of (2003) extended the classical newsboy problem, which is to set the initial order
retuns quantity for a single-period product, to incorporate returns by assuming that cus-
per tomer returns were a fixed proportion of quantity sold.
month Several studies have shown that a partial refund can discourage customers from
- a fee returning purchased merchandise. Yan (2009) found that a partial return policy is
the best choice for a retailer when the product is compatible with online marketing.
Swinney (2011) considered the impact of returns policy on a firm’s incentives to
penalit
adopt a quick response strategy. The research identified conditions under which
y for quick response increases/decreases profit (when a partial returns policy should be
orders offered). Shulman et al. (2009) discussed how consumer purchase and return de-
above cisions are affected by a seller’s pricing and restocking fee policy. Shulman et al.
it (2010) examined the impact of reverse channel structure on the equilibrium of
partial return policy and profit of a bilateral monopoly. Shulman et al. (2011)
3 A Review: Customer Returns in Fashion Retailing 41

investigated the pricing and restocking fee decisions of two competing firms selling
horizontally differentiated products. They assumed that consumers have heteroge-
neous taste for the products. They showed that restocking fees can be sustained in a
competitive environment, but then stressed the importance of how restocking fees
are also more severe when consumers are less informed about product fit and when
consumers place a greater importance on how well products’ attributes fit with their
preferences.
A cluster of studies have also discussed supply chain coordination in the pres-
ence of a customer returns policy. Su (2009) studied the impact of full returns
policies and partial returns policies on supply chain performance, with proposed
strategies to coordinate the supply chain in the presence of consumer returns.
Ruiz-Benitez and Muriel (2014) modelled and discussed supply chain coordination
when the retailer is facing stochastic demand and an exogenously given retail price.
Huang et al. (2014) investigated the design of incentive contracts to coordinate the
supply chain in the presence of the secondary market as well as customer returns.
Liu et al. (2014) discussed the issue of supply chain coordination when the refund
amount is a decision variable. Their findings indicated that a buyback policy cannot
achieve supply chain coordination. Since handling customer returns is part of
reverse supply chain, some studies extended to examine the buyback contract
between the product suppliers and retailers when the retailers face customer returns.
Chen and Bell (2011) used a buyback policy with two buyback prices to coordinate
a supply chain when the retailer faces both price-dependent demand uncertainty and
customer returns. The retailer implements a full-refund policy. Su (2009) consid-
ered a supply chain consisting a manufacturer and a supply chain in which the
retailer implements a partial returns policy. He showed that a buyback policy can
enhance the supply chain efficiency. Yoo et al. (2015) discussed how the retailer
should set price and customer returns policies when the Stackelberg manufacturer
offers a buyback policy.
There have been few studies on customer returns with a sole focus on the fashion
retailing industry. The research of Choi et al. (2013) is unique as it provides insight
for mass customization retailers on making strategic decisions when deciding to
offer no-refund or full-refund policies. Considering that mass customization
(MC) fashion products usually cannot be returned, Choi et al. (2013) developed a
model of stochastic fashion MC program with the consideration of consumer
demand uncertainty. By modelling the optimization objective of a risk-averse MC
fashion brand via a mean-variance approach, they identified the conditions under
which a full-refund or a no-refund policy should be implemented. The numerical
analysis in their research showed that whether the risk-averse MC fashion brand
prefers to offer consumer returns with a full-refund policy or a no-return policy
depends heavily on the demand-return correlation (DRC) parameter. Choi (2013)
examined the optimal return service charge policy (a partial refund policy) by
studying both risk-neutral and risk-averse MC companies. He revealed how the MC
service provider’s level of risk aversion affects the optimal return service charge
policy. He also obtained the conditions under which it is optimal for some fashion
companies to offer a zero-return service charge (free return with a full refund).
 42 M.A. Diggins et al.

Hjort et al. (2013) empirically tested whether a “one-size-fits-all” strategy fits the
fashion e-commerce business and evaluated whether consumer returns are a central
aspect of the creation of profitability. They found that the segmentation of cus-
tomers on the basis of both sales and return patterns can facilitate a differentiated
service delivery approach.

3.4 Future Research Directions

As discussed above, fashion retailing is similar to other sectors of the retail industry
in terms of customer returns-related issues, but it has some unique characteristics,
including a high returns rate, short life cycle, fraudulent returns, and no allowance
of returns for customized products. As pointed out in the literature review section,
there are a very limited number of studies on customer returns management that
sugges focus on fashion retailing, but the implications and managerial insights from other
tion: returns-related studies can apply in fashion retailing. This section will identify some
cloths research gaps and opportunities which have been understudied in customer returns
retune management, especially for fashion retailing.
In fashion retailing, future research directions could focus on the following:
d due
reducing amounts of customer returns, especially fraudulent returns; efficiently
to managing customer returns, including the attempt to salvage-returned products and
daman provide customer returns policies that work in favour of fashion retailing.
ge can There have been only very limited studies on customer behaviour in returning
be fashion products. The rapid advances in information technology and consumer
upcycl analytics, however, allow retailers to collect and process large amounts of customer
ed. data (Acquisti and Varian 2005; Aydin and Ziya 2009) and more accurately gauge a
customer’s preference for products, returns behaviour, and willingness to pay
(Wertenbroch and Skiera 2002). This provides opportunities for research on cus-
tomer returns management. One research direction would be to find the correct size,
colour, and style of fashion product for the customer, which could save the retailer
and the customer from unnecessary trial and error through collect big data and
business analytics techniques. As a result, the fashion retailing industry can sig-
nificantly reduce customer returns. In addition, with the knowledge of customers’
willingness to pay, the fashion retailer may be able to provide a menu that displays
different prices with associated refund prices to customers. Development of an
optimal menu could be a useful direction for future research.
Return fraud is a serious issue in the field of returns in the apparel industry.
While there is no concise definition of return fraud, it can be said to include stealing
merchandise from the sales floor and returning it, employees keeping receipts from
previous sales and using them to process a refund later, copying and altering
receipts, and merchandise borrowing (Kang and Johnson 2008). Return fraud is
leading in many organizations to enact more restrictive returns policies. Kang and
Johnson (2008) found that nearly 95 % of retailers were affected by consumers
returning stolen merchandise for a refund, which costs retailers $16 billion and
3 A Review: Customer Returns in Fashion Retailing 43

accounts for approximately 9 % of total returns a year. Evidence shows that con-
sumers often exploit retailers’ generous returns policies. In a study conducted by
Rosenbaum and Kuntze (2005), nearly 20 % of consumers were found buying
products with the specific intention of returning them after satisfaction was
achieved, while nearly 18 % of all shoppers participate in some type of return fraud
(Piron and Young 2000). Several US-based retailers, including Guess, Sports
Authority, and Limited, have implemented shopper-tracking technology called
“Verify” to detect abnormal return behaviours and allow retailers to reject returns
that fail to meet certain criteria (Kang and Johnson 2008). Future research could
consider methods and approaches for identifying fraudulent returns by studying
customers’ purchasing and returning behaviour.
Numerous studies have examined the existence of different types of returners:
heavy returners, medium returners, light returners, and occasional returners (Foscht
et al. 2013). Studies often focus on how to discourage fraudulent returns and fail to
explore the consumer behaviour side. As such, further research could be conducted
to examine how consumer satisfaction, dissatisfaction, and/or loyalty affect the
quantity and frequency of product returns (Kim and Wansink 2012). Future
research could also look into the consequences of return behaviour and whether it
crosses product categories and purchase channels.
While there have been studies on how different degrees of return policy leniency
affects various types of retailers, there is a lack in-depth analysis on how marketing
mix variables affect retailers’ policies. It would thus be interesting to study the
interactive dynamics of retailers’ return policies and other marketing mix variables
(Kim and Wansink 2012) to isolate the effect of each marketing mix variable. For
example, will price interact with return policy leniency to make certain products
more likely to be chosen by consumers (Bahn and Boyd 2014)?

3.5 Conclusion

Product returns is an unavoidable aspect of any business that wishes to sell products
to consumers and should thus be embraced by businesses to take advantage of the
opportunities presented by product returns. With higher returns rates, serious
fraudulent returns, and the short life cycle of fashion products, efficiently managing
customer returns are crucial to the fashion retailing industry. With current tech-
nology and the hypercompetitive market, it becomes even more important to have
outstanding returns policies that can satisfy consumers, because consumers’ pur-
chasing and returning decisions highly depends on return policies offered by re-
tailers. Also, customers evaluate the product according to the advertised returns
policy (Moorthy and Srinivasan 1995). Retailers can use their returns policies to
better attract and retain consumers in an effort to develop long-term consumer
loyalty. To do so, it is important for retailers to keep in mind the various factors that
may influence consumers’ evaluation of their returns policies and their effects on
shopping behaviours. At the same time, it is important to minimize costs created by
44 M.A. Diggins et al.

heavy returners or consumers that take advantage of lenient returns policies.

Ultimately, retailers must walk a fine line between providing a satisfactory returns
policy to consumers to attract and retain them, while ensuring that their returns
policy does not negatively impact their profitability.
As discussed in this paper, there is a need for more research regarding customer
return management, especially in the fashion industry, since academics and retail
companies are beginning to understand that customer returns should no longer be
looked at as a burden. Rather customer returns should be looked at for unexplored
opportunities and improvements so that the topic can get a new positive status for
customers, academics, and retailers.

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