Tackling Fraud

How Apparel Sellers Can Preserve Profit Margins

If online retail were an Olympic sport, the apparel sector would definitely rank on the high end when it comes to degree of difficulty.

All ecommerce is hard, especially in an era of rapidly progressing technology and steadily increasing expectations among consumers. But those who sell clothes and accessories face challenges that don’t necessarily apply to other retail categories.  

Fashion is fickle. What’s hot one week, might not sell the next. Online apparel comes with a high return rate, as shoppers order several sizes or styles of an item, meaning to keep only one and return those that aren’t exactly what they wanted. That in part explains why the National Retail Federation says the return rate for all online retail is 12 percent, while the return rate for apparel is 30 percent, according to a University of California, Berkeley study.

And like other retail sectors, apparel is something of its own worst enemy, seeking to remain competitive by slashing prices constantly while watching their thin margins become thinner.

While consumers now expect discount pricing, cutting costs has become harder for retailers, a report by McKinsey & Co. and the Business of Fashion concluded, explaining that companies have done what they can to find cheaper goods.

“So far in 2016, off-price shoppers account for 75 percent of apparel purchases across all channels,” the McKinsey report reads, “and some traditional retailers now have more outlet and discount stores than full-price shops.”

All of which is to say that a number of apparel retailers are in peril. As Moody’s analyst Charlie O’Shea told Bloomberg for a story that focused on clothes and accessory sellers: “There’s room for a lot of shakeout.”

And while systemic problems often require a menu of solutions, a June 2017 commissioned study by Forrester Consulting conducted on behalf of Signifyd might show the way apparel sellers can start moving in the right direction. Forrester’s “The Total Economic ImpactTM of Guaranteed Fraud Protection(1),” points out how a major online retailer saved millions by focusing on the problem of fraud. 

The study concluded that the retailer added $5.6 million to its bottom line over three years by increasing the numbers of orders it shipped, reducing fraud costs and chargebacks and streamlining its fraud and order-filling operations through automation.

In all, the study concluded, the move to Signifyd, resulted in a 3.8x return on investment.

Millions of dollars and an ROI approaching four times the investment seems like a pretty good plan for an industry sector that has been suffering squeezed margins for years. To see just how good a plan, let’s dig into apparel’s fraud problem.

The apparel market is huge, making up 12.4 percent of ecommerce sales, second only to department stores (which are major sellers of apparel) at 19.1 percent, according to the Global Fraud Index Q1, produced by Signifyd and PYMNTS.com. Apparel was a $2.4 trillion market worldwide in 2016, according to McKinsey & Co. “The State of Fashion 2017,” produced with Business of Fashion. 

Along with being among the revenue leaders, apparel is also among the leaders in fraud with 8.89 percent of its orders deemed fraudulent, according to the fraud index. That’s second only to jewelry with its 13.27 percent rate. Now, consider that Signifyd and PYMNTS found that fraud accounted for $48.2 billion in the first quarter of 2017.

While it isn’t a precise measure, because not every company would see the same results as the Signifyd customer in the Forrester study, if you apply math and logic to the numbers provided by McKinsey, Signifyd and PYMNTS, you could reasonably argue that apparel retailers are leaving $234.5 billion on the table due to fraud.

That doesn’t add in the revenue apparel retailers are missing out on when they decline to ship legitimate orders that they incorrectly fear are fraudulent. The Forrester study found that that figure was actually higher than the cost of fraud itself. Using the figures in the Forrester and McKinsey studies, you could assume that apparel retailers are costing themselves another $277.9 billion in declined orders that could have been safely shipped.

Grand total? $512.4 billion. Not bad place to look for margin in a margin-stressed industry.

Signifyd customer Tuckernuck saw the profit in tackling its fraud issues more than a year ago. The Washington D.C.-based seller of all-American styled apparel was seeing thousands of dollars a month in chargebacks before turning to Signifyd’s Guaranteed Fraud Protection, which provides 100 percent financial guarantee on all approved orders. 

“None of us were trained (in identifying online fraud) but we were finding out as we went, which is, unfortunately, all we had to rely on,” Tuckernuck Operations Manager Emily Hayes said. “We would sort of teach ourselves as we go. We’re a small and scrappy team but we just kind of relied on our gut, and research that we did among and about how to identify fraud.”  

After turning their fraud reviews over to Signifyd, Tuckernuck increased the number of orders it shipped by 6 percent; and they paid no chargebacks.

Tuckernuck’s story provides hope for the apparel industry, one which, according to McKinsey’s research saw its slowest growth in 2016 since the Great Recession. On top of that, 67 percent of retail industry professionals polled by McKinsey said business conditions were worse in 2016 than they were in 2015.

Still, the same poll indicated that apparel industry professionals are determined to improve in 2017 and beyond.

Much of that improvement will come through embracing technology and especially finding digital solutions to challenges on the back end of ecommerce — order-filling, fraud protection, picking, packing, shipping, customer support and the like — according to McKinsey’s polling.

That does seem like a fertile field to hold or build up margin, given that much of the attention in ecommerce has been focused on the marketing and merchandising it takes to get a customer to buy. If the same attention is paid to what happens after a customer clicks on the buy button, retailers should find ways to do things more efficiently and cheaper.

Reining in fraud might be just the place to start.

(1) Note that the Forrester TEI study was based on one real customer and wasn’t intended to represent a statistically significant sample size.

Mike Cassidy is Signifyd’s lead storyteller. Contact him at mike.cassidy@signifyd.com; follow him on Twitter at @mikecassidy.

Mike Cassidy

Mike is lead storyteller at Signifyd. A former journalist and a retail geek, he covers ecommerce and the way technology is transforming digital commerce. Contact him at mike.cassidy@signifyd.com; follow him on Twitter at @mikecassidy.

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