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Software Firm Gets Return on Returns

Remember when they started asking for ID to return a shirt at your favorite store?

You can thank The Retail Equation Inc. for that.

The Irvine-based software-as-a-service company, whose products major retailers use to authorize merchandise returns, is about to become sharper.

It plans to beef up its product line with crime data from Louisville, Ky.-based Appriss Inc.—its new parent company—for added consumer and employee insights.

“An example would be someone who was arrested for shoplifting at Nordstrom over the weekend but is working at Target as a cashier,” said Retail Equation Chief Executive Mark Hammond. “That would be important information for Target to know.”

Appriss, backed by Insight Venture Partners in New York, sets up databases and notification systems for public safety, government and healthcare organizations. Its services include nationwide booking-records searches, offender custody status notifications, vehicle crash reports and prescription drug monitoring.

Appriss is currently pursuing a strategy that calls for it to acquire about half a dozen companies in the $4 million-to-$30 million range on annual revenue, according to Louisville Business First.

“We’re well beyond that range,” said Hammond, who declined to provide other financial details for the deal that was announced last month.

Appriss has some 450 employees, while the Retail Equation’s Irvine team has about 50.

How It Works

The Retail Equation started in 1999 with backing from La Jolla-based Enterprise Partners Venture Capital. It carved a niche as a specialist in retail returns and was acquired in 2011 by Silicon Valley-based Norwest Venture Partners.

The company’s products focus on nongrocery companies, Hammond said, as they have higher return rates, with a client list that includes Home Depot, Best Buy, AutoZone and Victoria’s Secret, among others.

Its software provides store clerks with return histories on shoppers at a given retailer—item, price, frequency, and whether they typically present a receipt.

“The core functionality is an authorization system,” Hammond said. “When you do a product return—very similar to a purchase on a credit card—we make sure that it’s not a stolen product that’s being returned to get (cash) or someone that’s abusing the system by buying a dress and tucking the tag in and wearing the dress and returning it every weekend.”

The Retail Equation’s statisticians and Ph.D.s create algorithms and various other mathematical models to determine the normal range of returns for retailers. The various equations analyze data and a shopper’s circumstances in real time to identify any spikes or other outliers that might indicate fraud.

Variables

The system uses the data and predictive analytics to look at a myriad of variables that are hard to notice on an individual basis, he said.

“It could be based on product, or that you are returning five minutes before the store closes on Thursdays; and we know that a lot of organized crime likes to return product at that point in time,” he said. “They try to force the issue [so that a sales clerk breaks store policy], especially if there is no one else in the store. Just imagine, you’re looking at very [large men] in front of you, and you are an 18-year-old girl and you just want to close the store and go home. You’re probably not going to follow policy because you get nervous and you’ll just process (the return).”

Thieves sometimes take product out of a warehouse and then return it to a store, or steal at one store and return merchandise at another location a few miles away, he said, adding “it’s easier for them to return it and try to get to that cash, than it is to sell on eBay. It’s a lot faster, too, because you get 100% of the value plus the sales tax.”

Retail Equation’s software recognizes such patterns and will not authorize the transaction.

“We take the problem out of the store,” he said. “Just like if your credit card was denied, you don’t talk to (the) retailer about why your credit card didn’t process, you talk to MasterCard, Visa or American Express. Same thing with us—when that return is denied, they call us, and so we take that problem away from the retailer; so that clerk does not have to deal with that issue.”

Statistics

Merchandise returns accounted for $284 billion last year, according to the National Retail Federation. That’s about 8.9% of $3.2 trillion in total sales, not including restaurant and autos.

Return fraud accounted for 3.8% of total returns last year, or about $10.8 billion. Estimates put the total in a range of $1.4 billion to $2.2 billion in California.

Most shoppers do not abuse the system, and Retail Equation’s algorithms put more leeway in the return policy for them, Hammond said.

The same system that can identify frequent “returners” can also figure out who is a “good” customer, one who shops often and rarely brings back the merchandise.

“[If a store allows] 30 days for returns and you are returning (an item) on the 31st day, normally under a policy rule you would get denied that return, but we know you’re a good customer, so our system is going to approve that return for you,” he said. “So it works in both directions. We improve it for the good customers, but then we are much tighter on the bad guys because we know the difference between the two.”

Retail Equation also focuses on predictive analytics in shoplifting.

The goal is to be proactive and anticipate “what product is going to be stolen” rather than reacting once a theft has occurred, Hammond said, adding that retailers can then put such items under better surveillance.

New parent company Appriss also plans to add some of Retail Equation’s analytics and predictive modeling to its suite of products.

“We see great synergy with Appriss and view this collaboration as the next phase of The Retail Equation’s journey,” said Jon Kossow, general partner at Norwest and member of The Retail Equation’s board of directors. “The combination of Appriss’ information assets with The Retail Equation’s predictive technology capabilities should lead to new insights and patterns of human behavior.”

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