Rundown: Return fraud on the rise, Nordstrom going private and Big Lots' lifeline

0:03Hey, everyone. Happy New Year and welcome back to the Modern Retail Rundown. I am Gabby senior reporter and Modern Retail. I'm back with Editor-in-Chief Kale Guthrie-Weissman. Hey, Kale. Happy New Year. Hey, Gabby. Happy New Year. How was your break? It was nice. Yeah, it was relaxing. But of course, a lot of stuff happened while we were taking our break. Yeah, there were things over the week and a half, two weeks we were off, where I was like, okay, well, we're going to need to talk about that. Because especially people love to get their retail news right in the wire, hoping that nobody notices.

0:40But of course, we're going to notice. Right. And the calendar year ending, I guess. Yeah, that's true. But yeah, I mean, speaking of, we can kind of break down what we're going to be talking about today. But first, we'll start with a big topic I feel like we've had the past year or so, which is retail returns are just continuously a problem for a lot of companies. And especially now fraud retail, which we'll get into more specifically, but it seems like that kind of continued into 2024. There's some new data that came out on that we'll talk about. But yeah, and then after that, Nordstrom going private, that was also another headline we saw over the holiday break where I was like, oh, it finally happened.

1:25We already talked about this once ago. So yeah, and then of course, the last thing we really talked about last year was Big Lots, which we thought was pretty much dead in the water, but it is clawing its way back. It's going to keep some stores open after all. We'll talk about this soon, but it seemed like it didn't have any hope. But of course, there's always hope if there is some moneyed PE backer who's willing to finance something. Yes. Yes. And you did say never say never. So it's true. You kind of called it there. But but first, let's talk about returns. So, you know, this is a time where brands are just trying to always squeeze every sale out of their customers.

2:12And of course, returns are just part of the business. But it does feel like more and more returns are being cited as, you know, I guess, a culprit to some lower than expected performances. But this new report from EPRES in collaboration with Deloitte showed that in 2024, retail returns totaled$685 billion, or about 13 % of all retail sales. It's slightly down from 2023, but obviously in volume, It doesn't mean it actually dropped. It's still pretty high. But yeah, some other interesting figures. What do you make of this fraud returns, I guess, that keep happening to retailers? I mean, I guess what I would say is that none of this is surprising.

3:03It's somewhat good news that the percentage of returns to overall sales has slightly gone down, but it's still clearly a major problem. Some of it is real. Some of it is people buy a lot because it's cheap in the last quarter and then they return it. There's a big issue right now, especially with apparel, where more people are buying many sizes in apparel and then returning the ones that don't fit. But clearly, this is a problem that we've written about for years. We'll talk about our specific story that we had from a few weeks ago, but it eats away at brands' bottom line, where they are having to eat the costs of fulfillment and getting back these products.

3:42And then there's also the fraudulent ones, which are increasingly happening, which we'll explain soon. But pretty much, I guess it's sort of good that it's slightly less than it was last year, but still not great as a whole. Right. And out of that total, the fraud, I guess, returns are slightly higher, actually. 2020 over 23. And then this other stat I thought was interesting, which is what you sort of mentioned, wardrobing, people buying an item, using it, and then returning it, you know, feigning ignorance, like, oh, this was open. I didn't know. That kind of thing. I think that's also 60 % of the retailers that were polled said that they are getting more of this.

4:25So yeah, I think, you know, we'll talk about, you know, some of the solutions that they're adopting, at least the major retailers. But let's get into this, I guess, another niche subcategory within returns in a story that our reporter Allison reported a few weeks ago. The rate of fraud retail returns are also being fueled by, you know, all these marketplaces that are popping up. So we have brands like Timu and Shein where people are buying all these cheap goods and then actually returning them to a different retailer and pocketing the difference. It seems like a complicated practice, but there's a lot of videos and posts on social media just showing you how to hack this, which is apparently becoming a big problem now.

5:15Yeah, and it's one of those problems that's very difficult to account for. And Amazon's kind of playing into the hands with its launch of all and focusing on cheaper goods and even other companies that are focused on more value. But And essentially, the thrust of the problem is that people, we don't know how many people, but brands say anecdotally that it's increasing, they see a product available on Amazon or some other major retailer that has a robust fulfillment network, and they buy it. But then they might see what is the same or a very, very similar product on another very cheap website like Timu, like Shein, or even like AliExpress, something like that.

5:56and they also buy it. And so pretty much what they do is they get the first more expensive product first, and then they get the second one later that they got at a discount, and then they return that second product in lieu of the first product, thus making up the difference. And it's one of those things that's very, very difficult to account for, but it's increasingly being a problem. You're seeing a lot of posts on Reddit, posts on TikTok that are talking about it. And there's a word for it, cross retailer fraud. But I think we're probably going to hear a lot more about it beginning this year, because there's been such a big war between all the platforms to offer the lowest price and to source from the cheapest manufacturers.

6:39So if they're sharing a lot of the manufacturers, maybe Amazon's because of fulfilled by Amazon is still a little bit more expensive. But people are catching on to that and in doing this whole rigmarole to get the cheapest price. Yeah, exactly. And to me, part of why maybe, you know, at least on these cheap marketplaces, it is becoming a problem or the fact that customers even can do this is that, you know, there's a lot of duplicates, right? Like I think a lot of customers have, you know, become aware of the fact that a lot of this stuff is coming from the same factories. They look almost identical when you're buying from Amazon versus Shein.

7:15And so it's, yeah. And like, I guess, you know, tagging or, you know, chipping and all of that is not really an issue because that would be really expensive to do, you know, tracking items. So yeah, I think that's becoming a bigger problem. I think it's kind of the opposite to me than something, you know, you see in like luxury retailers where like, this wouldn't really work at like a Sephora or an Archstrom because again, And they have these sort of the technology to track where every item came from, whereas this is not really the case. Hence all of this hacking, I guess, and making money off of it.

7:55I thought some of the comments were interesting where they kind of know that it is exploiting a retailer. But obviously, there's a lot of anger right now. And people don't really seem to have a problem pocketing that money. Exactly. And I think that you're seeing a lot of people trying to find loopholes. Doing this at scale is very difficult. And there are other forms of return fraud that are much more systematized and probably have a lot to do with sort of back channel. And this seems much more one off where it's just someone wants to get a product and wants to get it as cheap as possible and takes a lot of work.

8:30But it shows that people are getting crafty with it. Also, just another interesting note that I was looking into what were returns 10 years ago. And according to a market watch story that I just found, consumers in 2015 returned$642.6 billion that year. So that's compared to the$685 billion that you said earlier. So that's pretty much like$40 billion it's gone up in the last 10 years. So that's a lot. Yeah, I guess it makes sense with the rise of e-com too, but in COVID and all of that. But yeah, I think the fraud aspect is obviously, you know, happening. It is real, but it's definitely not all of 685 billion, right?

9:16Like, I mean, most of that is still a lot of people buying in bulk or, you know, multiple, you know, sizes, like you said, and then returning. But as we've talked about previously on the show, they are actually being punished for it, quote unquote, right? Like you don't have really free returns as much as we did a few years ago because it's very expensive. No, you are seeing, and we've talked about this in a variety of different ways, a lot of companies are charging for returns. They're trying to crack down on the people who are, quote unquote, serial returners. Of course, on the flip side of that, you're seeing an increase of the likes of Amazon, who for, I think, products that are worth less than$10, they're saying, keep it, but you can still return it.

9:58And so it sort of potentially evens out in the end. And one thing that I'm always interested in is that the numbers are always a little bit foggy. And I think retailers want to blame external factors beyond what there is in their own control. Like, for example, last year or the year before, there was that report that was retracted about the rise of retail theft and how that was such a big problem. And then people found that the methodology was a little bit shaky. And I'm not saying that's what's going on here with returns, but I also do think that when we talk about retail fraud when it comes to returns, tracking that is really difficult and there's no way to find a perfect methodology to know which of these returns were fraudulent, which of these were actually real returns.

10:42And I wouldn't be surprised if retailers are a little bit more liberal with saying the problem has to do with fraud rather than something related to their own business doings, you know? So yeah, it sounds similar to what we dealt with with the theft issue, right? It just seems like another scapegoat. But maybe this is obviously not on the same scale. But yeah, I think it's very hard to track. And I don't know if they want to track something that costs a few dollars. Is that worth dealing with fraud-wise? I don't know. Exactly. And it's also the big problem is that as you have this race to the bottom where you're seeing more platforms sell really cheap goods for the thinnest margin they possibly can.

11:25They don't even want to receive those items in the end. They're not going to be able to recycle those items. They're not going to be able to figure out a way that's just going to add to the sea of waste that we have. And so in many ways, the growing returns problem alongside the growing issue of discount e-commerce points to a bigger problem of waste and consumerism that there has been no proven solution for just yet. Yeah. Yeah. I guess, you know, we'll see whether this trajectory of the trend will continue to rise. But for now, let's move on to Nordstrom. So this was sort of the big headline that we had been waiting for pretty much what felt like all of last year.

12:03But it is indeed going private, partly due to the Nordstrom family themselves themselves buying it out as part of a bigger deal. But yeah, what do you make of this? I mean, I think this dropped like literally right before Christmas. Yeah, I think I saw it the day before Christmas and I was like, ah, offices are closed. We can't write about it just yet. But now we get to talk about it. I mean, this is a long time coming. We talked about this in September when the first iteration of this deal came about. So pretty much what we have is the Nordstrom family have they've teamed up with a Mexican retailer, El Puerto to Liverpool.

12:38And if you listen to the Modern Retail Rundown, you know that we've talked about Liverpool before because they made an offer in September. The offer back then, we'll go into it more, was around$3.8 billion. And clearly, that was not enough to convince Nordstrom's shareholders, the Nordstrom board, but they liked this one. So pretty much what we have is that shareholders will receive a little over$24,$24.25 for every share they own. And this buyout is worth$6.25 billion. It was unanimously approved by Nordstrom's board of directors. And under this plan, the Nordstrom family will retain control once again.

13:17They will own 50.1 % of the company, and Liverpool will have 49.9 % of the company. So pretty much that's where it's at. It's going private. The board was happy with it. When you look at, A, what's been going on with the department stores, but B, there have been other attempts to take Nordstrom private in the past that were way better than this deal now, which we'll talk about in a second. So I imagine they were like, we should get the best we can while we can, because the sale price is only going to go down from here. Yeah. And I think, like a lot of department stores, we saw Nordstrom, which sits at a very interesting intersection.

13:55It is obviously more on the luxury side, but it's more accessible than some of its competitors, but their sales were already in decline. And then post-COVID seemed like they were just struggling more and more, like a lot of apparel and fashion brands. But I guess, yeah, it seemed like to me that the initial reaction was, I guess, sort of positive, or at least, you know, to analysts who said, well, you know, the pressure of the public markets is at least relieved now. So if they want to rebuild, they can do it behind closed doors. But yeah, Yeah, no, I think that the overall reaction right now is potentially this is a good thing.

14:32Nordstrom, compared to a lot of its competitors, is doing relatively better. At its last quarters, I think it posted modest, modest growth. Not much, but growth in this economy, especially in the department store sector, is big. But it still, I think, had pretty muted forecast for the full year. And with this, the company will have more of an ability to make more sweeping changes, as opposed to the usual bureaucracy that comes with being a publicly traded company. But it's also just good to know of how much Nordstrom and department stores have fallen. And so in 2018, there was another bid, and that bid was worth$50 a share.

15:12So about twice what this one is now, and would have been a much bigger deal. And also, if you look at the numbers, so for the full year 2018, Nordstrom's net earnings were$564 million, and its net sales were$15.5 billion for 2023. So last year, its net earnings were only$134 million, and its net sales were$14.2 billion. So its overall net sales fell by over a billion dollars, and its net earnings have really, really cratered. And so it was looking for any way to try and find a new strategy and to restart its growth. And this has been whispered about, not even whispered about, but talked about for many years.

15:56And now it seems like it's finally coming to pass. Yeah. And I guess this is a good time to maybe talk about Liverpool, which we mentioned earlier. It's this very interesting company, I guess, that has been courting Nordstrom and waiting for it for at least months now. But when we did talk about it a few months ago, we mentioned that this is a Mexican retailer that had already purchased almost 10 % of the stake in the company in 2022. You know, it seems to be doing pretty well in Mexico. So its net sales grew about 10 % between 22 and 23. But they seem pretty excited about Nordstrom. I mean, when they did acquire a small stake in it, they said, you know, this operation represents an attractive opportunity to diversify assets geographically.

16:49So they are moving on north. But yeah, it'll be interesting to see how Nordstrom operates now. I mean, will this impact the actual consumer facing business? People probably say like, not really, but who knows? I mean, I think in the long run, it'll be hard to tell yet. Yeah, it'll be interesting to see. I would be interested to know if Nordstrom will try and get any lessons from Liverpool. Liverpool is a store that's much smaller than Nordstrom, but seems relatively successful in Mexico. It has two different brands. It has its Liverpool stores and its suburbia stores. And ever since 2022, when Liverpool bought its then 10 % stake, everyone was whispering, this is because it wants to help facilitate a buyout.

17:33And Liverpool always said, no, no, that's not true. But now we know it actually is true. And this is what's going on. And so we'll see how the two work together with the Nordstrom family. Yeah, it'll just be interesting to see what sort of strategic changes are made. Usually they happen small. You can't see them from the get-go. But I imagine a year or two from now, we'll get a sense of what the overall grand plan is. Yeah, looks like the deal's probably going to close in the first half of this year. So we'll keep an eye out. But yeah, speaking of deals, let's move on to Big Lots, which managed to just have a sort of 11th hour deal that came in to help save at least some of its stores.

18:13And it says it's going to try to keep a lot of the employee jobs, but that's to be determined. But yeah, what is the latest there that we talked about last week? So pretty much it got a last minute sale to Gordon Brothers Retail Partners. It happened on December 27th, so not even a week ago. But right before we hit 2025, it says with this deal, the company will keep several assets, including the ability to have 200 to 400 stores remain open. The backup deal with this investment bank closed, as we said, right after Christmas, and a Delaware judge approved the bankruptcy. And this was, you know, as we talked about right before the end of the year, right after the deal with Nexus Capital Management fell through.

19:02And so the big thing that it's focusing on and announcing it is that it's going to be able to keep some jobs. It said that it would allow anywhere between 5 ,000 and 10 ,000 employees to keep jobs. But still, Big Lots has about 900 stores. And so keeping 200 to 400 open is less than half. So we'll see. Yeah, and that was already in the process of being liquidated. So they're already down from that number probably. But the actual physical retail part of the deal was actually in partnership with Variety Wholesalers, which agreed to acquire the stores and help run them. So there's a lot of players, I guess, involved here that all came together.

19:45It's like an all hands on deck situation to keep some, I mean, at least keeping the company alive, right? That's kind of where we're at right now after the bankruptcy. Yeah, it's about can we keep the IP alive? We're in this era where a lot of quote unquote legacy stores have closed. A lot of them, they attempted to remain open via e-commerce. Think of Bed Bath & Beyond. Think of before that, Pier 1. And you don't hear much about them anymore. So the fact that Big Lots was able to keep some of its store alive and have an actual retailer control those stores means that it'll remain up at least in some iteration.

20:25I guess my question is, is like, is this overall good news? What do you think? Well, I guess it depends who you ask is what I have here. Because, yes, like the brand staying alive for X amount of reasons is good. But if you ask a vendor, like I was reading about Serta Simmons and Tempur-Seely, they don't seem happy with at least the way the deal is shaped up because this doesn't mean they're getting paid. I mean, most likely they are not going to be paid for a lot of inventory that they've fulfilled in the last few months. So, yeah, I mean, I think the big issue here is that big lots was in a lot of debt.

21:08And even with a buyout, it doesn't necessarily mean that everyone's going to be paid out. So that's the problem right here. No, yeah. And with bankruptcies, it's always some people get paid out and some people don't. I thought this was really interesting, as a lawyer for Serta pointed out, that Big Locks racked up$250 million in more debt, even after it realized it would be unable to pay its vendor brand. So even though it was like, yeah, we don't have enough money, we're in too much debt, we're going to have to go bankrupt, it still bought more things. And will those vendors get paid? Probably not.

21:39We'll see. Yeah. I mean, I think right now this is like a really fast developing story, of course, like we keep pointing out. So we don't really know how it will shake out. But it'll be interesting to see the headlines, I guess, in the weeks and months ahead of how they plan to save the business, overhaul it, and what the actual physical retail part of it will look like. But, you know, big lots will continue to exist. So we have that. Yep. Big Lots stands to exist another day. And so good for it. Yeah, exactly. Yeah, I think we can keep it there today. That is our show. You can rate and review us anywhere you're listening to us.

22:20And on Thursdays, listen to the Modern Retail Podcast for interviews with industry executives. Kelly, I always have a fun guest on. Who do you have on next week? Next week, we have a fun one. I spoke with the founder of Gregory's Coffee, which if you live in New York and now other cities, you know that it's becoming a nicer alternative to the likes of Starbucks, etc. We spoke about expansion plans, how it's scaling, all that jazz. And as listeners know, I love to talk about coffee. So we had a good time. Yeah, great way to start off the year. And follow us on socials at Modern Retail. And of course, come back on Saturdays for more Runtown.

23:05And back on today.