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What Happens To That Scarf You Really Hated

Hard as it might be for Aunt Betty to imagine, all you wanted for Christmas was not, in fact, a purple rhinestone-studded leather iPod case. As Americans rub the holiday haze from their eyes and peruse their well-meant but unwanted loot in the harsher January light, they'll enact in force the first retail ritual of each new year: bringing it back to the store.

Shoppers, on average, return about 6% of everything they buy. That proportion spikes in January to nearly 10%. This used to be a sore point for retailers. Rather than try to make sense of a hodgepodge of generally used, sometimes broken goods with packaging shredded or instructions missing, stores tended just to write the lot off as a loss. But over the past decade, an opportunistic industry has sprung up to give the reject pile a new lease on life.

Most big-box retailers--Sears (SHLD), Target (TGT), Best Buy (BBY), Kohl's (KSS), and many others--now outsource the handling of returns to companies that specialize in so-called reverse logistics. These third parties' job, basically, is to pick up a store's returns and figure out what to do with them--restock an item, sell it somewhere else, like in Peru or at a flea market, or throw it in the trash.

For retailers, it's a way to squeeze money from what previously was a cost center, since they get a cut of any eventual sales. Genco, the biggest such service provider, charges stores a management fee to collect and sort the products at its 33 return centers. If it's able to sell a returned item to a secondary market, the proceeds are split with the retailer. Newgistics, an Austin (Tex.) company, handles returns specifically for online sales--where return rates can surge up to 20%--for (AMZN), J. Crew (J), and Nordstrom (JWN), among others, charging by package. Other companies, such as Liquidity Services, don't charge a fee, only taking a cut from auctions of goods.

The best gift you can give a returns processor is to bring back something for no other reason than you just changed your mind. If that item gets back to a Genco center, for example, the manufacturer may give the retailer a credit for the return (free money). Then Genco will send the defect-free, originally wrapped product back to the retailer to be sold again (more money).

Stores are more willing to put unmolested goods back on the shelf. In the most common scenario, though, shoppers return something and simply say: "It broke," says Genco Executive Vice-President Curtis Greve. "That tells you how reliable reasons for returns are." It also suggests why retail chains are more than happy to pay someone else to make sense of them. Pittsburgh-based, privately held Genco helped develop this niche in 1993 when, as a $34 million-a-year company, it started handling returns for Wal-Mart Stores Inc. (WMT). By 2006, Genco had $570 million in revenue. Now it does logistics work for more than 100 clients (though not Wal-Mart, which licensed Genco's software and runs the process itself).

The trick for logistics companies is to find other places for returned merchandise. Much of what Genco sells goes to closeout retailers or dollar stores. If something is defective, it goes back to the manufacturer, or if that's not possible, Genco will try to fix it. It even puts products up on eBay (EBAY). Each retailer has its own restrictions about its returned goods' eventual home. About 40% of Genco's $1 billion in turnover comes from goods it sells in secondary markets overseas, Greve says. Some retailers require Genco to scrub the product of logos; some just want the highest bid.

As retailers get savvier about wringing money from returns, they're working harder to stem the inexorable march to the service desk altogether. With the proliferation of gift cards, post-holiday return volume isn't growing the way it used to. And when shopping for themselves, people more often buy things they'll like the first time around.

Corrections and Clarifications

"What happens to that scarf you really hated" (News & Insights, Jan. 15) should have said that Genco began processing returns for Wal-Mart in 1992, not 1993, and that it had previously worked with Target.

Corrections and Clarifications

"What happens to that scarf you really hated" (News & Insights, Jan. 15) should have said that Genco began processing returns for Wal-Mart in 1992, not 1993, and that it had previously worked with Target.

By Brian Hindo

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