Rampant returns prompt new policy

For years, Costco had one of the most liberal return policies in consumer electronics retail, allowing customers to return items months, even years, after they were purchased. But Costco’s move into higher-end products—and high-definition TVs in particular—has forced it to change that policy.

To that end, Costco adopted a new 90-day return policy on electronics in March to stem a trend in which customers took advantage of the unlimited return window to trade up to better products. The decision followed an internal study that showed customers typically waited longer than expected to return products, resulting in a greater rate of depreciation.

“The lag time was longer than we expected and that lowered the realized value of the returned product,” said Costco evp and cfo Richard Galanti, adding that the problem was “exacerbated by CE returns from the prior year.” As an example, Galanti cited a rash of returns on iPods in late 2006 after Apple came out with the new and improved iPod Video.

But Costco was hit hardest by returns of plasma and LCD televisions, the primary reason for the new 90-day policy. Prices on flat-panel TVs fell by nearly 30% in 2006 to the point where many high-definition TVs were priced hundreds of dollars less than their original purchase price when they were returned, allowing customers to essentially exchange their old TVs for larger and better models.

But not all the returns were tradeups. Costco found that many flat-panel TVs were returned by customers who were unable to install them, a problem it addressed this year with a new home installation service.

Costco didn’t detail how much returns have cost the chain, but its decision to transfer $30 million into its sales returns reserve fund this spring showed it was a considerable sum. As Costco ceo Jim Sinegal told the Wall Street Journal in August, the chain was hard pressed to recoup even half its money.

“We were spending an enormous amount of dollars by taking these things back and (selling them to a salvage company) for 30 or 40 cents on the dollar.”

And while Costco won’t have a clear sense of how well the new policy is working until it’s been in place for a full year, early signs show that it’s helping.

“Our first 90-day window came up in June and so far the trend is good,” said Costco vp of investor relations Bob Nelson.