Holiday Returns Hangover: Defectives vs. Damage

The confetti falls on New Year’s. Then January hits… and your deduction report looks like a horror movie.

That’s not a coincidence. Holiday returns and “excessive defectives” programs are increasingly where retailers manage their risk—and where suppliers quietly lose a lot of money.

Holiday sales in the U.S. are on track to top $1 trillion for the first time in 2025. When you’re dealing at that scale, even a 1% swing in returns and defectives is worth billions across the system.

Retailers know that. So they watch defectives and damage closely—and they push the costs they can back on you.

Why January and February are so ugly in deductions

Three things collide after the holidays:

1. Consolidated returns from the whole season

   • Items bought on early Black Friday deals finally make their way back.

   • Shipments across multiple weeks and events all reconcile at once.

2. Catch-up compliance audits

   • Teams that were in “just keep it moving” mode in November and December start reviewing shipments.

   • Routing misses, carton labeling issues, and other violations are finally tallied.

3. “True-up” of damage, defectives, and customer service credits

   • Retailers reconcile how much came back, what condition it was in, and who they think should pay.

   • If you don’t have your own view of that story, their math wins by default.

That’s how a brand can feel like the season went “fine” and then open January’s statements wondering what just hit them.

Build a simple return taxonomy (before the wave hits)

One of the most powerful things you can do is separate returns into three basic buckets:

1. True defectives

   • Real product failures: things that don’t work, don’t meet spec, or present a safety concern.

   • These belong on your side of the ledger—and they deserve serious root-cause work.

2. Transit damage

   • Packaging crushed, units broken, frozen, or melted in the network.

   • These are often network or handling problems, not product problems.

3. Policy abuse and “gray area” returns

   • Open-box items that are basically fine but not resellable as new

   • “Wardrobing” or one-time use

   • Customers returning outside policy that still get credited

If all three buckets are coded as “defective,” your brand appears to have a product quality problem—even when the real issue is packaging, handling, or policy.

Why this matters for 2026

Most retailers don’t just look at defectives and returns in isolation. They use current-year performance to set next year’s penalty rates and allowance expectations:

• Higher “excessive defectives” fees

• Stricter defective-return programs

• Bigger baked-in allowances that come straight out of your margin

A messy 2025 returns story can mean:

• More money taken upfront in 2026

• Less flexibility in negotiations

• A brand reputation internally as “the one that breaks”

On the flip side, if you can show that your defectives rate is in-line with category norms—and that a chunk of what’s being called “defective” is actually damage or policy—you’ve got leverage to push back.

How to fight back with data (instead of opinions)

Here are a few practical moves:

1. Compare retailer return rates to benchmarks

   • Use syndicated data, third-party benchmarks, or your own direct-to-consumer (DTC) returns.

   • If one retailer’s “defectives” rate is 3x everyone else’s, that’s a conversation starter.

2. Use lot codes and ship records to map problems

   • Tie returns back to:

     • Production lots

     • Ship dates

     • Specific distribution centers (DCs)

   • If one DC is driving a disproportionate share of “defectives,” you may have a handling problem, not a product crisis.

3. Flag and reclassify damage vs. defective

   • Work with your retailer to refine reason codes where possible.

   • The goal is simple: “Call it what it really is.” Over time, that changes your reported defect rate.

4. Document packaging and handling improvements

   • If you change case-pack design, pallet patterns, or pack-out, keep before-and-after data.

   • Bring that to your 2026 negotiation: “Here’s what we saw, here’s what we changed, here’s the early impact.”

     
     

Fictional example (for illustration only)

Fictional example (not a real brand):A small appliance supplier launches a new air fryer into a major retailer before holiday. Sales are strong; reviews are decent. In January, the retailer flags the brand for “excessive defectives” and hits them with a large defective allowance increase for 2026. The reported defectives rate is 6%, way above category. The brand digs in and finds a pattern: 70% of “defectives” are coming from one regional distribution center. Many units are returned with crushed boxes and dented housings—but no internal failure. Pallets in that DC are being double-stacked despite “Do Not Double Stack” markings. After a joint review, the retailer agrees to reclassify part of the volume as damage, not defective, and adjusts the planned 2026 allowance increase. A simple root-cause analysis on one facility saves the brand hundreds of thousands of dollars.

Again, fictional—but the mechanics are very real.

Where deduction recovery fits (without the hard sell)

There are two sides to this:

• Prevention: tightening packaging, routing, and policy alignment so you generate fewer problem returns.

• Recovery: going back through deductions to challenge the ones that were mis-coded or overreaching.

Teams like Harvest Revenue Group (HRG) live deep in that second bucket—finding dollars in deduction data most brands have already written off. Woodridge Retail Group’s role is often to help suppliers tell the story: what happened, what was fixed, and why future rates should come down, not up.

You don’t have to accept every “excessive defectives” charge as the cost of doing business. With better data and a clearer taxonomy, you can walk into 2026 negotiations with facts, not just frustration.