Economic soothsayers are closely watching 2006 holiday sales figures to gauge the strength of the economy.

But sales are not the only figure experts should be watching. They also should be looking at the amount of goods returned for refunds. This figure has been growing rapidly in recent years and is eating significantly into companies’ profits.

Retailing experts are predicting approximately $457 billion in holiday sales this year, a respectable 5 percent to 6 percent increase over 2005. In addition to gift cards, which are expected to account for $24.8 billion in total sales, other popular purchases will include toys and games, consumer electronics, greeting cards, clothing, candy, appliances, home-care products and jewelry. Many of these gifts will be returned.

Returned products have always been the ugly ducklings of the consumer industry. No one wants to deal with them. And no one wants to talk about them to Wall Street analysts. Yet, over the past few years, the quantity and dollar value of returns have been multiplying.

Consumers are demanding exchanges or refunds for everything from furniture to food. Business Week on Dec. 11 reported that one Wal-Mart customer returned a thawed “frozen” turkey and all the fixings for her Thanksgiving meal because her guests had car trouble and couldn’t make it to town. Wal-Mart obliged.

Customers want to return books they’ve read and CDs they’ve copied. Reasons range from the understandable (wrong size, color, too complicated), to the mystifying (“didn’t like it after all”) and audacious (“just needed it for the weekend”). Whatever the rationale, consumers feel they have the right to change their minds and they favor brands and businesses that make it easy to do so.

The cost is tremendous. U.S. consumers now return an estimated $100 billion worth of goods each year; Canadian consumers $10 billion a year. This is not just a post-Christmas phenomenon. It’s a constant.

Typically, 5 percent to 30 percent of a retailer’s total sales end up back at the store. In some product categories, such as magazine publishing, 50 percent of all orders will subsequently be canceled.

While returns are most common in catalogue and Internet sales, almost no retailer or product category is immune. According to data compiled by the Reverse Logistics Executive Council, University of Nevada, Reno, catalog retailers have a return rate in the 18 percent to 35 percent range. Department and discount stores typically get back as much as 15 percent of all sales. Some 20 percent to 30 percent of all greeting cards are later returned. And electronics stores get back 10 percent to 12 percent of what they sell.

Refunding the purchase price is only part of the cost of a return. The retailer also spent money on the original sale – on product, advertising, staff, technology, and brick-and-mortar costs – and they will spend even more to take the goods back. According to one estimate by two Vanderbilt University professors, manually processing a single return can cost the seller more than $32. For many of my clients, the actual costs are far greater.

Some businesses try to discourage returns by erecting barriers that make the process difficult and unpleasant. Others view returns as a necessary evil, and while they don’t go all the way with a “no returns” policy, they offer store credit only. But other businesses are starting to see returns as an opportunity to build customer relationships and loyalty.

GapKids, for example, has a very liberal returns policy that customers see as one of the benefits of shopping there. Zappos.com, an online retailer of shoes, handbags and accessories, encourages customers to purchase several pairs of shoes at a time because the customers know they can send back the ones they don’t want at no charge. Dell Computers also sees the returns process as an opportunity, rather than a drag. When customers cancel orders before shipping, for example, Dell sends the canceled products to its Dell outlet stores and sells them at deep discounts as “manufactured seconds.”

There’s no getting around the fact that returns are costly, messy and a fact of life. But leading companies also are starting to see returns in another light: as a way to strengthen the company’s relationship with its best customers.

George Stalk is a Toronto-based senior vice president and director of The Boston Consulting Group, a global consulting firm. He can be reached at 181 Bay Street, Suite 2400, Toronto, Ontario, Canada M5J 2T3.