The Cost of Returns
Post-holiday blahs are not just about the sugar lows as we rein in our holiday baking and eating. As Jan 1st is that day of reckoning and resolutions on the scale, it is also a revenue day of reckoning for retailers as returns are accounted for. The real picture of retail revenue, however, is not truly exposed until all those returns get in throughout the winter.
By February, when consumer shopping throughout most of the country is hampered by snow, (landslides), and black ice, retailers struggle to regain their footing. The consumer retail market is not an awful place to be, though. Growth, though not stellar, has occurred at a slightly faster rate than the US economy.1 Retail sales for 2017 grew 4.2%, 3.2% in 2016, 2.6% in 2015, and 4.3% in 2014.2 Though consumer tastes are changing, challenging some retailers’ futures, the real overall problem for the industry is profitability due to approaches that no longer fit the new consumer, as well as poor supply chain practices.3 Significantly, free shipping and returns are driving down already thin margins. And the problem will grow as more shoppers turn to ecommerce as their preferred mode of shopping (or are forced to, due to poor availability of stores or goods in the stores).
Returns plague the industry, driving down sales, and are extremely costly in terms of operational expense. According to the National Retail Federation, “Returns cost retailers $260 billion in 2015,”4 and grew in 2017, according to some sources, to close to $380 billion! According to Woman’s Wear Dailey (WWD), returns are a whopping 11.7% of sales.5 It seems that just tackling the returns issue might return some retailers to solvency!
Though online sales plague brick and mortars, etailers bear the higher burden of returns where “about 30 percent of items bought online end up being returned, versus 9 percent of items bought in stores,” according to NRF. And, unlike in stores, many etailers have to pay for those returns.
According to one survey, only 50% of the good can be resold.6 What happens to the rest? Charities or landfill. Billions of pounds of returned items are never resold and wind up as landfill.7 And even if returns are diverted to sites that sell returned merchandise, that ultimately devalues the brand of the product and retailer alike. It’s a triple loss: the sale + two-times the delivery costs (for those who offer free shipping) + processing and handling costs (see chart on Retail Transportation Costs). Most firms struggle to account for all those costs and, thus, haven’t fully understood potential solutions.
Role for the Store
Consumers, in spite of liking online shopping, seem to prefer returning to the store. Hence, there is still a strong position for stores if retailers can adjust to the new consumer. Although it might not be as glamourous a reason to keep a mediocre performing store open, consumers like returning things to the store. And there are tangible benefits to the retailer to let them do so.
- Firstly, consumers are checking, to a greater extent, their ability to attain no-hassle returns. So that most often means an in-store return. Thus, they are more likely to buy from that source.
- The cost is at least double to mail a return back vs. processing it in the store — $3 processing and no logistics costs vs. parcel costs plus multiple, subsequent handlings. (See chart above.)
- While in the store, 20% to 40% of customers purchase a replacement for that item vs. online shoppers,10 or they shop for additional items.
- In-store returns reduce the cost of logistics on the restocking side, since salable goods can be returned to the shelves quickly vs. a return center that has to ship the item to a warehouse or store for resale.
- Retailers like Best Buy offer “open box” sales at deep discounts, which appeal to many consumers.
- And simply, the hassle reduction for the customer seems obvious (given a store or mall nearby) vs. having to get labels, repack, contact the carrier, and wait for their arrival to return the package.
So repurposing a bit of the store can provide many benefits.
What Retailers Can Do
Future approaches should include changes in polices, processes, and technology. Here are a few approaches.
Get It Right the First Time!
Fit is the huge issue in apparel. There are a few sites now that work across retailers to help with fit, fabric preferences, and so on. Fitting apps are becoming quite common on brands’ or retailers’ sites; as well, there is the emerging use of AI and 3D technology.
However, more controllable are accurate catalogues, rich product information such as great graphics that show all angles of the product, videos, how-to’s, and transparent warranties, guarantees, and so on. Consumer reviews and feedback are also most helpful. Consumers want the research and information on the product they are purchasing.
And then there is the issue of accurate picking. There are still sad statistics on outright shipping the wrong product. There is no excuse for this problem, since it can be controlled by good software and employee training (and employee incentives).
Intelligent Source of Demand Management
Returns are often a bellwether of a poorly performing category, brand, supplier, or product. Many firms are already into building and, often, stocking the next season before returns data comes in. So it behooves companies to get an early jump on collecting that data and addressing product issues early, before the problem gets larger.
Companies often replenish without understanding consumers’ “use cycle” and repurchase cycle time before returns data gets accounted for, and, thus, may have more unwanted stock on the shelf. Sales alone cannot tell us what satisfies the customer. Companies need to look more closely at their replenishment strategies, which may be a tall order for general merchandisers with thousands of SKUs. However, there is enough money on the line to merit taking a closer look at this. Again, early return data surely is one reliable data stream.
It Is Logistics!
So much of the shipping back, handling, and restocking is handled by logistics. Yet many retailers pay scant attention to these processes. Many retailers turn to logistics organizations that specialize in handling returns.11
Returns processes encompass several functional areas such as warehouse, return/repair centers, and reverse logistics and there are fairly sophisticated12 software products that focus on these areas. 3PLs that specialize in one or all of these processes can also provide a cloud platform that can be used by the retailer who may interweave various tasks between themselves and the 3PL.
Trading partner integration is key. A firm such as Amazon, for example, who appears to really understand the cross-enterprise integration, will refund the consumer as soon as UPS scans the box when you return something. This reduces consumer angst, wondering when — and if — they will actually get a credit.
Change Your Policies and Win More Customers
Today, we don’t really have an accounting method that can measure lost consumer sales. We may collect web visit data, but that is inference and we don’t really know what causes consumers to move on. That does not mean retailers should not pay attention to return policies.
“A ComScore study that was conducted on behalf of UPS in 2014 found that more than 60% of shoppers actually read your return policy before completing a sale, and that the return policy ultimately influences 80% of the sale. Still, many retailers are not paying attention to these innate facts.”13
It appears that some retailers have very strict return policies such as restocking fees,14 having the customer pay for returns shipments, or having a no-returns policy. Or they discourage or prevent cross-channel returning, forcing consumers to return through the channel they used for purchasing. This makes for some unhappy customers. Examples are brand retailers like Talbots, who will take returns via any channel regardless of which channel you purchased through vs. a Chico’s, who prevents cross-channel returns.
Enterprises have to realize that consumers are taking the returns policy and process more and more into consideration when they buy, and consumers will think twice about buying from a retailer that does not have reasonable return policies. (Of course retailers do need to protect themselves from abuse from some who use products and return them!) Retailers must note that consumers can just Google “retailers with good return policies” and get a myriad of reports from most any media outlet. They show the best and the worst.15 Reviewing these lists, I noted that some of the firms on the worst list are also in trouble financially. Of course, there are many reasons for retailer lack of performance, but surely their returns policy is a factor since consumers will go elsewhere! A poor returns policy, ultimately, does not protect revenue.
Having a good back up IT system helps, too, as firms can be friendlier to customers who have lost their receipts. Bed Bath and Beyond has such as system as do the club stores like Costco and many other brand retailers, so customers know they are being valued.
Policy is a particularly big issue during holidays or for other gift-giving purposes, since there is often a lag by the time the gift is given/received and the recipient determines to return it. The 30-day return policies may have lapsed or paying for parcel return devalues the gift — not just financially, but in terms of that joyous impression the giver was planning on.
Use the Store! Or the Mall
As mentioned above, stores are still the preferred method of returns, so enhancing the returns desk is probably a good idea. Interestingly, Amazon now partners with Kohl’s stores in certain cities to accept returns of goods purchased from Amazon. Smart! And Kohl’s has, potentially, new customers entering their store!
With Whole Foods now in the “family,” Amazon has established return lockers. This is a lower labor approach and lower hassle that many retailers can use so consumers can avoid waiting on a line to return.
Then there is this smart idea: return bars. A firm called Happy Returns (a name rich with irony) has agreements with several firms to return goods, and is located within malls.
Partner with Liquidators
There is a new generation of aftersales returns and resell firms that either are in-store or online. This completely removes the hassle from the retailer, and it provides ready cash vs. the expense associated with the returns process. But brands may be at risk. Information integration here is crucial so that precious data about customers, product issues, and so on, gets back in a timely way to merchants, planners, and designers.
There is plenty of research to conclude that hassle free returns increase customer loyalty and average sales per customer. “When trying to identify ‘good’ customers, managers often ignore those who return products, or might even consider those customers non-ideal, decreasing the resources devoted to them. In the long term, however, satisfactory product return experiences can actually create a valuable long-term customer whose contributions far outweigh the associated costs,” authors J. Andrew Petersen (University of North Carolina) and V. Kumar (Georgia State University) say. “These same returns create long-term value because customers who feel there is little risk in making the wrong purchase keep coming back.”16
Product designers crave customer feedback to help them develop new and better models and returns are the most tangible feedback they can get!
Finally, logistics costs due to a capacity crunch (read transportation article in this issue of the brief) will continue to plague retailers as more consumers shop online, driving up carrier rates, and, thus, impacting retailers’ overall profitability. Finding solutions now will return real cash — and customers — to your business.
2 Source: National Retail Federation — Return to article text above
6 This inventory can also fuel the off-price outlets of major retailers like Saks Off 5th, Nordstrom Rack, Brooks Brothers, and all the shoe companies, for example. — Return to article text above
8 For a fascinating view of ocean transportation, read: 90% of Everything. — Return to article text above
9 And of course there are more nuanced options, such as drop ship from a supplier’s warehouse, during which the supplier or consumer will incur shipping costs. But just to keep things simple and assume the retailer incurs all transportation costs, this helps put the issue in focus. An interesting example is Saks Fifth Avenue that moves all markdowns to the NYC store in January for a mega-sale and then to their outlet. Many retailers do two rotations before they move to the outlet. Thus, the internal transportation costs per item can range from 80¢ to $2.00. In addition, rotations often are accompanied by markdowns as they move. — Return to article text above
10 With apparel and footwear, consumers may have purchased a range of sizes since they may be unsure of fit. — Return to article text above
13 Huff Post, Michael Lazzare, The Blog 12/16/2017 — Return to article text above
14 sometimes justified — Return to article text above
15 Time.com-Money: 10 Stores With the Best Return Policies — and 5 With the Worst and Kiplinger: 7 Stores With the Worst Return Policies — Return to article text above
16 Italics mine, source:ScienceDaily: Measuring customer value? Don’t overlook product returns — Return to article text above
To view other articles from this issue of the brief, click here.