Skyrocketing rates of product returns are creating a whole new logistics wrinkle for retailers already swamped by inventory fluctuations and supply chain hassles. The problem is usually at its peak during the first couple months of the year, which overlap with extended return periods following holiday shopping. Add to that the rapid growth of ecommerce during the pandemic and record retail sales at the end of last year, and any retailer not on top of its returns strategy at the moment could be in a big hole at the end of the quarter.
The NRF expects $761 billion in products sold in the U.S. last year to be returned, which is more than double 2019 returns levels as a percent of total retail sales (Figure 1). The growth tracks with the rise in ecommerce as products bought online are usually returned twice as frequently as those purchased in a physical store. Consumers will often order multiple sizes or styles online with the intention of returning part of the purchase.
Returns are expensive. Not only do retailers have to spend on return shipping, but there is additional cost to return the product to inventory. According to AlixPartners analysis, the initial margin on returned items can be completely outstripped by return shipping, processing, and restock costs. Returned goods also take up valuable warehouse space at a time when this resource is at an all-time premium. Then there’s the environmental cost – packaging, transportation, and others as unsold returned goods go to landfills.
Retailers need to create a returns strategy that starts before product development and spans the whole product lifecycle. If your returns operations are in need of First AID, here is a framework to get started:
AVOIDANCE: The best way to reduce returns and associated costs is to stop them from happening. Most levers available to retailers require advance planning:
Address product quality and sizing issues: A combination of predictive analytics and targeted consumer insights when a product is returned can help retailers address product quality or sizing issues for products with a high likelihood of returns.
Employ stores as showrooms: By ensuring that major stores have a complete size run, more customers can try before they buy and choose the right product the first time around – even if the final purchase takes place online. Virtual fitting room technology can also help.
Review existing return policies: Ensuring that any decision is brand-right, assess your consumer-facing returns policies, including cost to consumer and return windows. Operations teams must work closely with their sales counterparts to understand the true costs associated with any policy.
Know when to let consumers decide: Use data analytics to determine when it is more cost-effective to allow the customer to simply keep the product. This has brand implications as customers may appreciate donating the product, but it can also lead to unwanted changes in consumer behavior.
Minimize transportation costs: To do this, retailers can consolidate shipments for returns, for example with Happy Returns. They might also consider partnerships a la Amazon and Kohl’s or establish strategies to mitigate transportation rate increases and surcharges.
INFORMATION: It’s impossible to avoid returns altogether, of course, which means retailers need to take a data-driven triage approach to efficiently process them.
Identify returns fraud and abuse: For every $100 in returned merchandise accepted, the NRF estimates retailers lose $10.30 to return fraud. Retailers must track repeat and large offenders and establish controls that recognize fraudulent activity.
Use an early warning system: By working across business functions, logistics teams can get a sneak peek at inbound returns. This not only helps dedicate appropriate labor resources but can also flag in-season, high-value, or in-demand returns for expedited processing.
Tailor rules based on products: All returns should not be treated the same. Resolve to fully process only boxes that contain good-as-new items that are margin positive after restock/repick/reship costs and still active in the assortment. Empower associates to act the first time they touch a return.
DISPOSITION: Retailers need to have well-defined plans in place to responsibly address returned items that cannot be resold. There are a few options:
Create a rapid restock or redeploy process: Immediately redeploy items that are in season, high-value, or in demand so they are available as soon as possible for in-store or ecommerce purchase. In-store returns should go back to the floor immediately rather than sent to a warehouse, if possible.
Take advantage of resale options: Consider wholesaling or donating items that may be discontinued or for which margin minus costs to restock/repick/reship is negative. These can either be sent to liquidation-type buyers or to the growing number of resale-focused retailers.
Outsource partial or full process: Just like any other component of the supply chain, there are pros and cons to handling returns internally. If this is not a core competency, consider outsourcing labor or the whole process to a capable reverse logistics partner that specializes in returns like Optoro.
Once simply considered a cost of doing business, returns have become a margin-eroding problem. The bumper holiday season was a welcome relief for retailers swamped with supply chain problems. However, not getting a quick handle on returns can overturn any gains made between October and December. With a combination of strategic planning and proactively developing a strategy to tackle urgent issues, retailers can avoid feeling the hurt.