Retail viewpoint: many happy returns for retailers

The holidays are off to a smashing start for retailers. US core retail sales jumped up 0.9% in November month-over-month, outpacing November 2016 by 5.5%.¹ Black Friday sales were huge—US shoppers spent a record-breaking $19.6 billion in online sales alone Thanksgiving weekend through Cyber Monday,² a whopping 15% increase over last year.³

That’s terrific news, but we need to start talking about what’s coming next: the NRF is projecting that consumers will return 13% of purchases this holiday season.⁴ Managing the flood of returns will be critical to closing out a jolly holiday season, but it won’t be easy. Returns, and especially online returns, can wreak havoc on distribution centers (DCs) and bottom lines.

How can retailers avoid this looming logistical mess this holiday?

Oh, what fun it is...to return

Basically, there are three options retailers can offer: return to store, return to DC, and return to a third party.

Return to store is usually the cheapest option for retailers (figure 1). It’s also what online customers prefer: 60% of online shoppers preferred to return items to a store when given a chance.⁵ Most importantly, stores can make a returned product ready for resale the fastest.

But relying entirely on store returns isn’t going to work all the time. Processing returns eats up a lot of resources and prevents sales associates from actually selling. It also makes a big impact on resale margins because things that customers return—but stores didn’t originally sell—often wind up lumped in clearance bins.

Then there’s the return-to-DC or processing center option. This puts the burden squarely on the retailer to flex up and down on staff at the DC during peak times—and that can be a tough challenge. No one wants to be drowning in thousands of return packages when you’re supposed to be gearing up for the new year. And if your DCs can’t process returns quickly, it will leave a bad taste in customers’ mouths.

Another option is to pass the buck and have shoppers return to third-party processors (3PLs). 3PLs can seem like a big, red “easy button” for retailers because they offer the most flexibility and least distraction (figure 2). Using 3PLs is easy for customers too—all they have to do is box up the sweaters they don’t want and send them to a 3PL. The 3PL will quickly check to make sure they’re in good shape, sort them, and send them to the retailer for resale.

Sounds perfect so far, right? The downside of 3PLs is that they aren’t cheap. They also can’t make products ready for resale as fast as stores can. So retailers can’t push that “easy button” all the time.

Ready for the flood

Processing returns may be a pain, but they are also a great opportunity to increase sales and build a loyal customer base. To avoid a post-holiday slump, we recommend taking a hybrid approach that combines the best of store returns and 3PLs:

1. Make the return process easy and painless for shoppers. Return policies can have a huge impact on the top line: 67% of shoppers view a retailer’s return policy before making a buying decision.⁶ And average spend increases when a retailer implements a hassle-free returns policy.⁷ That means all retailers should think about offering policies like no shipping fees for returns.
   
   
2. Staff up in-store to handle returns. At a minimum, make sure your sales associates are well-trained, easily accessible, and using simple workflows to manage return counters. Since 70% of shoppers buy something else when returning their stuff in a store,⁸ bold retailers may even want to incentivize store returns by offering a special discount or perk.
   
   
3. Use 3PLs to scale up for the holidays. We suggest using third-party solutions rather than your DCs for online returns—but make sure they deliver up to your standards. Our clients who use 3PLs say this frees up resources to focus on what they are best at: selling.

This holiday season, anticipating the flood is a start, but the wisest retailers will also build an ark.

Data pack

For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above please contact retail@alixpartners.com.

¹   Seasonally adjusted November retail sales exclude motor vehicles, gas, food services, and drinking places
²   news.adobe.com/press-release/experience-cloud/adobe-data-shows-cyber-monday-largest-online-sales-day-history-659
³   Total Black Friday sales numbers (including in-store sales) were not available at the time of this article’s publication
⁴   forbes.com/sites/bryanpearson/2017/12/05/sales-shmales-return-policies-could-define-this-holiday-season
⁵   nchannel.com/blog/reverse-logistics-retailers
⁶   readycloud.com/info/the-ultimate-guide-to-ecommerce-returns
⁷   cnbc.com/id/49379910
⁸   nchannel.com/blog/reverse-logistics-retailers