Returns, the point of no return

Michele Caprini
08/02/2022
In brief
Returns management is one of retail’s key points, all the more so for the breathtaking growth of the phenomenon linked to post-pandemic shopping behaviours. Retailers can turn this into a growth strategy in many ways. It is necessary to make the process transparent and timely, reducing losses with predictive technologies and optimizing reverse logistics to make the product available for sale faster or foregoing it altogether. And, above all, uphold the principles of sustainability as regulators of the entire delivery and return process where demand awareness and accountability play an important role.

“Retailers’ returns jump as online sales grow: a more than $761 billion dilemma.” This was the CNBC headline of last 25 January, loudly highlighting a problem in American retail. A big one, but certainly not a new one, which however in view of its scale now make it an unavoidable priority.

Returns, an endemic problem

According to the National Retail Federation, in the United States the volume of merchandise being returned to stores and warehouses accounts for 16.6% of sales in 2021, compared to 10.6% in 2020, for a global value equivalent to one and a half times the revenues of the world’s largest retailer, Walmart.

With the meteoric growth of eCommerce during the pandemic and the fierce competition on product and service offerings there has been an equivalent rise in the rate of returns, and now is time to take stock. Always according to NRF (whose figures incidentally are much higher than other estimates by the world’s leading researchers), digital commerce accounted for about 23% of total U.S. retail sales in 2021. The average rate of returns for online purchases was 20.8%, up from 18.1% a year earlier.

Looking at Europe things don’t look very much different, but the responses from individual national markets do change significantly. Combining the various studies on consumer behaviour on the continent, Italy occupies fourth place in this particular ranking, where the percentage of customers inclined to return goods that do not meet their expectations is over 40%. Ahead of us, there is Germany, Holland and France, then, in order, the United Kingdom and Belgium.

From store to website

The different trend of returns distinguishes eCommerce from brick-and-mortar retail. According to European Ecommerce, the rate of returned items in physical stores is about 8-9%, while it ranges from 15% to 30% for online stores and, unsurprisingly, it reaches peaks of 40% in the fashion industry.

The greater tendency to use the return service on a massive scale is of course closely related to income. The higher it is, the greater the tendency to make impulse purchases, to be corrected or cancelled in the next phase of the purchasing cycle. The differences in returns indicators between the various countries of Europe, classified according to greater or lesser spending capacity, are the clearest confirmation of this.

There is nothing new by saying that the problem of returns is not at all easy to solve. On the one hand, online consumers are accustomed to the more favourable returnability options, which they classify as a decisive factor for comparison and choice between different merchants (even more so than customer testimonials and price). On the other hand, no one can dispute the fact that this aspect of the relationship with the customer is necessary to defend commercial positions or increase the level of competitiveness.

The offer

It must be said, however, that while the offer must include an adequate returns program, there is certainly no lack of malpractice in the demand side. Overly generous return policies can incentivize customers to over order, as is typically the case of a dress in multiple colours and different sizes.

On the face of it, rejected purchases lead to higher operating costs and represent a substantial loss in the costs for handling returned goods once the sale falls through. NRF estimates that by 2025, reverse logistics spending will exceed $600 billion.

In order to contain and reduce the rate of return sales, several different avenues of action can be taken. There are those who decide to improve product descriptions and, in the case of fashion, the size charts and size guides, or focus on 3D presentations on websites, as done by Walmart with the acquisition of Zeekit, a startup specializing in virtual image technology.

And there are those who, instead, consider it more cost effective to leave the item with the customer in exchange for a refund, rather than face the hassle and cost of shipping back and processing a bulky, custom-made or low-value item to then restore the inventory and resell it at a discounted price. Or perhaps accepting the redelivery while recognizing the customer the possibility to give up the original box or, in any case, the repackaging of the returned merchandise.

Another major retailer, Best Buy, has launched an online store for the sale of appliances, TVs and other products still under warranty. Others have focused on service innovation, setting up new outlets dedicated to returns and, among the big brands, there are those who have decided to adopt advanced robotics and AI systems for flow management.

Logistics

Retail must find increasingly advanced solutions for managing a huge number of shipments in ever-shorter deadlines, while maintaining a high level of customer satisfaction and safeguarding profitability. Merchants need to offer faster and easier shipping and return options and meet the expectation that returns should be as simple and convenient as purchasing.

If the return process is not smooth, the shopping experience deteriorates significantly and the chances of losing the customer increase, not counting that the process-specific risks are high. Just think, for example, of the costs of transporting and handling unpackaged and tampered goods: a substantial loss for a sector whose margins are a constant concern. The ongoing trade war revolves around logistics. In order to reduce the costs of returns and quality of service, the retail industry of the most advanced markets is proceeding to forms of hybridization with the logistics sector, increasing outsourcing or the acquisition of technologically advanced companies in the field of inventory optimization.

Sustainability

Sustainability is no longer a trend, but a strategic competitive factor.

Ever more important is the attention paid to the behaviour of brands on issues such as returns and waste management. Proof of this is the undercover investigation by the British television network ITV, which proved that Amazon destroyed millions of unsold items every year in the UK. In the recent past, other brands have incurred the same incident, and Burberry is perhaps the most effective example.

The delivery of orders and the flow of returns, with what these implies in terms of emissions, plastic use, packaging and disposal, are part of an emergency that affects all actors and every intermediate step of sale and consumption. Change requires a collective effort, bigger than a single retailer – regardless of its strength – or a group of consumers. Innovation is not a suggestion but a necessity which has in technology its enabling tool and awareness is the common priority.