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Returns have long been the nemesis of many retail brands. When a product is returned or exchanged not only does the retailer experience incremental supply chain costs but often the item cannot be resold at the original price owing to damage, wear and tear or obsolescence/devaluation given the passage of time–particularly an issue with fashion or seasonal merchandise. As I laid out in my 2018 retail predictions last month, the mounting cost of returns is a growing and scary problem for many retailers that simply cannot go unchecked much longer. As e-commerce continues to grab share it’s going to get worse–perhaps considerably–before it gets better.
We’ve created a monster
Over the years, I have worked for two retailers with significant catalog businesses. I’ve also been the chief operating officer for a furniture brand. We worried about returns, which could often run in excess of 30% in certain product categories, quite a lot. Of course back in the day outbound shipping was rarely free, and free returns and exchanges virtually unheard of. Today, as the direct-to-customer business is almost entirely e-commerce driven, free shipping is nearly ubiquitous, and “hassle free” returns and exchanges increasingly common. So not only has the average net per item cost of handling a return gone up, we’ve made it so easy to return and exchange products that frequently customers will order three or four of the same item in different sizes or colors to be sure they get one item that works. By design, whether we like it or not, as retailers have become more customer responsive they’ve driven return and exchange rates higher at the same time the cost of those returns has escalated. Whoops.
And it’s only getting worse
It’s probably no shock that return rates for products purchased in physical stores are typically less than products purchased online–often radically so. As e-commerce captures a growing share of all retail sales, omni-channel brands that have high return rates AND high return handling costs find themselves in the unenviable position of seeing their marginal economics deteriorate–what I refer to as the “omni-channel migration dilemma”–as their online business grows. Conversely, for some “digitally native” brands that were starting to experience an unsustainable rate of returns this has been a huge motivator for opening their own brick & mortar locations. Moreover, given Amazon’s hyper-growth and their (and the US Postal Services’s) willingness to massively subsidize delivery, many brands feel like they have to maintain free shipping and liberal returns policies simply to remain competitive. None of this is all that new, but for many brands it is fast becoming a huge issue.
Something has to give
Rumors abound that even Amazon is starting to worry about the escalating cost of returns and exchanges. Of course, as long as they continue to be valued on growth instead of profitability, there can be no assurances of any major changes any time soon. Yet we are seeing some small shifts. Last week LL Bean announced a change to their (some would say ridiculously) liberal return policy. A number of retailers have quietly been raising their average minimum order sizes to qualify for free shipping or implementing more restrictive measures, including processes to combat fraud. New technology is being deployed to try to minimize returns upfront. And some retailers are waking up to the fact that their physical stores can actually be assets and encouraging online shoppers to return and exchange products in their brick & mortar locations. It turns out that not only is it typically cheaper to handle returns in a physical store but consumers often make incremental purchases when they come in.