The five-day holiday shopping season, from Thanksgiving Day to Cyber Monday, generated a record 196.7 million shoppers across the United States and each spent an average of $325.44 $, according to the National Retail Federation. It’s been a big boost for retailers, but also a reminder that the heady level of holiday retail sales can leave a big hangover when it comes to returns.
The combination of online shopping habits and consumer-friendly policies has turned the persistent issue of returns into a major business concern, squeezing profit margins and undermining inventory planning and forecasting. According to the National Retail Federation, $761 million in retail purchases were returned in 2021, up from $309 million two years earlier.
Retailers can expect costs, including customer service, shipping, processing and clearance, to add up to nearly 60% of the sale price of a $50 item.
The returns, in fact, are messy.
The “onward” supply chain, in which the movement of goods is carefully choreographed to fill store shelves and deliver online orders to homes, is designed to deliver a stellar and inviting experience for customers. The reverse supply chain is another matter, with a chaotic and unpredictable mix of products, from new to unsalable, flowing in a wide range of directions.
The growing variety of items offered on e-commerce sites has exacerbated the problem, with a range of products ranging from homewares and clothing to appliances and furniture vying for attention. A
walmart Inc.
supercenter will carry about 142,000 different items, for example, while Walmart.com carries about 75 million products, and when trailers with returns arrive, planners will have no idea what products will be on board.
So why haven’t retailers taken significant steps to improve the returns process and prevent it from imploding their profitability? One reason is that few companies have appointed an executive who will actually own the performance side of the business, including responsibility for reducing the rate of return.
Therefore, most retailers underestimate the true cost of returns.
While retailers capture customer service, transportation, and processing costs, cash tied up in the 15% to 30% of salable inventory when it comes back into the system often goes unaccounted for. This leads to higher supply costs as they attempt to match supply to demand and inflate inventory holding costs.
Customer returns are skyrocketing in the United States, but many items are not returning to retailer shelves. WSJ takes a look at the complicated process and how retailers respond to increasing returns. Photo illustration: Laura Kammermann
The first step to solving the problem is to appoint an executive responsible for the end-to-end return process. Next, a company should measure both customer satisfaction and the detailed cost of returns.
Researchers at the University of Tennessee have broken down the feedback process into five “pathways” to help feedback managers better understand opportunities for improvement. We call it pre-sales, initiation, induction, networking, and processing and disposition.
The best way to mitigate return costs, of course, is to find ways to limit returns before they happen, in the pre-sale process. Making your return policy more restrictive can naturally limit returns, but it comes with the risk of lost sales. Start by improving product descriptions so customers have a better idea of what they’re buying. Then consider technology solutions that simulate the in-store experience. Walmart acquired Zeekit’s virtual fitting room technology and now allows customers to “try on” clothes in a virtual environment.
Many retailers can also enhance what we call initiation and induction processes, where goods enter the reverse supply chain.
A discount store in Las Vegas, Nevada. Finding local buyers or charities for returned goods that cannot be sold as new reduces waste, reduces costs and extends the life of items.
Photo:
patrick t. fallon/Agence France-Presse/Getty Images
Today, a growing number of retailers provide the tools for customers to print labels or barcodes and use services where they don’t even have to pack their returns. Larger retailers can ensure drop-off points are conveniently located, and some even offer free door-to-door pickup. Although it may seem expensive, it can put goods back on the shelves for a sale.
As goods go through the returns process, costs and waste increase dramatically. Once a package leaves a UPS store, it passes through a maze of warehouses connected by multiple transportation movements. Minimizing distribution with regional return facilities can limit transportation and move goods faster. If the products cannot be sold as new, artificial intelligence can help determine the best channel for each returned product and recover more of the product’s value.
Generally, products that cannot be resold are burned or buried. In fact, returns generate nearly 6 billion pounds of landfill waste and 16 million metric tons of carbon dioxide emissions each year, according to a study by returns management company Optoro. Making products easy to disassemble and reintroducing used materials and components into the manufacture of new products is a start.
Ultimately, finding local buyers or charities for returned goods that cannot be sold as new holds the most promise for reducing waste, reducing costs, and extending the useful life of items.
Alan Amling is a Distinguished Fellow of the Supply Chain Institute at the University of Tennessee. Thomas Goldsby is the Dee and Jimmy Haslam Professor of Logistics at the University of Tennessee-Knoxville.
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