The unsustainable cost of free returns
By Jessica Schiffer | Jul 29, 2019
Brands are tightening up their famously lenient policies to combat rising costs.
Key takeaways:
A 95 per cent spike in e-commerce returns is prompting brands from Amazon to Nordstrom to re-evaluate lenient return policies.
10 per cent of online returns are donated or incinerated, and items that are restocked must be hand-evaluated for potential damage, and then steamed or dry cleaned before being restocked.
US returns alone create 5 billion pounds of landfill waste and 15 million tonnes of carbon emissions annually, equivalent to the amount of trash produced by 5 million people in a year, according to one estimate.
In the early days of e-commerce, deep-pocketed companies like Amazon offered free shipping and returns to juice growth and help customers overcome their misgivings about ordering online. These standards have been adopted en masse by retailers, including debt-ridden Gap and Neiman Marcus, who can’t afford not to match the competition.
However, sustaining such initiatives is becoming increasingly unaffordable. E-commerce return rates have spiked 95 per cent in the last five years. Happy Returns forecasts that the value of returned goods will rise from $350 billion in 2017 to $550 billion by 2020 in the US. The new normal has set off a costly and vicious cycle that even Amazon can’t withstand — alongside companies like Nordstrom and LL Bean, the e-commerce giant has tightened up its policies.
The cost of free returns
Retailers lose a third of their revenue to returns, says RSR Research retail analyst Paula Rosenblum. Fashion-focused retailers are hit particularly hard as customers swap in-store dressing rooms for the privacy of their own homes. California e-tailer Revolve did $499 million in sales last year but spent $531 million on returns, after accounting for processing costs and lost sales. The number does not account for the retailer also covering the shipping costs of returns. Revolve declined to comment on whether it’s working to resolve this discrepancy.
The expenses continue to mount once the apparel and footwear reach a retailer’s returns hub. About 10 per cent of what Happy Returns, a reverse logistics platform, sends back is donated or incinerated, according to chief revenue officer Glenn McMahon. These goods often end up on a warehouse shelf where they can take up space for up to two years before their disposition route is decided. This racks up costs, especially in the UK, where warehouse space is already scarce. The other 90 per cent is hand-sorted to assess potential damage, before being either steamed or dry cleaned and then sent to be restocked. All this results in time away from the shop window, increasing the risk that returned garments wind up on discount.
Adapting bricks-and-mortar
Some brands have found it useful to adapt existing stores into return hubs, which streamlines the return process, allows for early physical detection, and cuts down on the costs incurred from last mile delivery and pick-up to multiple locations. “Any large pure-play online retailer without physical return locations will incur the highest costs for returns,” explains Jonathan Treiber, chief executive of offer management platform RevTrax.
Nordstrom’s new Local shops, for instance, carry no inventory but allow customers to drop off returns at its locations in New York and California. The stores will also process returns from non-Nordstrom brands, transforming a cost centre into a source of income. Similarly, Amazon has partnered with Kohl’s since 2017 to leverage a network of 1,150 return locations.
A newer alternative is Happy Returns, which has clients including Revolve, Everlane and Eloquii. The California-based company runs 400 “Return Bars” in select shopping malls, stores and college campuses in the US. Clothing is then shipped in bulk to various return hubs where it’s eventually shipped out to be restocked, liquidated, recycled or donated. Return volume has increased 10 times in the past 12 months.
Although the company would not provide specifics, Happy Returns is cheaper than most traditional options. “Our return rate is pretty low, but Happy Returns... have been able to minimise the cost for us while giving our customers another convenient return option," says Chris Riccobono, founder of menswear label Untuckit.
Environmental costs
Returns in the US alone create 5 billion pounds of landfill waste and 15 million tonnes of carbon emissions annually, equivalent to the amount of trash produced by 5 million people in a year, according to Optoro. In the EU, total packaging waste in 2016 amounted to nearly 87 million tonnes or about 170 kg per person. The majority of brands rely on single-use plastic materials, which are difficult, if not impossible, to recycle.
“With rampant returns, you’re adding to the impact of clothing manufacturing,” explains Stiv Wilson, director of campaigns at The Story of Stuff, an environmental non-profit. “You’re going to war with a bad army, and potentially doubling the carbon footprint of a garment in the process.”
The simplest and fastest tip that experts offer retailers is to lessen the waste involved in every shipment. Net-a-Porter, for instance, sends products out in branded boxes with black tissue paper and ribbon. That package is then surrounded by a second cardboard box, creating what Wilson calls “mountains of waste”. The amount of single-use packaging is then doubled if the customer exchanges an item.
A person familiar with Net-a-Porter’s operations says that the majority of its box packaging is already recyclable or biodegradable and that the e-tailer is actively working to replace plastic hangers, branded bags, ribbons, jewellery boxes and labels with more eco-friendly materials. Net-a-Porter is also currently testing a move to electric vehicles for its premier service in an effort to reduce its CO2 emissions.
Brands like Gabriela Hearst, Maggie Marilyn and Reformation, are also investing in more sustainable packaging that is either compostable or biodegradable. One current hurdle is that this packaging tends to be between two to 10 times more expensive than plastic packaging, which averages around 4 cents per bag. But this is marginal to juggernauts like Zara, who recently announced it would use 100 per cent recycled cardboard and partially recycled plastic for all of their shipments. However, Zara’s intense clothing production schedule, which involves releasing 500 new items each week, could render these initiatives moot.
Investing in technology
Hiring data analysts whose sole focus is the reverse supply chain, as brands such as Asos and Zalando have done, goes a long way in lessening waste. “Brands need to be looking closely at the data surrounding what’s being returned, what didn’t sell, and what they should produce less of,” says Rachel Kibbe, founder of textile collector Helpsy. Analysts can also help companies tweak and perfect the sizing information around each item so that it’s more accurate, ideally providing the customer with less reason to return, says Eric Heller of digital marketing agency Wunderman Thompson.
Reverse logistics companies like Happy Returns are now providing their partners with dashboards that summarise their brand’s most common reasons for returns, the percentage of returns resulting in exchanges or site credits, and even direct feedback from customers. It discovered that one partner had a higher-than-average return rate for a summer style due to fit issues. The retailer was then able to update its product page to better explain the fit to their customer and reduce the number of returns.
Fast fashion companies like Zara and H&M are also investing in better fit analysis, with both now relying on software that suggests sizes for online customers after they input their height and weight. Other companies are getting creative: In 2017, the British lingerie retailer Figleaves added a feature to its website allowing shoppers to speak to a fitting assistant via Skype before making a purchase. Fifteen months after launch, the company’s chief executive said that returns have dropped.
Industry experts agree that standardising fit across the industry would do wonders for all of the shipping back-and-forths. Roughly 72 per cent of American shoppers returned items last holiday season due to fit issues, according to a survey by Bodyblock AI. But achieving standardisation is a logistical nightmare, making the reduction of a brand’s carbon footprint the easier and more immediate option.
Article was originally published here.