We've Created A Monster: Retail's Growing Returns Problem
By Steve Dennis | Oct 29, 2018
At the beginning of the year I published "A Baker's Dozen Of Provocative Retail Predictions For 2018." In No. 11, I opined that the industry's problem with returns would soon start to get the attention it deserves. For awhile now I have seen the growing rate of costly product returns as a ticking time bomb—particularly as e-commerce garners greater share. As we've gone through this year, stories of retailers tightening their return policies, tracking "serial" returners and going after returns fraud have become more common. Earlier this month, Axios joined in the chorus, calling attention to the problem of e-commerce returns in particular. Unfortunately, despite greater awareness, the issue is likely to get worse before it gets better. But eventually something has to give.
Product returns and exchanges have been the nemesis of the direct-to-consumer industry going back to the mail-order catalog days. For products that are fit and/or fabrication sensitive (think fashion, intimate apparel, shoes) returns often exceed 30%, and rates north of 40% are not unheard of. Back in the good old days, while high return rates were definitely an area of concern, the fact that the customer often paid “shipping & handling” costs helped soften the damage to the bottom line. In fact, for some brands, shipping & handling was actually a profit center.
Today? Well, not so much.
More and more free shipping is becoming the norm. Many “disruptive” brands have made free shipping “both ways” an intrinsic part of their business model. And as the holiday season approaches we are about to enter a period where free shipping offers will practically be tables stakes. In fact, Target has already announced that it will offer free two-day shipping beginning November 1. None of this bodes well for turning the tide on returns.
As is so often the case, Amazon remains the 800-pound gorilla here, particularly as free shipping is core to the Prime value proposition. And while Amazon charges for this privilege, its total fulfillment costs continue to grow as a percent of sales. While the company does not share much detail about the underlying drivers of this escalation, it's hard to imagine that product returns are not a key contributor.
Some argue that fast, easy and inexpensive returns are all just part of being customer-centric or staying competitive. And certainly that is true. Yet it's also true that the growing problems are largely self-inflicted and, in many cases, distorted by the increasing popularity of e-commerce. Online shopping can be incredibly convenient. At the same time it's next to impossible for most consumers to be sure of fit, color accuracy, product quality, etc. sight unseen. So given there is no additional direct cost, it's not surprising that many customers buy 2, 3 or 4 of the same item in different colors and/or sizes, fully expecting to return all the rest for credit. In the quest to be customer-friendly many companies have radically changed their cost structure. And not in a good way. We have met the enemy and he is us.
In "normal times"—and for any number of reasons it's clear these are far from normal times—such liberal and wildly unprofitable practices would have long been tamed by market forces. But as many investors have been willing to value growth over profit, the consumer has seen a huge benefit, while many brands continue to see their margins shrink.
Confronted with this reality, smart retailers are not only refining their policies and adjusting their pricing, but also turning to new technology and/or partners like Happy Returns, Optoro (which raised $75 million earlier this year) and others that seek to help brands deal more effectively with this rising tide. At some level, returns and exchanges are simply an inherent part of the retail business. Seeking to make the best of a necessary, but costly, part of the retail equation is eminently sensible.
Real progress on reducing the overall incidence of returns, however, must focus on the root causes. Many retailers have made significant progress on reducing returns due to product damage, shipping errors and the like. Taming the monster of returns that have nothing to do with delivery quality, and everything to do with intentional customer decisions, is far more vexing.
Article was originally published here.