How Retailers Can Control Costs Even As Return Rates Climb

Returns are a cost of doing business for any retailer. But despite representing $309 billion in lost sales for U.S. retailers last year, they haven’t always been a strategic focus.

In the wake of COVID-19, returns are receiving serious (and necessary) attention for several key reasons:

  • Retailers are spending more processing returns in stores. They are expected to keep merchandise out of circulation due to COVID infection concerns and to provide employees with personal protection to prevent infection spread;
  • The costs of shipping online purchase returns are up after the sudden surge in e-Commerce sales overwhelmed delivery companies, according to Bloomberg;
  • Increased e-Commerce adoption, driven by COVID shutdowns, is expected to lead to higher overall return rates, because digital purchases are more likely to be returned store purchases. Return rates at physical stores range from 8% to 10%, but rise to approximately 20% for e-Commerce, according to data from CBRE. During the busy holiday season, digital return rates can spike to 30%; and
  • Return policies and experiences have a significant impact on customer loyalty. In a survey of consumers conducted by Doddle, 84% said a positive returns experience encourages them to shop with a retailer again. Conversely, 73% of consumers responding to a survey by Returnly said they would not shop with a brand again after a poor returns experience.

Under these conditions, returns could quickly become a logistical nightmare, a customer experience risk and, most of all, a drain on profits. For retailers struggling to avoid bankruptcy or emerge from it, a growing returns quagmire could be deadly.

“Remember that retailers built their supply chains around their brick-and-mortar business and are not optimized for e-Commerce,” said Alex Fitzgerald, Principal in the Consumer Practice of Kearney in an interview with Retail TouchPoints. “Many are looking to understand how they can improve the economics of their e-Commerce supply chain in order to meet evolving customer needs without compromising margins. Returns is just one example.” 


In-Store Returns Trending Up, But Not Pouring In

When stores began to reopen, there was a fear that consumers would storm return desks. Indeed, one-third of consumers responding to a survey by Optoro said they had kept one or more purchases that they planned to return when stores reopened.

Fortunately for retailers, that surge did not materialize.

“Volumes of returns are not overwhelming,” said Andy Mantis, Head of Data Insights for 1010data. Mantis analyzed the monthly dollar value of returns year-over-year (YOY) for several categories and found that “the dollar value of returns is still below prior years” as of July, although it was trending up.

Mantis looked at returns as a percentage of sales over the prior 60 days because “returns normally happen within a two-month window from purchase,” he said. “Most industries now have return rates close to normal levels. However, apparel and department stores are elevated. Normally, apparel returns are roughly 7.5% of the prior two months, but they are running closer to 10%. Department stores are normally at 11%, but they are currently near 14%. Unfortunately, this is the group that has suffered the most during COVID-19.”

Chris Ventry, VP in the Consumer and Retail practice of SSA & Company, noted that “some of our clients saw an increase in returns at their stores in the short term, but people are becoming more comfortable returning as well as purchasing online,” lessening the need to flock to retail stores to make returns. Another factor that kept the anticipated rush of returns at bay was retailers extending the time limit for returns, effectively spacing out pent-up volume.

Although retailers were not overwhelmed by returns immediately after reopening, the tide could turn later this year, said Kelvin Sakai, Director of the Supply Chain Advisory for CBRE. The rate of e-Commerce returns typically hits approximately 30% during Q4, , and if an elevated level of e-Commerce adoption “persists through the holiday season, we can assume e-Commerce returns might exceed 20% to 30%,” he said. To prepare, “retailers should be considering enhancements to their warehouse returns capabilities or increased use of third parties” that specialize in returns. 

Sakai also suggested that retailers encourage curbside buy online, return in-store (BORIS) during and after the holidays. Consolidating returns at a store location is less costly than paying to ship one item from a residence, and a larger volume of customers can be moved through quickly if they don’t have to exit their cars.

Infection Control: Burden Or Benefit?

There are no industry standards for COVID-19 infection control with returns, but the National Retail Federation (NRF) advises retailers to “consider requiring returned items to be sealed and stored separately, requiring employees to use PPE (personal protection equipment) to process, handle and disinfect returns, and storing returns in isolation for a safe time period before returning them to [the] sales floor.”

The association also recommends that retailers “suspend or modify returns and exchanges to limit interaction between employees and recently returned items.”

Whatever solutions are employed will add cost to a returns process that already cuts into profit margins. On average, food, drug and mass merchants lose five margin points on returns; for department and specialty stores, it’s six points, according to IHL Group.

But brick-and-mortar retailers could take a page from e-Commerce subscription services such as Stitch Fix and Rent the Runway, and turn those costs into a powerful selling point, Ventry suggested.

The business model for web sites offering rentals, secondhand merchandise or subscription boxes depends on cycling products between customers, and those companies have not only led the way in developing practices for cleaning and sanitizing but also in marketing those processes as a benefit. “This concern about health and safety has only helped them,” Ventry said.

Even before COVID-19, many shoppers realized that “new” items in physical stores were not always clean, because they could be tried on and put back on a rack immediately. Creating a marketing message around applying stricter hygiene standards at stores would resonate with consumers and make them feel more at ease, Ventry added.

1010data’s Mantis suggested that retailers “view returns through the lens of the profitability of your customer. A small percentage of your customers drives your profitability, which means that you want to give latitude to your profitable customers and be very stringent with the ones that you’re losing money on.

For example, shipping products back in certain cases costs more than a retailer could recoup through vendor credits, liquidation or resale. If customer service representatives have that cost data on hand and can combine it with the purchasing and returns history of the customer, they could be allowed to tell the customer to keep the product, not send it back. With this approach, the retailer limits its losses and the customer is delighted, he explained.

Mantis added that retailers should test scenarios with different customer cohorts to discover more effective ways to manage returns. “If ever there was a time to test things, now is the time,” he said. “Given that the stakes are so high, act quickly to see what can be implemented in advance of the biggest shopping season of the year.

[This is part one of a two-part report. Part two will publish next week.]

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