This past holiday season, as with many other times of the year, the difference between making or losing money online came down to one thing for many retailers: How effectively and efficiently they handle returns of merchandise.
Returns are as old as the retail industry itself. But they play a much larger role in e-commerce. That’s why a retailer’s process for handling them, often called reverse logistics, is so critical. It includes everything from the retailer’s processes to its inventory-management systems to the industrial real estate where its returns are handled.
Consider that the average return rate for merchandise bought in stores is roughly 8 percent. The e-commerce return rate is much higher – 15 percent to 30 percent, depending on the merchandise category – due to years of ingrained behavior among shoppers. Specifically, folks tend to buy multiple varieties of a given product online, examine them at home and then return all but the one they opt to keep.
This becomes an expensive proposition, considering the robust growth of e-commerce. To wit, eMarketer estimates that November-December online sales in the U.S. totaled $123 billion. Applying the typical rate of online returns to that estimate means that up to $37 billion of goods came back to retailers in the post-holiday weeks. Retailers endeavored to limit that loss by assessing which goods can be resold, where and how quickly.
How to deal with those returns is a complex challenge that many retailers address with a combination of solutions.
Dedicating Warehouses for Handling Returns
Many retailers and shippers process returns in their own warehouses. But there’s a marked difference between dedicating space to processing returns and just letting them stack up in a corner of an outbound warehouse for examination when time allows.
Some high-volume retailers have distribution centers assigned solely to process returns. And processing a return requires, on average, two to three times more touches – actual human handling of the item – than outbound distribution. This includes inspecting and testing the item to see if it’s eligible for resale; cleaning it, repackaging and labeling it; and, in some cases, shipping it to its eventual place of resale or disposal.
Those additional touches require more warehouse space, often as much as 15 percent to 20 percent more than does normal goods distribution.
Hiring Third-Party Logistics Companies to Help
Some retailers hire third-party logistics firms (3PLs) to handle their return processing for them. Big 3PLs like XPO Logistics have the scale, facilities and systems already in place to handle large amounts of both inbound and outbound material. Some providers also operate online marketplaces for selling returns, such as the Blinq and Bulq sites operated by Optoro, a provider of returns-optimization software and services.
Demand for 3PL services is robust. Case in point: 3PLs were responsible for more than half of the largest U.S. warehouse leases signed in the first half of 2018. These operators collectively occupy 700 million sq. ft. of industrial space in the U.S. and are expanding at a healthy rate of 3 percent to 5 percent annually.
Using Returns-Optimization Software
Returns-optimization software can help retailers quickly analyze returns to determine which can be resold and how, which should be sold to discounters, and which should be donated or destroyed. Time is of the essence in that process, given that certain merchandise categories depreciate faster than others. For example, returned electronics lose on average 4 percent to 8 percent of their value each month, according to Optoro. In comparison, the depreciation rate for women’s fashion apparel is 20 percent to 50 percent over two to four months.
Directing Returns to Stores
Among the fastest methods of processing returns is to keep them out of the warehouse all together. To that end, stores have a natural advantage in being able to almost immediately put returned merchandise back on the shelves, provided it is in good condition. In addition, shoppers who return merchandise to stores rather than shipping it back to the retailer are likely to spend a bit more than their refunded money while they’re at the store.
Several retailers aim to capitalize on those advantages, as well as reducing their shipping costs, by incentivizing shoppers to make their returns at stores. Walmart allows customers using its app to bypass customer-service lines at its stores when returning merchandise bought online or in-store. Amazon has partnered with Kohl’s to allow shoppers to return Amazon merchandise at select Kohl’s stores.
Ultimately, with e-commerce sales now growing at double-digit percentages annually, retailers have multiple tools available to help optimize their reverse-logistics processes and reduce their cost of returns. Doing so addresses one of the greatest drains on e-commerce profitability.
