The mounting cost of returns is a growing and scary problem for many retailers that simply cannot go unchecked much longer.
Returns have long been the nemesis of many retail brands. When a product is returned or exchanged, not only does the retailer experience incremental supply chain costs, but often the item cannot be resold at the original price owing to damage, wear and tear, or obsolescence/devaluation given the passage of time — particularly an issue with fashion or seasonal merchandise. As I laid out in my 2018 retail predictions last month, the mounting cost of returns is a growing and scary problem for many retailers that simply cannot go unchecked much longer. As e-commerce continues to grab share, it’s going to get worse — perhaps considerably — before it gets better.
We’ve Created A Monster
Over the years, I have worked for two retailers with significant catalog businesses. I’ve also been the chief operating officer for a furniture brand. We worried about returns, which could often run in excess of 30% in certain product categories — quite a lot.
Of course, back in the day, outbound shipping was rarely free, and free returns and exchanges were virtually unheard of. Today, as the direct-to-customer business is almost entirely e-commerce driven, free shipping is nearly ubiquitous, and “hassle-free” returns and exchanges are increasingly common. So not only has the average net per-item cost of handling a return gone up, we’ve made it so easy to return and exchange products that frequently customers will order three or four of the same item in different sizes or colors to be sure they get one item that works.
By design, whether we like it or not, as retailers have become more customer responsive, they’ve driven return and exchange rates higher at the same time the cost of those returns has escalated. Whoops.
And It’s Only Getting Worse
It’s probably no shock that return rates for products purchased in physical stores are typically less than products purchased online — often radically so. As e-commerce captures a growing share of all retail sales, omnichannel brands that have high return rates and high return handling costs find themselves in the unenviable position of seeing their marginal economics deteriorate — what I refer to as the “omnichannel migration dilemma” — as their online business grows.
Conversely, for some “digitally native” brands that were starting to experience an unsustainable rate of returns, this has been a huge motivator for opening their own brick-and-mortar locations.
Moreover, given Amazon’s hyper-growth and its (and the U.S. Postal Service’s) willingness to massively subsidize delivery, many brands feel they have to maintain free shipping and liberal returns policies simply to remain competitive. None of this is all that new, but for many brands, it is fast becoming a huge issue.
Something Has To Give
Rumors abound that even Amazon is starting to worry about the escalating cost of returns and exchanges. Of course, as long as it continues to be valued based on growth instead of profitability, there can be no assurances of any major changes anytime soon. Yet we are seeing some small shifts.
Last week, LL Bean announced a change to its (some would say ridiculously) liberal return policy. A number of retailers have quietly been raising their average minimum order sizes to qualify for free shipping or implementing more restrictive measures, including processes to combat fraud. New technology is being deployed to try to minimize returns upfront. And some retailers are waking up to the fact that their physical stores can actually be assets and are encouraging online shoppers to return and exchange products in their brick-and-mortar locations. It turns out that not only is it typically cheaper to handle returns in a physical store, but consumers often make incremental purchases when they come in.
While Amazon has added to the problem, there are dozens of other venture-capital-funded pure-plays that have made free and easy returns a centerpiece of their value proposition. The good news (for traditional retailers, not consumers) is that it is increasingly clear that many are having difficulty profitably scaling and are not viable enterprises over the long term. As more of them fail completely, scale back or get acquired by a traditional retailer, the pressure to maintain unsustainable pricing and policies will subside. I predict we will see a lot of this activity over the next year or so. Whether this will have a dramatic effect on mitigating the escalating costs remains to be seen.
A Delicate Balance
Legacy retailers like Neiman Marcus, Nordstrom and Lands’ End have made liberal return policies a key part of their value proposition for decades. Newer brands — think Bonobos, Zappos and dozens of others — have leveraged hassle-free returns and exchanges as a key component of their growth story. Now it’s increasingly hard to put the genie back in the bottle.
Brands that seek to materially lessen the blow from the unsustainable cost of returns will have some harsh realities to deal with, not the least of which is that research shows consumers will often shun retailers that don’t maintain generous policies. Chances are that any brand that decides to revert back to “the good old days” may suffer from first-mover disadvantage.
But let’s be clear. While some brands have the financial wherewithal to absorb the greater and greater hit — or will mitigate the costs in a way that does not materially impact the customer experience — most cannot. And when the bomb finally goes off, we should all be prepared for a fair amount of collateral damage.