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Returns are causing a holiday hangover for retailers

Consumers will return around $158 billion worth of goods

Transportation is just one of the many costs of a reverse supply chain (Photo: Jim Allen/FreightWaves)

On Monday, millions of Americans celebrated Valentine’s Day, but retailers were still celebrating Christmas. 

While the winter holiday season ended over a month ago for consumers, retailers are still in the thick of it, contending with a mountain of product returns the likes of which they’ve never seen. According to a ​​report from the National Retail Federation, U.S. consumers will return about $158 billion worth of goods purchased between Nov. 1 and Dec. 24. That’s more than a 56% increase year over year.

“Peak season doesn’t end after the holiday shipping rush is through,” Laura Ritchey, executive vice president and COO of e-commerce technology company Radial, explained to Modern Shipper. “In fact, that’s when the third phase of peak season commences — processing returns and optimizing operations from peak lessons learned.”

Despite supply chain disruptions and other pandemic-related challenges, holiday retail sales in 2021 reached a record-high $886.7 billion, but the NRF estimates that 17.8% of those purchases will be returned, up from 13.3% in 2020. With those same supply chain and COVID-related issues driving the cost of each return higher, retailers are looking at a massive holiday hangover that could cost them billions.

Turning up the volume

Of course, one of the biggest challenges retailers face on the return side this year is the sheer volume of products being taken back into inventory. 

Per UPS, one in five adults made at least one return before Christmas this year, a 20% rate that doesn’t take into account the sea of returns that happen after Christmas. Last year, the NRF estimated that U.S. consumers returned a total of about $101 billion worth of holiday goods, but that number will be even higher this year for several reasons.

One is booming e-commerce sales. According to data from Mastercard SpendingPulse, e-commerce sales accounted for about one-fifth of all holiday sales in 2021, up from 15% in pre-pandemic 2019 – but those sales have a catch for retailers.

“As more and more people get into e-commerce and buy more items that they traditionally wouldn’t … that naturally has an effect to increase returns, because as you get more comfortable shopping, returns end up being a corollary,” explained Krish Iyer, vice president of strategic partnerships and industry relations for shipping and logistics provider Auctane. “The things that you are more comfortable shopping for then, therefore, become the items you’re more comfortable with returning.”

Watch: Did retailers overshoot consumer desires?

With e-commerce, consumers are more comfortable shopping for just about anything, and that’s led to a higher return rate on those purchases. ​​According to David Sobey, CEO and co-founder of Happy Returns, which manages returns logistics for PayPal, anywhere between 15% and 40% of e-commerce purchases are returned, compared to 5%-10% of in-store purchases.

Echoing those numbers, research from returns management platform goTRG estimates that about one in five products sold through e-commerce channels end up back in retailers’ inventories.

“E-commerce purchases have higher return rates than traditional in-store purchases, with over 20% of all items being returned. In 2021, e-commerce purchases grew by 61% year-over-year, which led to over $218 billion in e-commerce returns,” Fara Alexander, director of marketing and communications for goTRG, told Modern Shipper.

This holiday season, online sales accounted for $218.9 billion, an 11.3% increase over 2020, per the NRF. A CBRE-Optoro report, using a projection of $222.3 billion, estimated that e-commerce sales will account for $66.7 billion worth of product returns –– with that projection turning out to be accurate, retailers should expect e-commerce returns to be in the region of $60 billion.

A new wave of online shopping

There’s little doubt that the volume of returns will be greater this year than last, but why is that the case? According to experts, shifting consumer sentiment is driving a new wave of shopping habits that are putting products back into inventory. One such practice is bracketing.

“Higher e-commerce return rates are propelled by the ‘bracketing’ trend, where consumers buy multiple sizes, colors, etc. of a certain product, with the intent to keep one and return the rest,” Alexander explained.

Bracketing has become especially common in the case of apparel because buyers have less of a feel for how a piece of clothing looks on them when shopping online as opposed to in-store.

Another factor is that low inventory levels forced shoppers to buy earlier this year. According to Optoro, 41% of shoppers said they planned to do their holiday shopping earlier this year than they did last year, and those quick-trigger purchases of low-stock goods may have resulted in buyer’s remorse. Other shoppers returned goods because inventory shortages forced them to go with a second or third choice.

All of that early shopping is driving another trend: extended returns policies.

“If you buy in June, July, August for stockpiling reasons for Christmas, then what is an appropriate returns window?” Iyer asked.

For many retailers, the answer is longer than usual. Brands like Saks Fifth Avenue, Apple and Nike are offering returns within two to three months rather than the industry standard 30 days. That means more opportunities to make returns.

A heavy price

An uptick in the volume of returns would be a headache any year, but it’s a nightmare when returns cost as much as they do today.

“The most obvious cost is the lost sale on the product, potentially including the cost to originally ship to the customer if that is refunded. Retailers don’t recoup that cost from the carriers,” said Ritchey.

But the cost of returning a product goes much deeper than that. Beyond shipping refunds, retailers also have to cover transportation, processing, labor, quality assurance and a host of other linkages across the reverse supply chain.

The CBRE-Optoro report found that, when factoring in costs like processing and transportation, returning a $50 item would cost $33 –– that’s 59% more than it would have cost last year. In total, the report projects a 7% increase in costs across the board.

“As the volume of returns grows, it becomes more expensive for retailers to transport the returns, warehouse the returns and then invest in the labor to process the returns,” Alexander said.

Capacity is one of the largest expenses. At the moment, warehouse space is at a premium, and the CBRE-Optoro report estimates that reverse logistics facilities typically require 20% more space and labor capacity than a standard, forward logistics facility. 

To enable a smooth and reliable returns process, retailers will need to invest in space, but they’ll also need to fill it with workers, which are in tight supply amid ongoing shortages of warehouse labor and truck drivers. According to data from goTRG, those labor costs are up 16% compared to 2020.

goTRG also estimates that the cost of transporting goods to those warehouse locations are more than 42% greater than they were a year ago. Then, the returned goods must be processed, which adds yet another cost.

“Once the return is received in the warehouse, it has to be processed to give the customer credit, if not already received when shipped, which continues to add costs to the return – all borne by the retailer,” Alexander explained.

Processing has been especially costly for retailers during the pandemic, which has necessitated additional care when processing used products.

“With COVID, you have to have a lot more in your quality assurance process when accepting apparel items and making sure that they could be OK for resale,” Iyer added.

Dismantling the atomic bomb

With volume higher than ever and costs on the rise, holiday returns will create unprecedented losses for retailers this year –– unless they can find a way to cut costs. Of course, one of the easiest ways to recoup on losses is to resell returned products.

“Products can be … data-wiped sanitized and repackaged to be sold on a retail marketplace, sent back to the vendor, recycled, and more,” explained Alexander.

She also emphasized the value of automation:

“Retailers typically prepare by hiring seasonal labor to handle the increased volume of sales and returns,” she said. “As costs have risen due to labor shortages, it has certainly become more of a challenge for them to quickly scale their workforce up or down to meet demand. 

“That is why many retailers have started leaning more on technology-enabled solutions to help streamline productivity and make them less reliant on human labor.”

Hiring additional workers for the winter months is not an uncommon strategy for retailers, but with the labor supply in flux, relying on automation can help fill those gaps. It can also allow retailers to enable more self-service returns, which can help them cut the transportation cost of picking up returns from a customer’s residence. 

With the right technology to track those returns and make the process simple for consumers, self-service returns present a major cost-saving opportunity.

Read: More shippers address financial and carbon costs of post-holiday returns

Read: Return to sender: Holiday product returns will stress supply chains

“On the self-service component, there are not a lot of technology offerings out there which are very comprehensive, so it creates a lot of hesitancy for companies to utilize those portals,” Gaurav Saran, CEO of ReverseLogix, explained to Modern Shipper.

His company’s new order tracking module, Pulse, is the sort of system that can give self-service returns a new value proposition for retailers. Saran and ReverseLogix offer retailers a returns management system, similar to an OMS or WMS, that creates a separate slice of their business specifically dedicated to returns. 

According to Saran, decoupling reverse logistics from the rest of the supply chain can ease pressure on a system that’s designed to handle goods flowing in one direction, not both.

“As the market is evolving, companies are realizing the need for purpose-built systems to manage specific aspects of the business,” he said.

With a separate network for returns, retailers can manage them alongside their forward-facing inventory. But the most effective way to recover losses on returns doesn’t involve the supply chain at all.

“How do you dismantle an atomic bomb? Don’t build one to begin with,” said Iyer. “It’s the same idea: Could you reduce returns by preventing them to begin with, with better sizing, better descriptions, better photos, things like that?”

If a consumer has a better idea of what they’re buying and when it might arrive, chances are they’d be less likely to make a return. Online apparel shopping is a perfect example –– companies like Grin and Revery.AI are building virtual dressing rooms to give shoppers a better idea of how a piece of clothing would look on them, reducing the likelihood that they will buy and return a shirt or pair of pants that doesn’t fit them.

AI-driven technologies can also be useful tools when it comes to reducing the volume of returns. Features like product recommendations and demand forecasting can help retailers connect consumers with products that are good fits for them and anticipate when a spike in returns might occur.

“To get ahead of returns –– regardless of the season –– retailers must leverage technology like predictive analytics and invest heavily in customer care to ensure customers find the right products online the first time they make a purchase,” explained Ritchey.

Of course, returns are inevitable, but things like automation and returns management systems can help eliminate their cost. Plenty of retailers have invested in these money-saving measures –– those who haven’t are in for a holiday hangover.

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Jack Daleo

Jack is a staff writer for FreightWaves and Modern Shipper covering topics like last mile delivery and e-commerce fulfillment. He studied at Northwestern University, majoring in journalism with a certificate in integrated marketing communications. Previously, Jack has written for Backpacker Magazine and enjoys travel, the outdoors, and all things basketball.