According to the National Retail Foundation, 196.7 million Americans shopped in stores and online during the 2022 five-day holiday shopping period from Thanksgiving Day through Cyber Monday – nearly 17 million more than 2021 and the highest figure since NRF first started tracking this data in 2017. And The Wall Street Journal reports that:
The combination of online shopping habits and consumer-friendly policies have turned the nagging problem of returns into a major business concern, one that cuts into profit margins and undermines inventory planning and forecasting… Retailers can expect costs including customer care, transportation, processing and liquidation to amount to nearly 60% of the sale price of a $50 item.
For supply chain professionals, the increase in returns poses a huge challenge beyond the financial burden. How can the nightmare of reverse logistics be mitigated this holiday season and beyond?
In the following conversation, FourKites Vice President, Industry Strategy, Retail & CPG Mark Delaney and Director of Project Management, Network Collaboration Ryan Closser discuss the drivers behind the spike in returns and examine how reverse logistics can create cost efficiency and value. They also offer predictions for the busy holiday season and new year, and discuss whether a high return rate represents a new normal for retailers.
What are you seeing that is driving this year-over-year increase in returns?
Mark Delaney: COVID accelerated the adoption of e-commerce. Because of that, a lot of retailers are struggling with a tsunami of returns.
But there are other factors impacting returns besides the pandemic. One is economic. Everyone is trying to make their dollar go as far as they can, so returns this holiday season could be higher. Returns will also start taking place earlier this holiday season because most retailers are promoting Black Friday deals now instead of waiting.
Also, a lot of retailers, like Zara, are experimenting with charging for returns. If shoppers don’t return an item for 90 days, Zara has very little time to get the item back into the stores to sell. Because their items go in and out of fashion so quickly, returns become a huge challenge for them.
Some retailers are experimenting with charging only if you don’t return it in the store. The idea is, at least you’re in my store so there’s a good chance I’m going to get you to buy something else. But if you’re simply dropping it off in a third party location or shipping it back, I lose the opportunity to upsell you.
How can reverse logistics companies find space in such a challenging environment?
Ryan Closser: If you buy a product from a dotcom and send it back, it’s probably going back to a warehouse. But if you buy it from a store, it’s going back to that store, and it’s not like they have a ton of space.
There are different methods that some of these reverse logistics companies are employing to create space. It could be as simple as a drop trailer that is in the back of the store where workers can put the return. Once the trailer is full or is getting close to full, it is sent to the distribution center and what needs to be destroyed is destroyed, what can be repackaged, clean, refurbished, etc. can then go through that channel to another market. But it is a challenge because a lot of these stores are not built to have storage for goods.
How do retailers and their supply chain partners determine where to send a returned item?
Mark Delaney: Usability. If you’re returning a shirt and the shirt is clean and still in its packaging, then it should get back on the shelf. But if it’s been damaged or worn, it will be sent to a reclamation center or charity.
Another factor is seasonality. If I can get the winter coat back on the shelf before it starts getting warm, I have a shot at selling it. But if it’s March, then there’s very little chance I’m going to be able to resell that jacket.
Ryan Closser: Visibility helps you know where your product is coming from and if there’s a return, where is it going? You don’t want to pay for transportation multiple times, right? So if you have a trailer full of returned goods, it’s probably going to have to go somewhere to get sorted and then you’re going to pay to send that stuff somewhere else.
So how could you reduce all those miles and all of that waste by just knowing where this stuff needs to go? Does it go to a reclamation center? A charity? Back to the manufacturer of the goods who’s able to refresh and send it back to the retailer to resell?
What things should supply chain professionals consider incorporating into their operations to handle returns?
Mark Delaney: Ultimately, retailers need the right processes and technology that provide better control over inventory. For many, returns are in limbo until they actually are received at a sorting facility, creating frustration because “it’s in our network but we don’t know where it is.”
For seasonal items stuck in other parts of your supply chain, the trade-off and opportunity cost is enormous, especially when dealing with commoditized and holiday-specific products. So, having visibility at the point of acceptance helps you start managing that inventory much sooner in its chain of custody within your network to give it a chance of making it to the shelves again.
Having a granular view of the flow of goods also improves service levels. Take jeans: If a customer walks into a store and buys five pairs and plans to return four of them, the store’s inventory of that size might be temporarily wiped out, which frustrates other customers.
But if a store manager knows they have an inbound load that has exactly that size of jeans on it, customer service is improved, and it will help prevent the customer from going to another retailer.
Supply chain collaboration has increased these past few years — is having competitors on a common platform for the benefit of all realistic?
Ryan Closser: I think it’s a great idea, honestly. A lot of companies view it as “us versus Amazon.” That’s what American Eagle is doing. They’re saying “you don’t have to have Amazon be your fulfillment solution, we can be your fulfillment center.” I think that there are benefits to everybody collaborating on one single platform and sharing data and helping to defray some of that waste and cost. American Eagle is definitely pushing the boundaries of what people thought was feasible in that retail space for fulfillment, and that would be pretty great to engage them to go even further.
Does reverse logistics and the rise of returns put more pressure on suppliers to also be better at collaborating? Should retailers make reverse logistics part of their supplier scorecard?
Mark Delaney: Yes – by collaborating with your suppliers, you can improve service and cost. Returns should represent a larger factor in that scorecard process.
Ryan Closser: There’s also an aspect of, “why is the product being returned?” Is there a defect? Is the quality not up to the expectations of the retailer or the consumer? Being able to scorecard and say, 5% of these goods are being returned and we can see why — because there’s a hole in the right sleeve of all these shirts.
How can retailers address the potential of fraud in returns?
Ryan Closser: Back in the day, it was called “rocks in a box.” Somebody buys a PlayStation and then returns the box full of something that’s not a PlayStation. It requires human intervention to validate that what is being returned is the item that was purchased. It’s very easy to validate in a store. If somebody brings up three shirts, that person is looking at those three shirts and ringing them up.
But reverse logistics operates at such a high volume you may not know if what you’re scanning is what the barcode says it is. You need a human to validate the return. I wonder if soon we’ll see RFID embedded in some of this stuff so it’s very easy to validate. There’s a fraud prevention aspect that automation and technology can probably help lower.
Mark Delaney: If you talk to the folks on the loss prevention side of the business, they have largely been monitoring how many times a particular customer returns. Some folks will return at an average rate, but there are some folks who abuse that.
But again, this could be a slippery slope, much like charging for returns. Do retailers really want to poke the bear and say, “you know what, I’m not going to let you return anymore?” That’s a dangerous precedent to set. But there are a lot of retailers who are tracking that from a data standpoint.
Any predictions for the holiday season?
Mark Delaney: Right now it’s battening down the hatches for Q4. But going into Q1, there’s going to be a lot of retailers and suppliers trying to figure out what to do from a returns logistics standpoint, whether it is automation, charging for returns, or identifying folks who return too often and blacklisting them.
There’s going to be a lot of those sorts of conversations because now that the data is more readily available in terms of how much it’s costing. They’re going to be taking whatever steps are necessary to combat the issue, including collaboration not only with their suppliers, but potentially with other retailers.
Ryan Closser: Q1 is going to be very interesting. Inventory levels are super high right now. Are these the goods that consumers want to give during the holiday season or not? The products that people want are going to be delivered mid-next year. We aren’t seeing any kind of a surge right now from the transportation aspect in Q4, which is unique.
This is the first time in my 17 years of experience that it’s been kind of flat. You generally see a huge push of goods going from the ports to the distribution centers to the retailers but we’re not seeing it this year. I think that it’s going to be a unique and potentially challenging Q1 when it comes to inventory levels and returns.