Buyers' Remorse: Customer Returns Plague E-Retailers

The flip side of shopping convenience is that it works both ways, much to the horror of retailers now reckoning with the costs, hassle - and negative impact on margins - of customer returns.

As much as a third of all ecommerce sales get returned. The trend is growing - dramatically - as much as 15 percent. And most customers prefer to ship rather than bring the products back themselves, which adds to the cost.

Traditional retailers have long factored the impact of returns into their calculations and have planned accordingly. E-retailers, fueled by inexperience and a surfeit of the optimism that comes with the entrepreneurial mindset, have not been prepared for the degree to which returns drive profits. The issue is likely to become more of a concern as internet purchases increase both for dedicated eretailers and for traditional retailers who are making a concerted push to capture the benefits of convergence. Reports that UPS and FedEx were overwhelmed this year by last-minute Christmas internet purchases and were unable to handle the volume, resulting in late delivery of many gifts, is indicative of the adjustments the players in this aspect of the economy have to make. It also suggests that returns may rise even further due to disappointed recipients and purchasers of gifts that don't arrive on time.

The challenge going forward will be both to manage the costs and to provide incentives, promotions - and additional considerations to consumers so that the tide of convenient returns does not reduce the benefits of the ecommerce trend. JL

Shelly Banjo reports in the Wall Street Journal:

Behind the uptick in e-commerce is a little known secret: As much as a third of all Internet sales gets returned,

Free shipping and lenient return policies have given online retailing a huge boost. Now, chains are mining their order data to get shoppers to keep more purchases.

And the tide of goods flowing back to retailers is rising. Shipper United Parcel Service Inc.  UPS in Your Value Your Change Short position expects returns to jump 15% this season from last year, making them a significant and growing cost for retailers.

The stakes get even higher during the holidays, when return volume peaks. So this year, chains are digging through past transactions to weed out chronic returners, train shoppers to make better decisions or stem buyer's remorse.

Fashion discounter Rue La La, owned by Kynetic LLC, is testing a program that gives customers access to their own purchasing history, and also access to sizing data across its customer base, to help them make better purchases the first time around.

For instance, a customer who has continuously bought the same brand of dress shirts in both a small and a medium might see a note pop up saying: "Are you sure you want to order the small? The last five times you ordered both sizes, you only kept the medium," Chief Executive Steve Davis said.

Some customers might scoff at being told they need a larger size, but Mr. Davis said Rue La La, which last year booked nearly half a billion dollars in revenue, hasn't seen any negative feedback.

"We're definitely not judging," he said. "We are just exposing information we know will help customers make smarter decisions."

Rue La La said dealing with returns cost the company $5 million last year.

Fashion retailing startup Modnique.com is steering some chronic returners away from ordering clothing and shoes by sending them coupons for beauty and jewelry products, items that typically get returned less often. Home shopping network QVC Inc., a subsidiary of Liberty Interactive Corp. LINTA in Your Value Your Change Short position , is emailing customers after their products arrive to show them how to put them together and use them.

Unhappy Returns

Findings from a FedEx survey on holiday gift returns:

• One-third of Americans will return at least one gift after the holidays.
• Women will return holiday gifts more often than men (36% of women compared to 31% of men).
• 45% of shoppers prefer to return unwanted gifts by shipping them back to the retailer.
• 33% of holiday gift-getters complete all returns before New Year's Day.

"You're treating customers like a financial portfolio of stocks that can go up and down in value," said Omer Artun, a former marketing executive at Best Buy Co.  BBY in Your Value Your Change Short position and CEO of AgilOne Inc. which helps retailers mine customer purchases and predict shopper behavior. "You don't want to treat an unprofitable customer badly, but you do want to treat your good customers better and shower them with positive reinforcement."

As a result, constant returners may see fewer discounts in their inboxes, while their high-spending friends land the better offers.

Retailers are zeroing in on high-frequency returners like Paula Cuneo, a 54-year-old teacher in Ashland, Mass., who recently ordered 10 pairs of corduroy pants in varying sizes and colors on Gap Inc. GPS in Your Value Your Change Short position 's website, only to return seven of them. Ms. Cuneo is shopping online for Christmas gifts this year, ordering coats and shoes in a range of sizes and colors. She will let her four children choose the items they want—and return the rest.

Ms. Cuneo acknowledged the high costs retailers absorb to take back the clothes she returns, but said retailers' lenient shipping policies drove her to shop more.

"I feel justified," she said. "After all, I am the customer."

Companies are also tracking "wardrobers," shoppers who buy items to wear once and return, as well as people who order clothes just for the fun of trying them on at home, without any intention of actually keeping the items.

The biggest cause of returns is size. To help shoppers choose better sizes, Macy's Inc. and Nordstrom Inc.  JWN in Your Value Your Change Short position are working with analytics startups such as True Fit Corp. that crunch data to show customers how clothes and shoes will fit them in real life. The companies match up garment specifications and other data from retailers with information provided by shoppers about their favorite clothing items, to generate sizing and fit recommendations.

The rise of free shipping and returns has coincided with a surge in online sales of clothing and footwear. In the past, retailers would charge online shoppers $5 or $10 fees for delivery and returns to cover the cost of shipping and handling. The rise of more lenient policies by online shoe retailer Zappos.com and parent company Amazon.com Inc.  AMZN in Your Value Your Change Short position helped prompt customers to turn their living rooms into dressing rooms, as shoppers in many cases aren't on the hook for shipping fees in either direction or the back-end cost for returns.

Retailers say people who return a lot also typically buy a lot. But that isn't always the case, and the burden appears to be growing. In the current holiday season, that is something retailers can ill afford, when many are already discounting heavily to win over cautious consumers. Holiday sales are expected to rise by 3.9% from last year, according to the National Retail Federation, a Washington trade group.

Home-shopping network QVC, where returns rose to 19.4% of gross product revenue last year from 18.9% in 2010, recently began sending customers post-purchase emails with instructional videos on, say, how to put a vacuum cleaner together or the best ways to style a scarf.

When the home-shopping network started seeing returns spike for an at-home facial toning device last year, it began emailing purchasers a video with additional instructions on how to use the gadget. The return rate dropped by 30% on the $295 NuFACE Trinity facial-toning device, which claims to tighten skin with a low-level current. QVC estimated it avoided returns on $55,000 worth of merchandise.

In some cases, companies like Amazon offer disappointed customers "appeasements" like gift cards or small discounts on purchased merchandise to persuade them to keep products they would otherwise return.

Recently, a $700 ping pong table from Amazon was delivered to AgilOne's Mr. Artun with a dent. When Mr. Artun called Amazon's customer service hotline, a representative offered him a $140 discount to keep the damaged product. Amazon isn't an AgilOne client.

"We empower our customer-service employees to solve problems directly with our customers," an Amazon spokeswoman said.

Similarly, at Modnique.com, where returned and canceled items can come to as much as 15% of revenue, customer-service agents are allotted a daily amount for such appeasements. They can use discounts, gift cards or other offers to please shoppers that might call in with a problem.

"Sometimes returning the product will actually cost us more," Chief Executive Einaras von Gravrock said. "This allows us to turn a challenge into an additional sale."