Why Free Returns Aren't Free

Online merchants are now paying, literally, for the free services that fueled their early market share race.

Returns are now growing faster than sales, especially during the holiday shopping period. Either customers are going to lose some of the privileges they have come to think of as a right, or the great online shopping bonanza will come to an end. JL

Bourree Lam reports in The Atlantic:

The gap these companies are trying to fill is between customer expectations and costly execution. On the retailer’s side, the end of Black Friday madness is the beginning of a long, expensive period of return madness, a norm they created. In the early grab for online market share, retailers went for sales at any cost—free delivery, free returns and cart optimization. Sales have grown, but shoppers have been re-educated and returns are growing faster than sales.

Despite reports of trashed stores and disorderly crowds, Black Friday shopping excursions are actually dwindling. Preliminary data from Thanksgiving weekend indicates that both net sales and shopper visits to brick-and-mortar stores fell this year and last year, and that in-store sales fell by about $1 billion, according to ShopperTrak, a retail-research firm. As those with with Black Friday fatigue move to shopping online from the comfort of their homes, they’re attracted not just by deals and promises of free shipping, but also by the increasingly common safety net of free returns.

But neither of these services is really free. Much has been written about how much “free” shipping actually costs retailers, and as the ability to return goods at no cost becomes an increasingly normal part of online shopping—particularly during the holidays—that service too is becoming more burdensome for merchants.

A survey by the National Retail Federation last year found that the return rate for all merchandise purchased around the holidays is 2 percent higher than the average rate during the rest of the year. That’s especially burdensome for online retailers whose holiday sales figures are climbing. And according to sales data from Adobe, this year’s Black Friday online sales grew by more than 20 percent to $3.3 billion, with Cyber Monday sales hitting $3.4 billion. For online shopping, the return rate is estimated to be much higher in general, but particularly around the holidays. “The annual retail return rate is around 8 percent, but can reach up to 30 percent for e-commerce sales, especially in categories like apparel,” Tobin Moore, the CEO of Optoro, a company that specializes in returns, said in an email. “With so much of the Thanksgiving through Cyber Monday sales coming from online transactions, we anticipate that over 10 percent of items purchased during this period will be returned.”

Optoro handles returns for companies in the interest of reducing waste. The process of collecting, assessing, and re-shelving returned goods is often so costly for companies that items are instead thrown out or sold to stores that liquidate the products. Optoro collects these returned products, and then its employees repackage and repair the products to either be sent back to retailers, or—for products the company no longer wants—to be resold to wholesalers or discount websites. According to Moore, Optoro now works with 20 large retailers and handles millions of dollars worth of products a year.

Optoro is one of a handful of companies that try to reduce the cost and complexity of returns, with startups and giant shipping companies alike getting into the market. The main challenge for these companies is helping retailers fix what they see as a broken system, with bad data, overly complex logistics, a messy network of resellers, and fear that frustrated customers won’t send products back due to bad return experiences in the past.

HappyReturns, a startup run by two former executives of HauteLook and Nordstrom Rack, hopes to address the concerns that many consumers have when it comes to returning goods. David Sobie and Mark Geller found that there’s a growing share of consumers who would rather return items in person, either due to worries that an item might get lost in the mail, the hassle of packaging things up and bringing them to the right place, and the desire to get money back immediately. As such, Sobie and Geller are setting up physical locations for customers to return goods to the retailers they work with (they charge stores a per-item fee). This allows the HappyReturns to both ease the hassle of returning lots of items from several different stores and to serve as a reseller for items retailers don’t want back.“The idea for our business was whether we can create a buy-online, return-in-store experience for retailers who don't have stores, and in doing so create value for all parties in the transaction,” says Sobie.

According to Vicky Brock, the CEO of Clear Returns, a U.K.-based company specializing in returns technology, many retailers are only now starting to think about optimizing returns in the logistical sense. Her company, though, is focused on using artificial intelligence to predict and prevent returns in the first place. “The causes of returns are a complex interplay of product, customer, and marketing, and it needs big data and a sharp analytical focus for retailers to understand and act on the information that will allow them to reduce the costly cycle of returns,” explains Brock over email. “In the early land grab for online market share, retailers went for sales at any cost—free delivery, free returns, and techniques like sales conversion and cart optimization. Sales have grown, as have supporting technologies, but shoppers have been re-educated … and returns are growing faster than sales.”

Further, Brock says that most solutions to retailers’ problems have been technological, geared toward simplifying the supply chain, providing more detailed information about returns, and liquidating returned goods. The solution Brock is working on is better data, and using analytics to flag products for which profit margin and customer experience might be at risk. “The commercial goal is that customers keep more of what they buy, and keep buying,” says Brock.

This litany of challenges is why the market for returns is becoming increasingly competitive. Startups can attract retailers by improving on the current returns process and offering greater efficiency or savings. But shipping giants such as FedEx are also trying to branch into these services. Last year, FedEx acquired the company Genco (for $1.4 billion) to expand its reverse-logistics services—in some ways a natural progression since returned items can simply retrace their original steps to get back to retailers by mail. At the time, Genco was already processing hundreds of millions of return shipments a year.

“Returns are a costly business, but a crucial one, if retailers want to earn and hold onto a loyal, motivated shopping base. It will continue to grow in correlation with the rise in online consumer spending,” says Ryan Kelly

the senior vice president of sales, strategy, and communications at Genco. That means that the returns business is no longer an afterthought for retailers, because a large majority of customers tend to come back to stores they’ve had good return experiences with.

The gap all of these companies are trying to fill is the one between high customer expectations and costly execution. On the retailer’s side, the end of Black Friday madness is just the beginning of a long, expensive period of return madness, a norm they themselves created and now must maintain in order to keep customers happy.