Retail’s costly returns challenge

In a retail landscape where the consumer experience is designed to be frictionless and omnichannel is par for the course, returns are emerging as a major challenge for retailers.

Not only does handling returns cost a retailer time and money, but returned merchandise also presents a fraud liability and as Retail Dive recently noted, has a very real environmental impact as well.

Here’s an insight into the challenge that retailers now face when it comes to managing returns.

The returns reality

According to the National Retail Federation, customers returned $428 billion worth of merchandise in 2020.

To put that in perspective, that equalled 10.6 per cent of total retail sales last year and equated to $106 million worth of returns per $1 billion in sales.

While the percentage of returns compared to sales was roughly in line with the year prior, the NRF did go on to note online returns had experienced a marked increase that could arguably be attributed to COVID-19 and the year which saw most people shopping over the internet.

Meanwhile, the top categories of merchandise returned included:

  • auto parts (19.4 per cent).
  • apparel (12.2 per cent).
  • home improvement (11.5 per cent).
  • housewares (11.5 per cent).

More than one-fifth of returns were completed through credit cards, followed by cash (12.7 per cent) and debit cards (7 per cent).

And, while retailers may aim to make the return process simple in the interests of satisfying their customer, managing returns comes with a series of hidden and obvious costs.

A fraud liability

Managing returns - a fraud liability

Returns have always offered the potential for fraudulent activity, and as the NRF explains, last year was no different.

Of the returns made last year, they found roughly 5.9 per cent, or $25.3 billion worth, were fraudulent.

In online retail this percentage rose, with 7.7 per cent of returns to online retailers labelled fraudulent.

Ultimately that means for every $100 in returned merchandise accepted, retailers lose $5.90 to return fraud.

The hidden cost

When it comes to handling returns, it costs a retailer time and money, but often this isn’t measured.

There’s the cost of serving the customer as they make the return, then there’s the time involved with inspecting the packaging, and sending it back through the supply chain to get it back on the shelf (if indeed that’s where it is to end up).

Retail Dive recently argued measuring the cost of returns properly could improve the retailer’s bottom line.

They note most often, retailers look at their sales but do not look at returns, with the major reason being that data is often siloed throughout an organization.

Environmental issue

Environmental issue - Managing returns

In addition to costing the retailer, Retail Dive also notes returns take a very real environmental toll, and in the future that could well impact the customer’s perception of an organization’s sustainability.

Many customers believe they make a return and it’s simply placed back on the store’s shelf or repackaged and resold online.

Often, that’s not the case. The item is instead directed to a landfill or destroyed, with around five billion pounds of goods ending up in landfill annually.

Then there’s also the further environmental cost of the transportation required to handle returned goods.

So, what’s the answer?

Finding a solution to the return challenge

Handling returns properly lies in retailers having a deep understanding of the process, its cost and its impact.

There should be policies in place instore to minimize fraudulent claims, while each retailer should be mapping exactly what happens in the returns process.

Then, Retail Dive argues it could be time to investigate new models that are designed to minimize the environmental impact and improve the retail bottom line.

You can read the recent Retail Dive article on sustainable returns here, or view the strategies available to reduce return fraud here.