Industrial Midwest

Online returns could take $41B bite out of holiday earnings as reverse logistics redoubles

Online returns could take $41B bite out of holiday earnings as reverse logi,ph01

Brick-and-mortar stores have an average 8 percent return rate on previously purchased goods. But that’s nothing compared with the 15 to 30 percent returns that online retailers will see on holiday shopping.

One early innovation that e-commerce introduced was free shipping on returns, something that consumers now take for granted. According to a new report from CBRE, this policy means that retailers and shippers will handle the largest amount of returned merchandise this post-holiday season.

Digital Commerce 360, a data and analysis provider formerly known as Internet Retailer, estimated that online sales in November and December 2019 will total $138.5 billion. CBRE extrapolated the maximum value on returns of those online purchases at a whopping $41.6 billion.

“Returned merchandise has a massive impact on retailers’ bottom lines, so the industry is keenly focused on developing new ways to reduce returns and better process those that do come in,” said John Morris, CBRE executive managing director and Americas industrial and logistics leader. “Much of that involves improvements at the point of sale. But a big part of it also entails efficiently processing returned merchandise, sometimes by establishing distribution capacity and procedures strictly for handling returns, and sometimes by outsourcing the process to third-party-logistics companies.”

CBRE partnered with Optoro, a technology company that powers returns optimization for retailers and brands, to calculate both the cost of online returns and the value of potential solutions. According to Optoro data, inefficiencies within the retail industry’s returned merchandise handling add up to more than 10 billion instances of needless shipments and merchandise touches in warehouses. The result is approximately $50 billion of lost profit margin per year.

This process of processing returned goods within a supply chain—commonly referred to as reverse logistics—doesn’t affect all merchandise categories equally. For example, fashion apparel can depreciate by 20 percent to 50 percent over an eight- to 16-week period, according to Optoro, while electronics lose between 4 percent and 8 percent of their value each month.

Products returns also adhere to specific real estate requirements. These items are typically routed through second-generation properties rather than modern, Class A space. Since the reverse logistics process is high-touch and slow to process, lower ceiling heights are more appropriate. Class B facilities are also better suited to the odd configuration of pallet loads since they are harder to safely store in high racks.

Space is at a premium for distribution facilities handling returns. Reverse logistics necessitates between 15 and 20 percent more space than property simply housing outbound goods. The volume, dimensions and final destination of materials are typically known parameters at a traditional distribution warehouse, whereas those features of returned materials can be inconsistent and unspecified.

Retailers have a number of options for returned goods, from restocking physical stores, selling them to discounters and resellers, donating to charities or destruction. According to Optoro, online returns direct an estimated 5 billion pounds of waste to U.S. landfills every year.

“Many retailers and brands understand the impact that returns have on their bottom line and are looking for systems and technology to streamline and optimize the returns process,” said Joe Hsu, senior director of solutions at Optoro. “The good news is that despite the influx of returns this holiday season, the returns moment can have a significant impact on customer loyalty. According to our research, 97 percent of customers are more likely to shop again at a retailer where they had a positive returns experience.”

Increasingly, retailers are turning to new and more efficient return strategies. Third-party provider Happy Returns provides kiosks at which customers can drop off online purchases to ship back to the retailer. Brick-and-mortar retailer Kohl’s piloted a program in 2017 with Amazon (and rolled it out nationwide in 2019), whereby consumers can drop off unwanted online purchases at one of 1,150 Kohl’s locations. The service is free to Amazon Prime members while Kohl’s receives a bump in foot traffic—and incentivizes on-site purchases by offering 25 percent discounts.