Retailers are adopting a variety of measures to try to soothe the growing returns headache. Alvarez & Marsal’s head of retail Erin Brookes looks at how the challenge is being addressed
Generous returns policies have become the norm in online retail in the last two years, as the pandemic accelerated the shift to ecommerce and convenience emerged as a core value for shoppers around the world.
But many retailers are currently having to rethink that approach amid an ongoing high volume of product returns and increasing pressures from soaring inflation, higher transportation costs and labour shortages.
With 27% of retail sales in the UK now happening online, according to the Office for National Statistics, the avalanche of returns is dragging down profits in an industry already living on thin margins.
Nowhere is this more visible than in fashion retail. While not a new problem in this sector, it has reached critical levels since the pandemic as the consumer enjoyed the convenience of returns at no cost.
In May, fast fashion retailer Boohoo said that its rate of returns had soared so high that it contributed to a 94% drop in pre-tax profits in the 12 months to February.
“The process of handling unwanted items is estimated to cost businesses around £5.6bn”
Womenswear brand In the Style also partly attributed a fall in its half-year profits to “higher than anticipated” return rates.
The process of handling unwanted items is estimated to cost businesses around £5.6bn, research from GlobalData has shown.
In clothing retail, one in three items bought online are sent back, with companies spending £20 on average to return, repair, repack and resell each individual item, according to a separate analysis.
Ecommerce returns are also testing companies’ sustainability credentials. In addition to packaging waste, unwanted goods often have to travel hundreds of miles back to a warehouse, virtually doubling CO2 emissions produced in last-minute delivery.
Worse still, millions of returned items end up being sent to landfill because they became out of season or are too damaged to be resold.
The expensive problem of reverse logistics is crippling retailers at an extremely challenging time. Operating costs are mounting as a result of supply disruption and rising prices of goods and services, with UK inflation expected to reach double digits by the end of 2022.
At the same time, the worst cost-of-living crisis in decades means businesses are having to fight even harder for consumers through discounting and other strategies, as people increasingly cut back on discretionary spending.
The end of free returns?
From implementing technology solutions to dealing with reverse logistics to reviewing once lenient policies, retailers are taking different measures to try to soothe the growing returns headache.
In a landmark move in May, Spanish clothing giant Zara announced that it would start charging customers a £1.95 fee to return items purchased online.
Importantly, though, shoppers can still return items for free if they come to one of the retailer’s physical shops – there, orders can be incorporated back into the inventory immediately without the extra steps and costs incurred when returned by post to a warehouse.
Zara’s policy review is not only a bid to discourage serial returners and make logistics management easier for the company. It also nudges people to visit its physical shops, potentially boosting impulse buying and supporting the omnichannel customer journey.
But the industry’s rethinking around returns goes beyond the revision of once liberal policies.
Increasingly, it involves efforts to improve ‘the returns experience’ and to tackle inefficiencies in reverse logistics – often with the help of technology.
Marks & Spencer last year launched a click-and-collect service that allows customers to make returns at its stores using self-service digital screens and drop-off bins.
“Automating some of the most intensive tasks in returns management, such as inventory and warehousing, can also expedite the process”
It also refreshed its mobile app so that users can choose whether they want to return items in store, by post or by pick-up.
Automating some of the most intensive tasks in returns management, such as inventory and warehousing, can also expedite the process, reducing refund processing times for the customer and making goods available for resale sooner.
To avoid unnecessary waste, retailers should also be considering environmentally friendly packages that are also more efficient to transport, such as bags.
With profitability under intense pressure, many retailers will have to explore new and innovative partnerships with logistics experts to execute those strategies.
Finally, data analytics and other cutting-edge technology, such as virtual fitting rooms, can become powerful allies in helping to identify the reason behind returns.
This is especially relevant in fashion retail, where 70% of returns are initiated because of a poor fit or style.
In 2021, Gap acquired 3D avatar company Drapr to try to boost virtual clothing try-on, following in the steps of Walmart by buying a fit-tech start-up.
Retailers must also harness returns data to quickly identify product issues and inform design and merchandise mix decisions. This can help prevent returns from happening in the first place.
With consumers’ demands for rapid delivery, cheap prices and easy returns becoming the norm after the pandemic, striking the right balance between offering a good customer experience while preventing abuse of the free returns benefit will remain a key challenge for the industry.
Smart retailers will stand out from the competition by focusing on an efficient returns process that solidifies customer loyalty while keeping business impact to a minimum.
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