Retailers Face Big Challenges — and Big Opportunities — With Returns

The 2022 holiday retail season is officially upon us. Despite shoppers expected to be cautious with their spending, the holiday season is off to a good start, with Black Friday and Cyber Monday sales showing 2 percent and 5 percent year-over-year growth, respectively, falling in line with National Retail Federation projections for the season to show 6 percent to 8 percent growth.

At the same time, however, retailers are balancing a few major challenges: namely, rising costs from inflation, slowing e-commerce growth with the re-emphasis on in-person shopping, and a renewed focus on profitability amidst macroeconomic volatility. Given these factors, there's an acute need to revisit a massive cost center in retail operations — returns. Last year, $761 billion of merchandise was returned, and that number is only projected to rise.

As we look ahead to the industry’s biggest season, retailers must focus on innovative ways to leverage returns to manage costs, keep customer retention high, and boost revenue.

The Rising Cost of Returns

It now costs up to 66 percent of a $50 item to process an e-commerce return when you consider inbound and outbound shipping, labor receiving and re-fulfillment costs, warehouse storage fees, and inventory markdowns from slow restocking. And these costs are only going up with all the forces driving inflation.

Major retailers like Zara, REI, Abercrombie & Fitch, and J.Crew have started to walk back or adjust their free returns policies in reaction to these price hikes, charging consumers for shipping and/or restocking fees. However, the solution isn't as simple as nixing free returns altogether. Convenient, flexible returns are the cornerstone of good customer experience, and whether we like it or not, the industry has already normalized free and easy returns. As it stands, nearly 60 percent of consumers have reported not shopping with a retailer simply because they didn’t like its returns policy. And 95 percent of consumers have said a poor returns experience will make them less likely to shop with a brand again. So not only are flexible return policies a preference, they might just be the factor that determines whether a consumer chooses to spend with that retailer.

Fortunately, there have been many recent innovations to help offset the cost of returns, while even improving the customer experience and repurchase rates at the same time as lessening the environmental impact.

Shipping Consolidation 

One of the largest opportunities for boosting the economics of returns is leveraging in-store drop-offs and consolidated shipments. When online returns are individually packaged and shipped back to retail warehouses, costs can quickly add up. The labor required to process each item, combined with individual packaging and shipping costs, create a resource bottleneck as well as unnecessary additional environmental waste.

By utilizing brick-and-mortar locations or third-party drop-off networks, retailers can create a hub for consolidating package-less returns into denser, larger shipments that result in less plastic and cardboard being moved. This considerably eases the transportation costs and environmental burden of processing returns, while providing customers with more convenient express drop-off options to improve their overall returns experience.

Automation and AI

Slow, manual processing is another large contributor to the cost of returns as it requires significant labor resources. On top of the high labor costs from lack of automation, returns end up sitting in warehouses and aren’t processed for weeks, losing their seasonal relevance and reducing restocking potential. Eventually, many of these items must be sold at a markdown, making the relative cost of that return even higher.

The antidote to this scenario is technology. Integrating artificial intelligence (AI) and automation into returns processes can enable retailers to process items in a fraction of the time of manual operations. Retailers can then restock shelves quickly and efficiently to recoup the maximum value from returned merchandise in season, all while cutting down on the labor required to inspect and re-route each item. The impact of this returns management technology improvement is significant. It’s often the difference between recouping lost sales and getting stuck with a chronic inventory backlog.

Customer Experience

As e-commerce returns have grown significantly over the last couple of years, we’re seeing the importance of prioritizing the returns experience on par with the purchase experience, as it can be a powerful driver for improved loyalty and engagement. With the right digital returns experience coupled with easy exchange technology, retailers can boost rebound sales and keep customers coming back more frequently for future purchases. What’s more, retailers can then use the data and insights from that customer experience to improve overall operations and better prevent returns from happening in the first place.

Now more than ever, retailers need to innovate on the returns process as a whole to reap the benefits of increased sales, cost savings, and environmental stewardship. Ultimately, these investments can create a better, more holistic customer experience and business model at a time when retailers are increasingly in need of cost optimization and new ways to grow.

Tobin Moore is the CEO and co-founder of Optoro, an all-in-one returns platform to delight customers, drive revenue, and preserve the planet.