February 5, 2021
By Professor Adrian Beck
As I mentioned in my last blog entry, one of the (many) consequences of the COVID-19 Pandemic has been the acceleration in the growth in E-commerce retailing – the purchase of goods online that are either delivered directly to the consumer, or picked up by shoppers at an agreed location. In some countries this is now accounting for as much as one-third of all retail sales and while the eventual end of the current Pandemic will undoubtedly see this number drop back to a certain extent, most retail commentators seem to agree that E-commerce is now an established and growing part of the global retail landscape.
Of course, E-commerce is not without risks that can sap retail profits, such as frauds, delivery errors and in-transit thefts, and there is a growing realization that these need to have a greater degree of focus amongst loss prevention practitioners. However, one area of concern with E-commerce that is often overlooked as a potentially significant drain on retail profitability is the issue of product returns, especially in apparel retailing.
We are all very aware of the fact that garment sizing is less than uniform across the retail environment – a ‘medium’ sized shirt from one retailer could well be a ‘large’ in another. Equally, the selection of footwear is often a highly personalised experience – what feels comfortable to one person may be the complete opposite to another. For these and other reasons, traditional bricks and mortar retailing, with the capacity for customers to try before they buy, has been the dominant location for the selling of these types of products.
However, the growth in E-commerce, driven by a number of factors, such as convenience, price, Pandemic and credit-based schemes such as Klarna, has seen a rapid increase in the volume of apparel sales online, which in turn has led to a considerable increase in the number of products being returned to retailers. Indeed, some companies and business models positively encourage this practice – order the same product in three different sizes and return those that do not fit – the equivalent of a fitting room service delivered virtually! Undoubtedly, this is great customer service focussed on delivering sales, but at what cost to the business?
Many retailers are now seeing around about 40% of the products sent out to customers being returned, either to their E-despatch centres or their bricks and mortar stores. Indeed, some German retailers have reported rates as high as 75% and the value of returned goods in the US has been calculated at nearly $370 billion in 2018. There is no question that this will act as a significant drain on retail profitability if it is not recognised and managed well.
In addition to the obvious additional costs of having to pay for return transportation costs, and managing the administrative and handling processes, product returns can also generate a number of other costs as well, including:
- Stock being returned that is damaged in some way and not able to be sold again at the original price.
- Stock having to be re-packaged to enable it to be put on sale again.
- Fraudulent returns – cheaper/false items returned by customers.
- Stock being returned that has clearly been used (known as ‘wardrobing’) and which cannot be sold again.
- Stock being returned to a location where it was not originally on sale, which in turn can increase the risks of theft and damage and incur further transportation costs.
As a recent ECR Report on this topic concluded, there are many hidden costs to E-commerce and if these are not fully taken account of, they can have a dramatic impact upon business profitability. The report also highlighted the importance of having joined up and integrated data systems to properly manage the return of products back into a retail business and to develop a detailed cost of returns model to fully understand the impact of any given sales initiative.
It is also worth noting that such large volumes of products moving out and then back in to a retail business can, unless carefully managed, seriously compromise the efficacy of inventory records, especially where stock is perhaps despatched from one location but returned to another. In such circumstances, retail businesses need to have a clear stock counting/accounting strategy in place otherwise other forms of Omni-channel retailing can be seriously compromised, such as Buy Online and Pickup in Store (BOPIS), where a customer is ‘assured’ that a given location has available stock.
There is no question that E-commerce as a form of retailing is likely to further expand in the future – many customers clearly enjoy the convenience it offers. But, it is certainly not a given that it is necessarily an ‘easy’ way to drive retail profitability. It brings its own risks and challenges which need to be fully understood and carefully managed. One of those is the issue of product returns – making sure that retail businesses develop a coherent and integrated approach to their management will undoubtedly become ever more important as the volume of online sales increase further in the coming years.