CSCMP's Supply Chain Quarterly
December 14, 2017
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Forward Thinking

With e-commerce returns on the upswing, pressure may build on DC demand

Comment
Can businesses optimize their existing networks, or will they need to go outside for their requirements?

If there is one thing about e-commerce with which everyone agrees, it's that it will spawn unprecedented volumes of returns. One factor is the expected surge in overall e-commerce transactions, which would proportionately boost the number of returns. The other is the inability of consumers to examine or try on a product before they buy it. This, it is reckoned, will lead to more "buyer's remorse" and, by extension, returns.

Another scenario, and one expected to become more commonplace, is that buyers will order two, three, or even four units of the same product, then keep one of the items and return the rest. Why? Because they can!

Returns are a major cost center, but they are also a brand resource if done right. Today's consumers increasingly view the returns process, or "experience," as a key differentiator. Though there isn't the same sense of urgency as in fulfilling the forward move, a timely returns process is important because it dictates when the original customer will be reimbursed. A slow returns program only feeds perceptions of a shoddy operation, which is a key reason people don't use their devices to shop. A 2014 consumer survey by Indicia Ltd. found that the main reason people are reluctant to buy online is because of perceived problems with the returns process.

As more businesses get serious about developing some form of a returns policy—if for no other reason than just to get returns out of their warehouses—demand for reverse logistics support—whether internally or through an outsourced relationship—will undoubtedly grow. The question is (as it always is), by how much?

For now, reverse logistics is a small piece of the overall retail puzzle. But it's not expected to stay that way. North American e-commerce sales and returns are each growing at a 15-percent annual rate, according to David Egan, Americas head of industrial research for CBRE Inc., one of the world's largest commercial real estate services firm. Last year, $290 billion of sales in the U.S. and Canada were returned, or about 8 percent of total retail sales, according to CBRE. But 30 percent of e-commerce sales were returned, according to CBRE data. Returns that end up being sold at deep discounts or that must otherwise be disposed of equal a 4.4-percent loss of aggregate retail industry revenue, CBRE said.

The e-commerce numbers are a growing part of that equation, and they "are not going to get smaller," said Egan.

Those working in e-commerce—which today includes most everyone—will need to make a choice if and when their returns traffic begins to swell: Build a dedicated physical network to handle the stuff, offload the work to a third-party logistics provider (3PL), or find ways to sync returns flows with the traditional supply chain, which is still largely driven by the forward move. And that could mean increasing pressure on an industrial-property network that in many markets is already tight.

"We hear from customers that are already capacity-constrained who tell us to get the returns out of their warehouse," said Ryan Kelly, vice president of strategy and communications for Genco, a Pittsburgh-based unit of FedEx Corp. that handles a large amount of returns. Kelly said that customers aren't particular about whether their returns are supported by a centralized or a regional supply chain. He added that demand for warehouse and DC space would come both from the 3PL sector and from a portion of the direct-shipper community that is heavily into e-commerce.

Most of the top-tier markets are supply-tight, which has helped create the lowest U.S. industrial-vacancy rate on record. The total vacancy rate of the top 50 U.S. markets stood at 6.4 percent in the fourth quarter, according to data from real estate and logistics firm JLL. Just three markets--Boston, Pittsburgh, and Portland, Ore.—had vacancy rates at 10 percent or higher. Available space—defined as space currently occupied but on the market, generally because the current tenant is leaving at the end of its lease—is generally higher than the stated vacancy rate.

Robert Silverman, JLL's executive vice president, supply chain and logistics solutions, said he doesn't think an increase in e-returns will translate to a dramatic rise in warehouse and DC demand. He said companies are gradually "baking in" reverse flows through their internal systems and processes, such as reconfiguring one or two network facilities to effectively carve out separate paths for e-returns.

Silverman said companies are moving patiently to address the issue because the pace of returns activity allows them to be systematic in their approach.

Integrating elevated returns flow into an existing facility might not be workable, because the facility is designed to optimize the traditional forward move, said Egan of CBRE. That leaves a company to either build out its own reverse network by buying additional space or adding on to an existing facility, or farm out the services to a third-party logistics provider, which may eventually need its own additional space as well. Either way, it spells more demand for the industrial property sector.

Unlike the forward move, returns don't have to be returned from whence they were shipped. The nonlinear nature of returns may create demand in some markets that have more available supply. That, in turn, will absorb still more capacity, Egan reckons.

The complexity of managing e-returns and the challenge of scaling up operations for peak returns periods, could be good reasons to farm out the work. Genco, for example, has systems and technology designed just to support reverse moves, even though forward logistics accounts for more of its business than reverse. It also has several "all-in-one" centers that handle forward and reverse moves, but can support all types of reverse disposal as well as "recommerce," under which Genco repositions qualified returns into the forward logistics flow.

However companies go about it, it seems clear that for those who have truly high stakes in retail, a robust physical network, along with strong inventory control technology, will likely be the price of admission to compete at the big levels. "If you don't have a best-in-class returns policy, you're uncompetitive," said Egan.

Mark Solomon is executive editor—news at DC Velocity, a sister publication of CSCMP's Supply Chain Quarterly.

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