CSCMP's Supply Chain Quarterly
January 21, 2019
Forward Thinking

Online returns activity proves adage that bad things can happen to good products

Millions of online returns have "no fault found" attached to product, RLA says.

As if retailers and manufacturers don't have enough challenges dealing with returns of products that don't work, they now have to cope with a growing volume of products that people don't want.

The ordering ease and convenience spawned by online and mobile commerce has created an American "entitlement culture" that thinks nothing of returning stuff that is in otherwise perfect condition, just because they simply didn't want it, according to Tony Sciarrotta, executive director of the Reverse Logistics Association (RLA). In 2017, e-commerce created 400 million package returns that would not have otherwise occurred. Of those, 80 to 90 percent were shown to have "no fault found," said Sciarrotta, using a reverse logistics term to describe a nondefective product.

Consumers will return products ordered online—as they will do for store-bought items—because they are either disappointed with how they performed or because they changed their minds about the purchase. However, an increasing number of returns are effectively pre-ordained, and are conceived even before the consumer hits the order button to trigger the forward move. That's because consumers, knowing they won't be charged a shipping fee for returned items, feel free to order multiple sizes or versions of a product, keep all but one, and return the rest.

Not surprisingly, the percentage of returns of online orders is significantly higher than that of returns to traditional stores. According to RLA data from 2017, the e-commerce return rate was 18 to 25 percent, roughly three times that of brick-and-mortar stores. Online returns tend to run particularly high for clothing and shoe purchases because customers are especially likely to order several sizes to assure proper fit and style.

Sciarrotta told the SMC3 annual winter meeting in Atlanta Monday that returns account for between 7 and 11 percent of the cost of goods sold, but that the percentage is bound to go much higher as e-commerce inevitably takes a larger share of total retail sales. Currently, e-commerce composes about 9-12 percent of overall retail sales, depending on the source of the projection.

The reverse logistics process will be further complicated by what is projected to be a surge in demand for the Internet of Things (IoT), where products of almost every conceivable type will be digitally connected. Sciarrotta said the dizzying number of compliance standards for IoT deployment present a formidable challenge for those charged with processing returns.

Fortunately for retailers, many consumers still prefer to return items—even those ordered online—to stores. This provides several benefits to the retailers, according to Sarah Galica, senior director, reverse logistics, at Atlanta-based home improvement giant Home Depot Inc. It saves the retailer the costs of product pickup; it allows an unopened item to be re-stocked on the shelf or in store inventory for re-sale; and perhaps most important, it enables face-to-face feedback with the customer to determine what the problem was, a scenario that doesn't take place online, Galica said.

"A customer who's unhappy is more expensive for us than the cost of handling a return," Galica told the conference.

Last October, Seattle-based e-tailer Inc. began offering its merchants an option of allowing customers to keep items they might otherwise have returned, and still receive a refund. The theory behind Amazon's strategy was that it would save retailers the expense of processing returns, especially of relatively low-value goods, and would build customer goodwill by offering the flexibility of simply disposing of the product.

However, Sciarrotta of RLA said such a concept would be problematic for many retailers because they would lose the revenue opportunity of a potential resale. In addition, the program would be negative for the environment because it would add more junk to already-overburdened landfills, he said.

Ironically, technology—in the form of artificial intelligence (AI)—could play a role in mitigating online product returns by identifying consumer ordering patterns and perhaps enabling retailers to guide consumers away from products that they had bought and returned before, Sciarrotta said.

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