Many Happy Returns

Stephen DeAngelis

December 15, 2017

“Many happy returns” is an archaic birthday greeting offered to a celebrant with the hope he or she will have a joyous day and many more to follow. It is not a phrase used by retailers. No retailer sells a product hoping it will be returned; but, it happens. Puneet Saxena, Group Vice President for Product Strategy and Supply Chain Planning at JDA Software, reports, “While returns for in-store purchases average in the single digits, returns from e-commerce sales average 30%, with even higher rates in certain categories.”[1] For retailers, that means the digital path to purchase is a double-edged sword — one that brings both increased sales and increased returns.

 

Returns are a Big E-commerce Problem

 

“Online sales are growing at about three times the rate of those from brick-and-mortar stores,” James Ellis reports, “in part because of the popularity of free shipping. But that’s led to a big problem: an explosion of online returns. Almost a third of web orders end up being sent back, vs. 9 percent of purchases at physical stores.”[2] He goes on to note, “The expense of processing and shipping boomeranged items can range from 20 percent to 65 percent of an e-tailer’s cost of goods sold, says United Parcel Service Inc. So web merchants are seeking ways to make returns less costly.” If dealing with returns is a normal cost of doing business, Saxena asserts, “This creates an interesting problem for both retailers and manufacturers that sell online: in addition to predicting a customer’s original order, manufacturers and retailers need to be able to forecast expected returns.” He notes that businesses need to be able to predict both the demand (i.e., sales) and the return rate. Every product presents its own set of challenges which means, Saxena states, “This can easily become a mind-boggling problem to solve.”

 

Even if you get the returns forecast correct, you still have to deal with the return process. “It is important to manage the efficient flow of goods and services from a manufacturer to the customer in a traditional supply chain management context,” Saxena observes, “it is equally important for the digital supply chains of tomorrow to manage the reverse flow effectively.” Or as Bryan Pearson (@Pearson4loyalty), President of LoyaltyOne, puts it, “Delivery is a two-way street.”[3] He asserts, “More shoppers — particularly online shoppers — are choosing where to buy based on how easy it is to return an item, or deliver it back.” Although that means a good returns process can be a competitive advantage, it also makes the forecasting challenge even more complex.

 

Can there really be Happy Returns?

 

“Today’s shoppers do not hesitate to send back items that don’t meet their expectations,” writes Ben Ames (@BenBames), “whether it’s a question of fit, quality, damage during shipping, or a host of other reasons. By all accounts, the e-commerce returns rate today runs well into the double digits, with some estimates putting it at 30, 40, or even 50 percent.[4] The reverse supply chain is not easy to master. The customer-facing supply chain doesn’t have a reverse switch. Ames explains, “The sophisticated automated systems [retailers have] designed for processing high volumes of outgoing orders typically don’t run as well when shifted into reverse.” As Ellis noted, the cost of returns can be high. Ames believes inefficient processes are one reason costs are high; but, he adds, “There’s also the added labor, time-consuming worker training, the need to discount inventory, and additional handling and shipping fees.”

 

Ellis reports Jet.com uses an opt-out strategy to combat the cost of returns. He explains, “[Jet.com] gives a lower price for an item if a buyer agrees to opt out of its usual free-return policy. Change your mind? Pay a fee of $5.99 plus 5 percent of the item price.” Other companies, he reports are trying to improve their front-end sales process to reduce returns. According to Ellis, “Retailers are providing more sizing information and photos of goods — obviating the need for many returns.” And Pearson reports, “Getting the gift right means never having to say, ‘I don’t have a receipt.’ CheckedTwice.com, an online gift registry for families, offers a holiday registry that should cut down on returns before a purchase is even considered.” Other companies, like Best Buy, use their returns policy as a competitive advantage. Ellis explains, “While regular shoppers get only 15 days to return most items, members of its My Best Buy loyalty program who gain Elite status — those who spend $1,500 in a calendar year — get double that period. Elite Plus members — who must spend $3,500 in a year — get 45 days.” Pearson reports on another innovative returns program:

“Perhaps the most innovative concept in transforming the return experience springs from a standard-bearer in customer service: Nordstrom. Happy Returns, co-founded by former Nordstrom executives David Sobie and Mark Geller, operates a network of ‘return bars’ where online shoppers can bring items purchased from a variety of participating brands, including Everlane, Paul Evans, City Chic and Mizzen and Main. The service, available in partner malls and stores in 14 metro areas, is free and does not require receipts.”

Let’s face it; returns are never going be a happy subject for retailers; even if easy returns do make customers happy. The best retailers can hope to do is decrease the number of items returned, reduce reverse supply chain costs, and improve the resale of returned items. Saxena predicts cognitive computing will be a new tool in the retailer’s kit. He explains, “With this sophisticated forecasting techniques on hand, companies can plan for their end to-end supply chain operations more holistically, and predict their actual revenues more reliably. Machine-learning algorithms in this space are constantly evolving and are using transfer functions to establish the relationship between sales and returns. Such algorithms can perform updates to refine patterns based on the latest trends observed. The use of lagged signal processing in forecasting returns is now in advanced stages of research and development in the labs of leading supply chain software companies and is ready to be commercialized soon.”

 

Summary

 

Pearson concludes, “Retailers are overdue in re-engineering the return policy into an integral part of a good retail experience, and those who ignore this will lose sales. A gift return could represent a shopper’s last encounter with a brand, or it could be the first. Good merchants will let a good return experience generate returning shoppers.” Ames agrees. “Returns management is fast becoming a high-stakes endeavor,” he writes, “and how [retailers] handle it could dictate whether they thrive or merely survive in the brave new world of omnichannel.”

 

Footnotes
[1] Puneet Saxena, “Powering Your Digital Supply Chain: Forecasting Returns,” EBN, 28 August 2017.
[2] James Ellis, “Online Retailers Are Desperate to Stem a Surging Tide of Returns,” Bloomberg Businessweek, 3 November 2017.
[3] Bryan Pearson, “Sales, Shmales; Return Policies Could Define This Holiday Season,” Forbes, 5 December 2017.
[4] Ben Ames, “Study: Reverse logistics still a puzzle for omnichannel retailers,” DC Velocity, 17 November 2017.